Cyprus: The Operation Was a Success. Shame the Patient Died.

23 Mar

Update: Monday 25th. Habemas Dealam . For sheer fecking chutzpah, it may be years before this is bettered:

The Eurogroup welcomes the plans for restructuring the financial sector as specified in the annex. These measures will form the basis for restoring the viability of the financial sector. In particular, they safeguard all deposits below EUR 100.000 in accordance with EU principles.

Still reading it, but from what I’ve seen so far, wouldn’t retract a word of what follows. Joseph at Alphaville has a great summary, so I don’t need to bother.(/Update)

First thing to get straight – from a Eurogroup point of view, this week has been if not a triumph, a respectable success. Markets held extremely well. Probably best generic Eurorisk indicators are the BTP future – since the CDS Ban, one of the few vehicles for shorting Eurozone credit – and the Eurozone financials stocks index. BTPs hit their low for the week within a couple of hours of Monday’s open and closed the week flat; financials did worse, but far from a panic. The ECB’s marginal lending facility – which would be the place where bank funding difficulties would show early – remained similarly untroubled. And this despite a week where the policy-making process was essentially “Laurel and Hardy carry a piano upstairs” (Thx @dsquareddigest) The triumphalism of Eurozone policymakers escalated through the week, with the Eurogroup’s laconic 45-word statement on Tuesday, and even the comparatively verbose 144 words they added on Thursday. If these messages conveyed that the issue is seen as a local problem, the ECB’s action Thursday morning to turn Tuesday into “drop dead day” for Cyprus lawmakers signalled that the EU has no compunction about making things worse for the Cypriots (in the interests of the greater European good, natch). None of this is accidental. If we haven’t seen much panic out of Europe at large this week, we’re unlikely to see more this week. So Europe feels it has a free (whip) hand with Cyprus. Cypriot lawmakers are left to atone for their disobedience by passing 9 bills in a marathon overnight session, while Mrs Merkel explains how cross she is with them. Be clear too – these are not 9 bills “required” by the Troika – they’re a mixture of emergency measures (capital controls) and building blocks made for when the Eurogroup deigns to pass Nicosia the plans. Meanwhile rumours rage:

16.51 More on that speculation mentioned at 16.20 that the troika has upped the amount it wants Cyprus to raise by €900m. MNI is now reporting that a government offical told journalists that troika officials have indeed hiked the contribution demanded of Cyprus to €6.7bn from €5.8bn.

As I’ve noted before, there’s method to the Troika’s apparent madness. Not only will it not lend Cyprus the EUR5.8bn needed to close the funding gap, it refuses to allow Cyprus to recruit other sugar daddies (Russia/pension funds/the Church) to borrow from. it wants a ceiling on Cypriot debt that is sustainable (and bugger the fact that that ceiling is lower than Greek debt today). Still, let Cypriot retirees rejoice that the Robert Maxwell option has been banned for now.

So the misery of Cyprus is a feature, not a bug. It’s intended to make it clear that politics in the core states is primary. Expect no relief.

So what happens?

We know this much: depositors will pay – either via a levy similar to that discussed a week ago, or by closing down Laiki and probably Bank of Cyprus. While the news that small depositors look set to be spared is welcome, the scale of rumoured haircuts is hair-raising.Ekathimerini reckons that Laiki’s uninsured depositors would lose 40% under such a plan, and 20-25% for BoC. Certainly, Cypriot legislators had the right to veto the Troika’s package. They have no excuse for not having a workable alternative. Given the shambles of the week, and the traumatic memories of the ATM queues, and the draconian measures to prevent capital flight, the idea of Cypriot banks as a safe home for anyone’s money is likely dead for a generation, but this is likely to accelerate the outflow.[Do check the capital controls link. Western Europe has seen nothing like this in most of our lifetimes]. I remain mystified as to why Cyprus has decided not to Icesave Russian depositors (as per a rather good article that mysteriously appeared in the Guardian). But whatever, as has been noted elsewhere, a Cypriot euro, utterly immobile, is a crippled distant cousin of the currency elsewhere in the bloc.

Banned from foreign borrowing, and with a shortage of people with funds to lend anyway, it’s clear that creditors (including bank depositors) are going to take a hit. It remains to be seen what happens to bondholders -I’ve seen no mention of the small outstandings of senior bank debt being burnt, although nervousness in the governments has increased very sharply – and this is with the locals paralysed (chart: June 2013 in yellow, 2020 in white.

.

20130323-073510.jpg

[side note - if you want to know how the good bank:bad bank idea works, it's been put into practice a couple of times already - Proton in Greece and Ukio in Lithuania. Here's a lovely report via Uldis Zelmenis on the latter. The lessons are mostly unhelpful - better to be a small bank where basically all (99.5%) deposits are insured but it looks erm awkward for the uninsured:

The legal risk, however, remains that uninsured depositors (those, who held deposits exceeding the threshold of EUR 100 thousand) will bring lawsuits over the decision to terminate the license of Ūkio bankas and split it into the “good bank” and the“bad bank”. This could potentially inhibit the liquidation process of the „bad bank“ and may result in additional losses to state budget. ]

How bad is the damage?

Bloody appalling. Exotix’s Gabriel Sterne (chart) has produced forecasts which reflect a quite outstanding week’s work by the Troika. Take a moment to realise the scale of what’s been done here. No human agency has acheived so much economic destruction in such a short time without the use of weapons. The combination of laying waste to the financial sector and tearing up the savings of thousands of residents means that Cyprus won’t return to current levels of output for a decade, a funeral pyre which bears comparison only with Greece. There are four shocks happening at once; the bog-standard austerity shock; the trauma of bank withdrawal controls; the wealth shock; and the structural shock of wiping out the financial sector. The bailout bill is certainly going to get a lot higher too, as a larger amount of debt is piled onto a smaller economy.

Image

That said, a future as “Iceland without the fish” does have some comforts for Cyprus. Its economy actually looks a lot more like that of Iceland than that of its cousin, Greece. It’s a relatively wealthy, open economy with much stronger institutions – ranked #36 in the World Bank’s Ease of Doing Business survey – closer to Iceland’s 14, than Greece’s 79.

The debt clean-out will help growth as it always has. But cold comfort for the people sacrificed by a toxic blend of European idealism and grotesque local incompetence

49 Responses to “Cyprus: The Operation Was a Success. Shame the Patient Died.”

  1. Sarah Fenwick March 23, 2013 at 8:28 am #

    Great article. One note – President Nicos Anastasiades justified the bank levy on deposits as a way to avoid the collapse of one of the banks. Now that Laiki Bank will be resolved, the authorities have made their statement. Preparing to cut debt in the financial and government sector can lead in two directions – becoming a healthy partner in the eurozone, or leaving the eurozone completely and protecting the economy from similar situations in the future.

  2. xavier delcourt March 23, 2013 at 9:11 am #

    “the structural shock of wiping out the…” whom?

  3. Rick March 23, 2013 at 11:02 am #

    not “whom?”, Xavier Delcourt, but “What?”

  4. M March 23, 2013 at 11:39 am #

    “European idealism”… I thought it was realpolitik?

  5. M March 23, 2013 at 11:39 am #

    Great post btw. Slightly weird phrasing here though: “the scale of rumoured haircuts is hair-raising inflicts lasting damage”

  6. Aisling March 23, 2013 at 12:03 pm #

    Be careful with the Icelandic comparisons.

    Given their location they import little in the way of basics including having a relative energy independence the envy of most, if not all, of the EU. The hydroelectric and geothermal energy is a significant reason why their devaluation did not cause worse inflation. Their only FDI industry is aluminium smelting based on that cheap electricity. Their capital controls are still in place. And their fishing fleet are engaged in massive over fishing of mackerel in the North Atlantic at the moment.

    So Iceland without the currency, without the domestic energy production, and without the fish…

  7. Aldis March 23, 2013 at 12:45 pm #

    Here’s step-by-step summary of Parex bank (Latvia) takeover, which is bigger than Ukio case in Lithuania

    • Aldis March 23, 2013 at 12:46 pm #

      sorry, the link:
      http://fktk.lv/texts_files/Parnemsanas_apskats_02.02Eng.pdf

      • pawelmorski March 23, 2013 at 12:51 pm #

        Were Parex depositors haircut though?

      • Aldis March 23, 2013 at 2:48 pm #

        No hc on customer deposits. Withdrawal limits were introduced, some of big nonresident s were forced to convert their balances from ondemand to ca. 2Y term deposits. Even syndicated lenders (750mEUR) were bailed out. But this was the very beginning of the crisis, I suspect today the terms for creditora would be tougher.

  8. Eoin Callaghan March 23, 2013 at 3:40 pm #

    Reblogged this on Eoin Callaghan and commented:
    Pawel Morski has been a lead commentator on the Cypriot bailout “situation”. This post gives a great insight into why this “situation” has come about, ponders on the implications for Cyprus and highlights how Europe and the euro has survived an isolated eurogroup banking collapse.

  9. joshuak2077 March 23, 2013 at 3:53 pm #

    I am impressed, it is great article.., the EU plays with fire, and from fire shell burn…., their policies are despicable but more important economically incoherent, except the libertarian EU cult.
    Sincerely,
    Joshua Ioji Konov

  10. joshuak2077 March 23, 2013 at 3:54 pm #

    Reblogged this on Philosophy of Market Economics.

    • Question Man March 23, 2013 at 6:12 pm #

      Cyprus needs a normal economy. If it therefore is necessary to kill off the shady-money banks so be it. The business model was unsustainable anyway with interest rates up to 7% (where would that interest have come from? It reeks of a pyramid scheme to me).

  11. Archie March 24, 2013 at 2:55 pm #

    Is it possible to identify those who created the Cypriot debt and those who profited from it? Are those who profited now bearing the cost? Who benefits most from the bailout?

    Just where do the large bond holders fit into this? They took on risk when buying bonds. Having taken a risk they should be prepared to lose. Are they paying their share?

    How much did the ordinary Cypriot citizens contribute to the debt? Is the price they will have to pay over the next decade proportionate with their complicity?

    Are job losses, business failures, the cutting of services that are still to come a proportionate price they should pay?

    I am struggling to understand what is happening in the E.U. Can someone provide me with some clues.

    • Ilene (@ileneca) March 24, 2013 at 4:53 pm #

      Pawel, is there a way I can send you an email about reposted some of your articles? thanks, Ilene (ileneca at gmail dot com)

      • pawelmorski March 24, 2013 at 9:09 pm #

        Sent DM on Twitter.

    • Andrew Allison March 24, 2013 at 7:19 pm #

      The eurozone is being put on notice that, henceforth, bail-outs will be accompanied by bail-ins.

  12. Klaus Kastner March 24, 2013 at 8:43 pm #

    I still think that the best proposal so far is the one coming from Lee Buchheit. See link.

    http://www.voxeu.org/article/walking-back-cyprus

    • pawelmorski March 24, 2013 at 10:57 pm #

      Yes, linked to this in previous post.

Trackbacks/Pingbacks

  1. Cyprus: The Operation Was a Success. Shame the Patient Died. | Technically Business - March 23, 2013

    [...] See on pawelmorski.wordpress.com [...]

  2. Why Europe Should Be Thrilled By How This Week Went | Business Insider Australia - March 23, 2013

    [...] In another great post, the pseudonymous fund manager @pawelmorski points out how well markets took all this, and how Europe’s confidence seemed to grow throughout the week: [...]

  3. Why Europe Should Be Thrilled By How This Week Went (Featured) - Best news website in USA - March 23, 2013

    [...] In another great post[1], the pseudonymous fund manager @pawelmorski[2] points out how well markets took all this, and how Europe’s confidence seemed to grow throughout the week: [...]

  4. Weekend Reads (Cyprus, Speyside, animal intelligence, Michael Owen) | TRADING ROOM - March 23, 2013

    [...] Cyprus: Cyprus: The Operation Was a Success. Shame the Patient Died (Pawel Morski) Cyprus: Thoughts on capital controls and the „National Solidarity Fund“ [...]

  5. Assorted links - March 23, 2013

    [...] also their fear of Russian reprisals against their persons.  There is a very good Cyprus post here, and another [...]

  6. Cyprus: The Operation Was a Success. Shame the Patient Died. | Some of it was true… | Gold, Stocks & Forex - March 24, 2013

    [...] Read more at Cyprus: The Operation Was a Success. Shame the Patient Died. | Some of it was true…. [...]

  7. Cyprus: It’s not over yet | Felix Salmon - March 25, 2013

    [...] or two of massive debt relief, is going to be extremely difficult. The deal as constructed is, in Pawelmorski’s wonderful phrase, “Iceland without the fish”: Cyprus, as Iceland did before it, is letting its [...]

  8. » Mały krok ku normalności Trystero.pl: Niezależny blog finansowy - March 25, 2013

    [...] spadek PKB i istotne skurczenie się bazy podatkowej. Cypr zapewne wejdzie w kilkuletni okres gospodarczej depresji. Jak w takim scenariuszu wyglądać będzie dynamika cypryjskiego długu? Jestem przekonany, że [...]

  9. A Greek tragedy » The Cobden Centre - March 25, 2013

    [...] – Pawel Morski, ‘Cyprus: the operation was a success. Shame the patient died’. [...]

  10. Cyprus Tries the ‘Good Bank, Bad Bank’ Strategy | Macphisto007's Weblog - March 25, 2013

    [...] to save Cyprus’s banking sector is better explained, among other places, here, here, and here. But the rough outline is [...]

  11. Cyprus: What next? – Quartz - March 25, 2013

    [...] currency is grim. A respected fund manager and strategist who tweets as @Pawelmorski compares the impact of the negotiations in Cyprus to a full-on war (our [...]

  12. Cyprus: The Operation Was a Success. Shame the Patient Died. « Economics Info - March 25, 2013

    [...] Source [...]

  13. From the Archives: 3/25/2013 Edition « whatsjohnreading - March 25, 2013

    [...] http://pawelmorski.wordpress.com/2013/03/23/cyprus-the-operation-succeeded-shame-the-patient-died/ [...]

  14. Recommended Article By paul: Cyprus: It’s not over yet | Macphisto007's Weblog - March 26, 2013

    [...] or two of massive debt relief, is going to be extremely difficult. The deal as constructed is, in Pawelmorski’s wonderful phrase, “Iceland without the fish”: Cyprus, as Iceland did before it, is letting its [...]

  15. Cyprus: It’s Not Over Yet | - March 26, 2013

    [...] or two of massive debt relief, is going to be extremely difficult. The deal as constructed is, in Pawelmorski’s wonderful phrase, “Iceland without the fish”: Cyprus, as Iceland did before it, is letting its [...]

  16. Europe Should Be Thrilled By The Week It Just Had – Business Insider | Everyday News Update - March 27, 2013

    [...] In another great post, the pseudonymous fund manager @pawelmorski points out how well markets took all this, and how Europe’s confidence seemed to grow throughout the week: [...]

  17. Around the World - The Agonist - March 27, 2013

    [...] ** Cyprus: The Operation Was a Success. Shame the Patient Died. ~ Some of it was true blog [...]

  18. Brussels blog round-up for 23- 29 March: Cyprus crisis continues, creative accounting in Spain, and is Germany Europe’s bully? | EUROPP - March 29, 2013

    [...] true… looked over the previous week’s developments, commenting of the Cyprus bail-in that, ‘the operation was a success, but a shame the patient died’. Open Europe ponders whether or not Cyprus could leave the eurozone, but remain in the EU. A new [...]

  19. Chocolate Easter Cornflake Cakes and the Broken Euro | Cookatude - March 30, 2013

    [...] otherwise be possible? Much depends, I suspect, on the pressure on public finances caused by the nowinevitable economic collapse. Declining tax take might encourage  a desperate government to enforce use of the Euro, despite [...]

  20. News update 24/03/2013 | Simplifying personal finances - March 31, 2013

    [...] Operation Was a Success. Shame the Patient Died. An EXCELLENT write up with interesting conclusions http://pawelmorski.wordpress.com/2013/03/23/cyprus-the-operation-succeeded-shame-the-patient-died/ No human agency has achieved so much economic destruction in such a short time without the use of [...]

  21. Links 3/23/13 « naked capitalism - April 9, 2013

    [...] Cyprus: The Operation Was a Success. Shame the Patient Died Snapshot of “progress”. Take particular note of the conclusions about the Cyprus economy post bailout. [...]

  22. Another sorry debt sustainability analysis | The Prodigal Greek - April 10, 2013

    [...] spite of the fact  that as Pawel Morski writes in this post “No human agency has achieved so much economic destruction in such a short time without the [...]

  23. Another Sorry Debt Sustainability Analysis - April 11, 2013

    [...] spite of the fact  that as Pawel Morski writes in this post “No human agency has achieved so much economic destruction in such a short time without the use [...]

  24. GLOBAL LOOTING: How the Fat Cats will ruin us with Fat Tax | The Slog. 3-D bollocks deconstruction - April 12, 2013

    [...] as a slave well beyond any slave’s reach. As Pawel Morski writes of the Troikanauts in this post, “No human agency has achieved so much economic destruction in such a short time without the use [...]

  25. John Ward – Global Looting – How The Fat Cats Will Ruin Us With Fat Tax – 12 April 2013 | Lucas 2012 Infos - April 12, 2013

    [...] as a slave well beyond any slave’s reach. As Pawel Morski writes of the Troikanauts in this post, “No human agency has achieved so much economic destruction in such a short time without the use [...]

  26. New Slog Post: GLOBAL LOOTING: How the Fat Cats will ruin us with Fat Tax #johnward - NTMarkets.com - April 12, 2013

    [...] as a slave well beyond any slave’s reach. As Pawel Morski writes of the Troikanauts in this post, “No human agency has achieved so much economic destruction in such a short time without the use [...]

  27. The debt-management stage of banks and globalist superpowers is over. The tax collection is now under way. | - April 15, 2013

    [...] as a slave well beyond any slave’s reach. As Pawel Morski writes of the Troikanauts in this post, “No human agency has achieved so much economic destruction in such a short time without the use [...]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Flip Chart Fairy Tales

Business Bullshit, Corporate Crap and other stuff from the World of Work

The Prodigal Greek

The Greek crisis through a different prism

Classe éco

Un site utilisant Plateforme de blogs de francetv info

Dealbreaker

Wall Street Insider – Financial News, Headlines, Commentary and Analysis - Hedge Funds, Private Equity, Banks

Follow

Get every new post delivered to your Inbox.

Join 212 other followers

%d bloggers like this: