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