Europe: No Need To Worry, The Fire’s Downstairs

27 Mar

Am I jumping the gun, Baldrick, or are the words “I have a cunning plan” marching with ill-deserved confidence in the direction of this conversation?” Edmund Blackadder

Jeroen Dijsselbloem has been pilloried for his remarks following the conclusion of a deal with Cyprus. But is the assault just self-interested finance apologists (like, presumably, me) appalled at having their snouts removed from the public trough? Or are digs about his qualifications proving justified?

First up – let’s be clear. The EU is pretty emphatic about what the future of bailouts looks like: No more blank cheques, the ESM will not become a TARP, and uninsured depositors are in the firing line, as are senior bondholders; taxpayers are not.In this both Mr Dijsselbloem and the rest of the European authorities are in agreement.

If the bank can’t do it, then we’ll talk to the shareholders and the bondholders. We’ll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: “What can you do in order to save your own banks?” In other words, taking away the risk from the financial sector and taking it onto the public shoulders is not the right approach. If we want to have a healthy, sound financial sector, the only way is to say: “Look, there where you take on the risks, you must deal with them. And if you can’t deal with them, you shouldn’t have taken them on and the consequence may be that it’s end of story.”

Aside from the incitement to panic added to the end, there’s nothing new in the substance – the EU is clearly moving to bailins, as it should with a banking sector this vast. The EU Working Paper linked above is from June last year:

by removing the implicit certainty of a publicly-funded bailout for institutions, the option of resolution should encourage uninsured creditors to better assess the risk associated with their investments.

We’ve had a steady stream of denials that Cyprus is a template (a word which, incidentally, i can’t see either the FT using at all, or Reuters implying he used). We’ve had roughly nothing to contradict the principle that uninsured depositors are in the firing line. Pro tip: when someone says “insured depositors will be protected” they mean “uninsured depositors will not”. And there’s nothing new here – David Keohane has more detail, along with the far-from-trivial detail that this masterplan is part of a new regime that’s due to come in in 2018.

So far, so fine and dandy. There’s plenty to like about this in principle – it’s consistent, it’s transparent, it doesn’t put taxpayers on the hook for openended sums, and it’s progressive – things that hurt only people with more than €100,000 tend to be. In this case, the Eurogroup is being assaulted for doing no more than telling the truth.

However, there are two important problems here 1) depositors over €100,000 control enough money to overturn the European economy if they stampede; 2) there’s – to a fairly fine level of precision – zero evidence that the people in charge know what they’re doing. In short, the last thing the Eurozone needs right now is uninsured depositors thinking hard about the prudence of their investments.

Here’s two really interesting* tables



(it’s from Annex 3 & 2 here – 2007 data, but hard to imagine there’s been a fundamental change in the data, Ireland and Greece aside). So while the vast majority of individual depositors are covered, a very very substantial chunk of the European money supply isn’t. Capital movements accounting for a small fraction of this amount are a major cause of the severity of the peripheral slowdown. You cannot dick around with money on this scale unless you know what you’re doing. To suggest that the bailin legislation is a problem for the periphery and uninsured depositors is to say that the fire is downstairs. The FDIC is the chosen comparison for the optimists. But the FDIC works best with small banks (of which Europe has comparatively few); when Wachovia, Citi and Bank Of America ran into trouble, the FDIC was not left to do its job. And the US banking sector assets are around 80% of GDP, vs around 3x that for the Eurozone.

To raise the issue of depositor bailins now – five years ahead of schedule and with nothing in the way of a resolution regime would show impressive hubris had the Cyprus operation gone well. It didn’t. It was a complete disaster. If I had been in charge of European policy for the last week, I’d like to think I’d be suicidally depressed. I would be stuck in bed with a bottle of vodka, refusing to emerge unless finally coaxed out by someone willing to lie that the Cypriots would be willing to forgive me. From undermining the EUR100,000 deposit guarantee, to wiping out and freezing business working capital, to hammering businesses ahead of the April VAT payment, the execution alone is crammed with unforced errors A politically stupid plan, rejected by an equally culpable Cypriot parliament, was replaced with a worse one has inflicted massive, irretrievable destruction on the economy of Cyprus. There’s a great deal to be said for commercial experience and gradual rollout. If Coca-Cola had tested a new product that killed 10% of the focus group, it’s reasonable to assume that they’d hesitate with the global rollout of Cyprus Cola. Instead, Mr Dijsselbloem is clapping the dust off his hands, announcing that he thinks this all went rather well, and looking to have another crack somewhere else. And it appears he’s decided to start with further scaring already skittish large depositors.

nomura bankssource: Nomura

The European banking system cannot be remade piecemeal. We either hold things together until the resolution regime is in place or introduce a Roosevelt-style emergency Banks Act and remake the system. A major shift in uninsured deposits risks precipitating a crisis that hurts everyone – insured or not, periphery or core – or even outside the euro. Given that Europe’s banking experts looked at both Laiki and Bank of Cyprus and found they were good , yet we’re now hearing the Cypriot finance minister talk of 80% haircuts on Laiki, a little more humility – and even an admission that things went badly – would be far more reassuring than the current confidence.

In short, I’m howling because we have rank amateurs playing a high-stakes game without understanding either the rules or what’s at stake. Maybe our masters have plans for a controlled detonation of a massively complex and unstable system. But I see damn all evidence of that. Instead we appear to have a group of underqualified provincial politicians who, having been badly mauled by a housecat are looking to pick a fight with an alligator. (/rant)

Many thanks to: @goodrichwatts, @katie_martin_fx, @lorcanRK, @toby_n and @harveyrobinson1 for their help with this post. and the Cyprus presentation is by @alexapostolides.

58 Responses to “Europe: No Need To Worry, The Fire’s Downstairs”

  1. Miles Ruffell March 27, 2013 at 10:58 am #

    Excellent and frightening!!

  2. european March 27, 2013 at 11:37 am #

    I see it differently: I see that JD made the dutch uncle in contrast to his peers that talk double dutch. I am positive about his comment, that can be summarized as “there are not free meals any more”

    • Richard March 27, 2013 at 2:41 pm #

      True, no more free lunches, but your stance (like the Euro politicians) is akin to, while a fire is burning down part of your city, the mayor of the city coming out to say that the city won’t encourage moral hazard by giving free fire insurance to all houses in the city (while not bothering to fight the fire).

      So congratulations! You get to feel all self-righteous while your city burns down!

    • gina March 27, 2013 at 3:27 pm #

      somehow i don’t think Greek’s feel that they have had a free meal. nor the Irish. wouldn’t you agree? don’t forget, so far, german taxpayers haven’t lost a cent of their money. they bailed out their banks (who were bondholders of greek debt) by forcing the greek taxpayer to take on yet another loan they couldn’t afford (in addition to all those loans they couldn’t afford which they took out to buy German products at horribly inflated prices).

      • dpapagiannopoulos March 27, 2013 at 4:18 pm #

        Gina, dear
        Our free meals were consumed for a decade till 2010.

  3. Gloeschi March 27, 2013 at 1:27 pm #

    Great write-up.
    Seems we are so used to getting lied at by politicians that a quantum of truth is capable of toppling the house of cards.

  4. yorksranter March 27, 2013 at 2:38 pm #

    What’s with Swedes and holding enormous amounts of cash on deposit?

    • pawelmorski March 27, 2013 at 2:42 pm #

      Hmmm. Good question – but surely a FFoE blogger will know someone with the answer?

  5. devonseaglass March 27, 2013 at 6:30 pm #

    I read that Cyprus has been ‘given’ €10 billion of European taxpayer’s money, as well as using depositor’s cash, to sort out the banks. Did I misunderstand?

    • pawelmorski March 27, 2013 at 9:00 pm #

      Lent not given and not for the banks, but general fiscal.

  6. Iconoclast March 27, 2013 at 9:40 pm #

    The guy is not a native English speaker…give him a break. The actual rule is…there are no rules. It’s whatever works and I’d say the hysterical, vodka fueled, hyperbole by our author is way off the mark. The Troika must be feeling fairly pleased with themselves right now since the deal they got was pretty much the deal they wanted. Take a pilll and lie down. The Chinese et al will not be rushing for the doors any time soon..

  7. Ilene (@ileneca) March 27, 2013 at 10:31 pm #

    pawelmorski – is there a way to contact you?

  8. IGimlet March 28, 2013 at 4:23 am #

    Just because we don’t understand what they’re thinking doesn’t necessarily mean they aren’t thinking to begin with.

  9. Henry Barth March 28, 2013 at 6:23 am #

    Over 100,000 Euro on deposit in NOT a lot of money if it’s a lifetime of savings for retirement and you’d like to have a retirement income. The Irish were the first to put a surcharge tax on retirement funds…there will be more.

  10. ballymichael March 28, 2013 at 7:37 am #

    It’s an excellent coverage of the issues, delivered with clarity and with backing numbers.

    I will probably be lifting a bit of it here and there and translating it into german, to throw in on german forums. Mostly I’ll just link though, and hope that the small minority who are not high on self-righteousness actually read the thing.

    I actually don’t think the european authorities are quite as clueless as Pawel Morski is making out here. It’s more that the communication is terrible. And a lot of the actors aren’t in London, and don’t by any means come from what germans tend to refer to as the “anglo-saxon banking tradition” – so don’t actually do much talking to the press in london.

    The EU working paper on banking resolution linked above mentioned 2018, various governments (germany included, no surprises there) are pushing for it to be brought forward to 2015. But that’s the EU, what about the EZ?

    There, the date appears to be March 2014, when the ECB takes over banking supervision. They’ve been pushing for some time in Parliament and Council and Commission to have “european wide banking resolution” – ie: the instruments for bail-ins -to be ready by that date. And the Cyprus Fiasco does very much underline why they have.

    So what would ECB-run resolution look like? Asmussen’s speech from december 2012

    is actually pretty detailed, and diverges significantly from what Dijsselboem said.

    1. No mention of bail-ins for uninsured depositors. Just share- and bond-holders (junior and senior). By my understanding, this means legal changes, as senior unsecured bond-holders are currently pari passu with depositors. (Which was a big issue in ireland, in 2010)
    2. Direct Bank Support from ESM is still very much in there, but as a last resort (hardly surprising, given the . There seems to be some group-think going on amongst analysts that it’s dead? And I have no idea why. Well, actually I do – the level of knowledge of EU institutions in London is, I’m afraid, not high, and the default assumption seems to be that they’re incompetent. (Blame the UK press for that).

    And since Asmussen was the coordinator at the Finance Ministry of the (many, many) bank rescues and resolutions in germany in 2008, he does actually know what he’s doing. But he definitely does come from the Ordnungspolitik tradition. And that diverges significantly from the “anglo-saxon tradition”. So bank rescue funding is a job for the governments, not the central bank. Either that or (as the german cooperative and savings banks do) a mutual guarantee and rescue fund that they all pay into.

  11. Milton Arbogast March 28, 2013 at 8:05 am #

    In the first place, ad hominem comments about the poster’s English language skills are simply wrong. His English language skills are superb, and I defy anyone to prove differently. What a ridiculous criticism by someone who doesn’t know what they’re talking about.

    In the second, Jeroen (sp) has exactly the same sort of background as Karl Rove in the US. He is the worst sort of ignorant, poorly educated, political groupie who has suddenly found himself powerful. If he were your child’s teacher, you’d be complaining to the rooftops. But through ass-kissing and lordosis he has gotten himself into power. We see this. Europe, a congerie of two dozen different languages and cultures doesn’t need his ilk, and he will destroy it if he can.

    Here is the main problem: prove that Cyprus is not Germany’s Warsaw Ghetto 2013.

    Recall that the Germans left the administration of the ghetto to their clients within the local population.

    What Germany has to fear is that someone will start saying € = swastika. They don’t seem to understand that. And to front up some Dutch boot licker is not a clever approach.

    Oh, and would I have bailed out the banks with taxpayer money? Of course I would have, but I would have made the taxpayers majority shareholder owners of the banks they bailed out at the same time. And, more importantly, I would have put in place strick banking rules to prevent this sort of thing happening in the future.

    Taxpayers can, sometimes should, bail out banks. But then they own the banks. They’re not paying for Jamie Dimon to take a million dollar vacation. Larry Summers’ “unintended beneficiary” idea leads straight to the guillontine, but Jeroen’s ideas aren’t worthy of the name.

    • Marnix Bijl March 28, 2013 at 8:37 am #

      Dear Milton, please do your homework before posting a comment. I don’t know what you call poorly educated, but I get the idea that mister Dijsselbloem enjoyed a bit more education than the one calling him “poorly educated”.

      • pawelmorski March 28, 2013 at 8:42 am #

        Ahem: the words ‘poorly educated’ do not appear in the post. That would indeed be ad hominem. ‘Underqualified’ does – that’s something else, and IMO relevant.

      • Milton Arbogast March 28, 2013 at 10:08 am #

        I seldom have to defend my education, actually I never have to defend my education, and I won’t now. However, look at Jeroen’s c.v.

        “1991: Business economics research towards a master’s degree, University College Cork, Ireland”

        Work toward a master’s degree in Cork after completing agricultural studies at Wageningen University. Now, I suppose that in my ignorance I have missed the point that Wageningen is the Harvard of the Netherlands. I doubt it, but it is possible.

        On the other hand, “discontinued”, i.e. he didn’t get a degree, work at Cork is second echelon at best.

        I reiterate, “poorly educated”. The guy is deciding the fate of a million Cypriots and he couldn’t complete an advanced degree. Puhleeese.

    • Gina March 28, 2013 at 2:56 pm #

      Brilliantly stated… The general German population can’t seem to understand why so many in Europe are feeling outraged, And yet they steadfast refuse to listen to what the other side is saying or accept any form of criticism of their leadership. What saddens me is to see the German political class hardening their position, rather than softening it in the face of criticism. And the German people seem to close ranks in support of their political class. I don’t really get it cause I hear Greeks criticizing not only the Greek political class but also themselves, both on the streets and in the media. I hear British and American’s doing the same. Why can’t the German media machine question their leadership? A little (just a little) introspection for Germany is imperative considering the power this country yields over the fate of so many other people, and yet it seems to that the German media machine is incapable of this. So many years the Germans criticized the Americans for steam rolling over them and others. And now (see article below), instead of having learnt from that, all they can say is that the criticism of others of the US previously and Germany now is just the outcome of envy. That is how petty Germany’s political class has become and unfortunately there is no-one in the media prepared to challenge this view.

      • ballymichael March 28, 2013 at 4:00 pm #

        No, Gina, I’m afraid they don’t understand. The demand for a bail-in as part of the bail-out has been growing in intensity for a long time, and was greeted across the board (SPD, Greens, and Merkels coalition) as a very positive development (except for the bit about the deposit insurance – everybody thought that was a bad idea, and Schäuble didn’t even try to defend it. (Instead, he blamed Anastasiades, not in fact entirely accurately).

        It’s basically a mixture of popular fury (only really on show in the comments in german-language sites) about:

        1. how the promises their politicians made them about the Euro are proving to have been lies; together with

        2. a deep sense of grievance that these bailouts, which are entirely voluntary, as far as the german population are concerned, just lead to stupid nazi analogies and shrieky coverage in foreign media

        3. Differences in financial attitudes, culturally-bound. The german banking system is extremely fragmented by design, and generally well-regulated. (To make really stupid errors, german bankers normally had to travel abroad – which they did). Banks that make big mistakes get resolved, or quietly merged, very fast indeed. That’s actually pretty easy to do with a fragmented system. Sure, if Deutsche Bank got into bad difficulties, they’d struggle. But they’d probably just let it go under.

        4. Misinformation in the media / financial illiteracy. Germany is actually profiting from the crisis, to the tune of an estimated €14bn per year less debt service, because bond yields are so low. Unfortunately, pretty well everybody is convinced that the german tax-payer has paid out lots of money. And they lack the patience to be told by some banker the difference between Germany providing guarantees (that cost nothing unless they fall due) and actually paying out money.

        Basically, letting banks go bust (or at least be resolved) is a vote-winner across the political sprectrum in germany. And because they don’t have any banks that are “too big to fail” in a local context, like cyprus has. they really don’t get just what devastating effects it has on a local economy. In that context, by the way, the threats of default if a bailout were not given, by the Christofias government, were deeply counter-productive, for Cyprus.

        Hopefully, they’ll learn a bit by watching the upcoming disaster in Cyprus. But yes, this has badly weakened the Eurozone, in ideological and probably financial terms.

  12. Milton Arbogast March 28, 2013 at 11:42 am #

    And, one other thing, just for the two tables, this is an extremely well worked-out helpful and enlightening post. Thank you.

    In the US those two tables, whose data I daresay are replicated there, lead to much gnashing of teeth about the one percent and no action. That is, the one percent are not only left alone, they are put in charge. Obama campaigns for the 99% and represents the 1%. Romney’s gaffe was to campaign for the 1%, which arithmetic might have told him would not produce an electoral victory.

    In Jeroen’s Europe, the 1% (who represent 30% of the deposits) shall be emasculated. Fine, but you can’t just emasculate. It’s not like one of your farm animals Jeroen, you have to manage society afterwards. And managing means recapitalizing the banks and taking charge of them. Managing.

    • Caveatemptor_zero March 28, 2013 at 2:24 pm #

      Splendid post, take it to the streets of NYC and your future as an chiromantic and oneiric advicer is assured.

    • Gina March 28, 2013 at 3:09 pm #

      Milton, I find you spot on. Mr. J & gang also seem to ignore that there are human beings behind these numbers. Maybe the BoC and Laiki are not systemically important in Europe but they are too big to fail for Cypriot society. Shame on Europe. And all for Euro 7 billion. If Cyprus was a “special case” as they keep arguing, then it could have also been a “special case” for better treatment not worse (i.e. a bailout of the kind you suggested). Also sad is that the smaller European nations – Ireland, Malta, etc. refuse to show solidarity with each other and spend all of their time making headlines with statements along the line that “we are not Greece” or “we are not Cyprus” now. Obviously they are not, but that misses the point. BTW, didn’t Portugal and Ireland effectively get a “haircut” on the silent with extended maturities and lowered interest rates. And that went by without hardly a mention. It’s like when we were at school and the big bully used to pick on one weak little boy but then in order to ensure that the others still liked him and took his side, would go out of his way to be really nice to the other weak little boys.

  13. George Hatjoullis March 28, 2013 at 3:30 pm #

    Hard to disagree. However, you reveal a touching naivety in ever thinking the people running the show know what they are doing. This is not the first time they have demonstrated that they don’t (though i admit this time the degree of incompetence has set new records).

    The Cyprus debacle is a clear application of the ‘no moral hazard’ principle that has been evident in dealing with sovereign debt issues. You didn’t honestly think they were going to wait until they had a coherent banking unon before applying it to banking, especially if they deemed the banking system in question as not having systemic implications and the people of no consequence?

  14. Ratt March 28, 2013 at 3:51 pm #

    If this is EU’s plan to rape the share holders, bond holders and the uninsured deposit holders then what’s to keep them from collecting all their marbles and going home.

  15. Chido Houbraken March 28, 2013 at 4:26 pm #

    You wrote:
    “The European banking system cannot be remade piecemeal. We either hold things together until the resolution regime is in place or introduce a Roosevelt-style emergency Banks Act and remake the system.”

    With ‘resolution regime’ you mean the equivalent of the UK Special Resolution Regime? Don’t most countries have such a regime, now? Why would you want one on European level?

    The Roosevelt Bank Act was to *stop* a bank run (and then turn to the real problem). Not to prevent one. Besides, that bank run was not directly caused by failing banks, but it did make banks fail. And the Acts could work, because the bank structure was gone. Therefore it was possible to restructure it relatively easy. That’s not completely comparable with the European situation. History repeats itself, but never in the same way.

    If piecemeal remake is impossible (why?), then the only way to change the system (I believe) is to let it collapse and then make banking less interesting for the money-hungry, getting-kick-from-risk loving managers and chiefs. Banks have a preferred status in taxes and regulation, because they are supposed to be the greaser of the modern economy. So let’s treat them that way. The banking system is a precondition for a stable economy and therefore not a player in that same economy. No risks-for-profit with other peoples money.

    At this moment I feel like that frog in a pan of slowly heating water. As a taxpayer I keep ‘paying’ for all those banks being rescued because they’re too big to fail. And because my government tries to stay within the 3% deficit rule (which is in principle fine with me: you have to draw a line somewhere), there are heavy cuts on health, culture and education budgets. Three things I’m quite fond of.

    Meanwhile, it gets harder to obtain mortgage loans from those same banks, my credit interest rate is close-to-nothing and as a entrepreneur it is virtually impossible for me to get an investment loan.

    So now there are movements of entrepreneurs helping each other with loans (because there are still enough that make a respectable profit). They form investment funds, either regionally or within their field of expertise. Taking the risk together and sharing the profit. You know, that’s how a lot of European banks started out. And now it has to be done again.

    Banks and the current banking system is losing importance and influence. It needs to be reformed desperately to remain intact. If blunt honesty by a political responsible like Jeroen Dijsselbloem speeds up that process, I’ll applaud it. A bank run does not mean that money goes up in smoke (as it does with a stock exchange crash), it gets ‘relocated’ for a while. It leaves the banking system, but not society. And (being the devil’s advocate, now) since I get no interest on my credit and can’t obtain an investment loan, what do I care about banks?

    • Gina March 28, 2013 at 7:36 pm #

      How about applauding the fact that every time i buy a product made in Germany, more jobs are created in Germany. I create jobs in your country. There is no way the periphery can create a Siemens or a VW or a BASF. When I go to the supermarket now I can’t even find oil that is bottled by a Greek company. All the oils are bottled by German companies (who therefore make all the profits). You are big enough to kill all the competition cause you have the biggest economies of scale. That is why transfer unions exist. Cause you can’t plant a Mercedes factory in every remote part of a country and so inevitably there are going to be pockets which simply can’t produce enough to maintain the same living standard which you deem appropriate for you and your children. Or of course, we can return to closed markets. After all, Germany has China, Brazil and soon India so what does it need the periphery for anymore. Purpose served, right?

      • Chido Houbraken March 29, 2013 at 9:14 am #

        Sorry Gina, I’m not German. There are more countries in Northern Europe.

        Funny thing is, until not that long ago I was very much in favour of supporting our Southern EU friends. We’re in this together, right? Then I hear and read about these complaints coming from the south. As if a country has a godgiven *right* to be supported.

        But that’s the problem, isn’t it? There has been support for decades (again and again I’m surprised about the amount of ‘supported by the EU’ signs near public projects in the South) and now there is dependency.

        And then the south started accusing Germany of Nazi/fascist colonialism. That was the limit for me. (Historically speaking, especially Italy and Spain better be very careful with such accusations.) If this is the BS to justify a claim or to blackmail a country, you’ve lost me.

        But the real problem is a culturally different approach to government. My impression is (grossly exaggerating now) the ‘South’ sees the EU as a publicly funded cash cow for private use. Not as a tool to be stronger together. Or, to put it differently: the EU is an agricultural organisation (I’m connecting to Jeroen Dijsselbloem, here), where the sowing is done by the North and the reaping is done by the South. And, now the crop is lost by a natural disaster, the South wants compensation.

        It seems like these cultural differences are too big. Splitting up the EU into a ‘north’ and a ‘south’ looks very tempting to me. It should do to you too, Gina. You can create your own little closed market and kick out all those nasty Teutonic olive oil bottlers.

    • Gina March 29, 2013 at 9:47 am #

      Dear Chido, did the Southerners start their rant before or after the Northerners started calling them lazy and other stereotypes, which by the way, I have been living here in Germany for years and those stereotypes were bandied around all the time. You know, great joke, ha ha. What the Southerners mean when they call Merkel Hitler is that she lacks a heart. They must surely be squealing cause they are hurting, wouldn’t you say? Isn’t it worth trying to find out what these people are feeling considering you are of superior intelligence and culture and also wield power over their fates. Or will you resort to stereotypes and say they are squealing because they are lazy no gooders and because they want everything free? Stereotypes on both sides wouldn’t you say. But trust me the Southerners saying these things simply plays into Shauble and Merkel’s hand. It is not clever. It would have been better if the Southerners had stayed quiet and let the Dutch, Germans and FInns continue to rant about how inferior their culture was and let them call them lazy to their hearts content and simply pander up to the North in the hope of better treatment like Slovenia. Certainly your email suggests that is what the South should have done to win over the Northern electorate. Forgive me if I say, Northerners are betting at dishing it out than at having it dished out to them. But our discussion misses the point, and my point in my email which is about competitiveness and job creation in Southern Europe. What we should be concerned about with here is Human Suffering, not Human Egos. It is irrelevant if a bunch of illiterates call Merkel Hitler or Greek’s lazy. What is more relevant is that 100′s of 1000′s of people are loosing their job as we speak and what we can do to prevent these people suffering. Wouldn’t you say?What is important is whether the solutions being found for the weaker members of the EU are constructive and I don’t believe they are. But that’s my view. Europe was hot on Too Big To Fail so long as the banks in question were banks in Northern Europe. Now that it’s about banks in Southern Europe, suddenly a hard line stance has been taken.

      • Chido Houbraken March 29, 2013 at 3:16 pm #

        Dear Gina,
        I wasn’t ranting in stereotypes; I tried to avoid that. We’re alle Europeans and we’re together in this mess, in my view. And then all I see is complaining. That made me edgy. You can’t seriously expect one party to keep bailing out the other party, without consequences. And you can’t do that without looking at the past.

        Do you really think that there’s no considerable job loss in Northern Europe because of the banking crisis? Are you seriously thinking that companies (including banks) are not going belly-up here?

        As far as I know, at least one bank in my country was considered not too big to fail and it went bankrupt. The saved banks were largely paid by the shareholders (I lost some myself in 2009) and the taxpayers.

        (Aside: one of the reasons unemployment rates are rising even more is that successful companies can’t expand (thus creating new jobs), because the saved banks refuse point-blank to give investment loans.)

        What really bugs me is the idea of the EU / Northern Europeans being there to forget the past and bail everybody out. To show solidarity and shut up. I don’t believe in solidarity when it comes to economics. It kills responsibility. I believe in loyalty. That’s a two-way-street. So I don’t mind bailing out, but not for free.

        Yes, the suffering is greater in the South. But – I’m sorry to say – that’s mainly the result of bad national government. Not claiming the Northern governments are doing so incredibly well, but as John Hill said about the Cypriot situation: “you can’t orderly bail out a country if it doesn’t cooperate in any meaningful way”.

        That doesn’t mean you shouldn’t help the vulnerable. There are all kinds of ways to help them overcome these dark times. Bailing out governments and banks is not the best way. I thought it was, but believe now it isn’t. Because then ‘they’ will never learn. Especially the banks.

  16. Brick March 28, 2013 at 5:16 pm #

    Very good article. Still for Cyprus an FDIC like would have been a better solution, well ok everything would have been a better, still the the islands bank are relatively small, by European or US standards. Had we had an EDIC entity, it would have been also pretty bad for depositors BUT, it would be over by now. The bail out could have been directed at helping the citizens.

    Agreed that in case the Deutsche Bank goes belly up it wouldn’t do a thing, still for Cyprus, Portugal and Ireland it would have been a far better solution, than the state bailin the baks out with ESM money. An EDIC with ESM guarantees might be the way to go. Won’t happen I know, still it could imo even work for Spain.

  17. Panos Sialakas March 28, 2013 at 7:46 pm #

    Reblogged this on Panos World and commented:
    ” If I had been in charge of European policy for the last week, I’d like to think I’d be suicidally depressed.”
    Still, EU leaders don’t seem to think that way…even if they just have taken another wrong turn.

  18. John Hill March 29, 2013 at 2:30 am #

    Ah so the ‘rank amateurs’ don’t understand the rules. The rules set by the banks I take it? Or perhaps ‘the market’? Are those the same banks that play so well by the rules when it comes to LIBOR? And the same banks that were supposed to be able to self-regulate so well before 2008? And is that the same market that did such a fantastic job of accurately pricing risk before the crisis? And still does? Please don’t make me laugh. Har. Har.

    For last time I checked, normally the rules are set by the people that you are ranting against. That is at least the way even a very flawed EU-style democratic process normally works. Perhaps your howling results mainly from the fact you don’t like the look and sound of the new rules, and definitely not the idea that they may come a little earlier than 2018?

    This constant ad-hominem criticism of Mr Dijsselbloem is cheap, unoriginal and mostly besides the point as the core of it appears to be: ‘it is not what he said, but how he said it and when he said it.’ For it spooked ‘the markets.’ Oh dear, what a terrible thing to do.

    Contrary to the myth you too are now subscribing too, it was not Mr Dijsselbloem’s idea that <100k depositors would participate. It was the Cypriot government's, elected by its very own people. Should Mr Dijsselbloem have let it happen? Perhaps not, but let's not forget who else was in the room: Ms Lagarde, Mr Draghi and a lot of other people. Are they all 'rank amateurs,' under-qualified and provincial.

    Has it also occurred to you that the troika had been negotiating with Cyprus for many, many months about a resolution for banks that had been in ELA since June last year? The Cypriots kept dragging their feet, and everybody kept going around in circles because of this. Sadly the only way to break the impasse and move forward was to force their hand. And yes, this did not look pretty. And no, most people are worse off now than they would have been if it had happened in a more organised fashion. But you can't orderly bail out a country if it doesn't cooperate in any meaningful way. Let's not blame Mr Dijsselbloem for that, and certainly not in an isolated manner.

  19. Milton Arbogast March 29, 2013 at 5:21 am #

    Apparently, and I am late to the party, it has been true for quite awhile that “Europe” was seriously questioning the concept of “too big to fail” that rules in the US:

    “The Commission has calculated that between October 2008 and October 2011, it approved a staggering $5.75 trillion, the equivalent of 37% of the EU’s GDP, in state aid measures to financial institutions. Of that, about $2.05 trillion was actually used between 2008 and 2010, as banks in countries from Ireland to Greece teetered on the brink of collapse and had to be rescued.”

    And, of course, and once again I am late to the party, the reason is that the “banking problem” is far bigger in “Europe” than it is in the US. How it is that European banks have been given a green light to do just about anything a crook can do is a mystery to me, but there it is.

    I am under the impression (I don’t even remember the party) that when the Swedes bailed out their banks they took them over and everything worked out pretty well. Once again, why is that not the correct solution? Governments take over of the banks.

    Is banking too difficult for the average man? I never met a banker that seemed to bear out the truth of that statement. In fact, I thought they prided themselves on being average.

    • Chido Houbraken March 29, 2013 at 10:46 am #

      @Milton Arbogast
      You wrote:
      “Once again, why is that not the correct solution? Governments take over of the banks.”

      It’s a fantastic solution. For banks and their board of directors. But it’s not that great for taxpayers, believe me. And ‘correct’ is not the term that comes to mind when “entrepreneurs” taking risks with other people’s money get bailed out.

      “Is banking too difficult for the average man? I never met a banker that seemed to bear out the truth of that statement. In fact, I thought they prided themselves on being average.”

      Wow. So Dijsselbloem is underqualified/undereducated, but a banker can be an ‘average man’? Who would have thought that?

      First the ‘average man’ doen not have a university degree and is not a crook (like European banks, as you stated earlier). Second, when reading the banking-blogs of Joris Luijendijk in the Gardian or viewing the Warren Committee and the PCBS hearings, I get the impression that what bankers consider to be average, will not be shared by Average Joe.

      Especially Luijendijks blogs give me the impression that banks are still breeding little Nick Leesons and other underqualified, non-supervised and overtesteronized young professionals. Not your average person, believe me.

      To parafrase you: if the school of my kids was runned by such individuals, I’d want the police to arrest them and I’d have them criminally prosecuted.

      • Gina March 29, 2013 at 12:45 pm #

        Chido, uninsured depositors are not to blame either for what bankers do or for what inept politicians do. You’ve got to put your money somewhere. Depositors are after all taxpayers. Ultimately, it is the job of the Dijsselbloem’s and the Schauble’s to ensure that there is in place Europe wide regulation/supervision that keeps bankers in check and protects deposits – insured and uninsured – and stops businesses from going under due to banker folly. For example why didn’t the ECB stop the Bank of Cyprus from gorging on Greek government bonds post crisis? And on the basis that Cyprus is a sovereign state, that must protect it’s own borders at its own cost (therefore it is not California) and can be invaded at any point in time with no guaranteed military support from Nato or Europe and which has different geopolitical interests than perhaps Germany (who likes exporting to Turkey) and yet these Europeans can at a stroke push the country into a dangerous recession, what Germany & Co did was down right immoral. It would have been tantamount to the US allowing Germany to fester in depression during the height of the cold war. It did not though. It pumped millions into the country, wrote of its debt and included a provision that interest was only to be paid on the condition it did not cause poverty in Germany. That is what I call solidarity. Or do you really believe that it was easier for the American’s to sell their investment in Europe to American’s after WWII than it is for Merkel to sell investing in Cyprus. Or did you think it was easy for Obama to sell saving the car industry to the American electorate? No-one is saying that the North is right or the South is right, that is not interesting. Economics cannot be divorced from politics and should not be divorced from human suffering. Surely….Unfortunately Europe does not have the political framework in place to ensure a better handling of the situation. That’s how I see it.

      • Chido Houbraken March 29, 2013 at 3:24 pm #

        If the state bails out banks, it is done with taxpayers money. In most states that means raising taxes and cutting budgets for health, education and economic stimulation programmes. That worsens the suffering.

        Oh wait, you want other countries to pay the bail-out? Yes, well, then it would work, I suppose.

        (Your reference to American Marshallplan money for West-Germany is not valid. In short: the USA occupied West-Germany at that point in time, therefore able to achieve all kinds of necessary reforms without a lot of hassle.)

      • Gina March 29, 2013 at 3:56 pm #

        Dear Chido, I am not just talking of the Marshall Plan. I am also talking of the significant debt write down in 1954 and the easy repayment/interest schedule gifted to Germany by the US to ensure growth/recovery. That the Marshall Plan and subsequent write off of Germany’s debt in the 1950′s don’t count for you and today’s Germany is quiet obvious. By the way that included a total write off of Germany’s debt to Greece – it had “borrowed” Greece’s gold reserves during the Nazi occupation which led to a hyperinflation in greece which made the hyperinflation of the 30s in Germany look like child’s play. It wiped out the fortunes of a nation. It is worth more than Euro 100 billion in today’s money. Obviously, you are right that there was/is serious mismanagement in the public sector in Greece and corruption and all of that needs to change. I put that down to lack of experience with democracy. Greece only had a democracy from the mid 1970′s. It takes time for systems and mentalities to develop and of course it must seem unacceptable to people. Joining the European Union was wonderful for Greece because of the new systems which were imported into Greece. Unfortunately it also lead to easy money and easy money in a corrupt political system equals financial disaster. SO just like post Nazi Germany needed to change, so post crisis Greece needs to change. But there are ways and ways of doing things. All I can say is that I wish Greece had been occupied by the Americans. Then the American’s could have built up Greece’s political and administrative system, built up our democracy and transparency in Greece. The first thing the American “occupiers” did was set up a Ministry of Audit in Frankfurt to ensure no corruption and mishandling of funds. And the US could also have taken care of all our defensive needs at their cost. Wow. Super. It worked out rather well for Germany, that occupation. BTW, Southern countries have also let non-systemically important banks to go bankrupt. Even Greece. In any event, i think we should agree to disagree. It has been interesting and thank you for your thoughts. I do appreciate where you are coming from and it is not nice to feel that your taxpayers sacrifices are not being appreciated. They are. Cheers.

  20. j March 30, 2013 at 12:50 am #

    …or its a deliberate collapse in some regard.

  21. Cassandretta April 8, 2013 at 1:15 pm #

    On a minor point, the ‘supported by the EU’ signs often indicate a gross support, not a net one, that is, money which has gone to the EU and has come back. So even if there is not net loan, the EU appears as the benefactor.

    On more general comments, I’d be wary of blaming our troubles on incompetance, as some of the greatest harm has been done by the cleverest people. For example NIgel Lawson, Margeret Thatcher’s Chancellor in the UK, possibly one of the cleverest chancellors, probably had a much greater impact on UK finance than most of his often clueless predecessors. And his changes to the laws governing banks and building societies led to the boom (I’m tempted to say big bang) in property prices which fueled the debt crisis and which a few of us spotted was dangerous even at the time.

    On the other hand he had been a journalist, so perhaps we should have taken that as a warnng sign . . .

  22. Frances Coppola April 9, 2013 at 12:12 pm #

    Stuck in bed with a bottle of vodka may be exactly where Dijsselboem is. He’s been silent for the last two weeks.


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