Sigrún Davíðsdóttir's Icelog

A collection of info and blogs/articles on the Cyprus bailout – updated* – and a Monday morning update**

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** No lack of outpour blogs and comments re the Cypriot bailout. Bank shares are falling in London and elsewhere. The sense is that it’s not so much the principle of grabbing part of deposits but the fact that there is no minimum. I would definitely see it as positive to lower the loan and consequently the debt burden to the sovereign.

(This is getting a bit complicated but opinions flood the web – I’ve added to the Monday morning update, marked with *)

What will happen tomorrow? Extended bank holiday? Not (yet?) so, according to Kathimerini.

Guardian running live blog on events.

Cyprus president Anastasiades tells his version of the story via Euractive.

*Needless to say, Goldman Sachs thinks this is a good deal, via Business Insider.

*A digest and opinion from Tim Duy’s Fed Watch, the headline puts it clearly: “War on common sense continues.”

Russia, supposed to make a small contribution to loan and extending earlier loan of €2.5bn, have not made up their mind, according to Kathimerini.

Here is the Prodigal Greek, alias Yiannis Mouzakis, summing up things re the vote in the Cypriot Parliament and other relevant topics.

*Fistful of euros votes down Olli Rehn.

*The banks go free, not the depositors, a Guardian blog by Michael Burke.

Anonymous Pavelmorski writes another blog – after his first one found below – along these lines, what were they thinking.

Paul Krugman dives into the debate with a short blog, confessing he did not see this coming. Wonders how much the Russian element matters.

FT Alphaville looks at the fall-out of the Cyprus debacle as markets open: not pretty but not horrendous.

And FTA also looks at the lessons one can draw from the Cyprus package.

Frances Coppola writes a thorough and critical piece on the Cyprus shock, directed at the ECB.

My favourite blog of the day, so far, comes from Izabella Kaminska. She points out that no, this isn’t a great move but then, these Cypriot banks aren’t great either, which means they have difficult times finding equity. Kaminska writes:

Think of it this way. If I can persuade people to keep giving me money (to look after), I can make as many crappy loans as I want with that money — and I won’t be found out until the funding is either taken away from me completely (in which case I won’t have enough to give back), the bad loans are so bad I can’t even afford to pay the interest I owe (less of a problem in the zero yield environment), or last and not least the loans mature and I suffer principal loss.

The last situation can be easily masked if I can persuade new depositors to fund that loss unwittingly.

And that’s really what has been happening post crisis. All deposits retained in zombie banks (rather than nationalised ones where the equity gap has been funded by government instead ) were already in reality funding these losses unwittingly.

In other words, the moment you gave deposits to a bank whose loans were failing or were set to fail you were effectively providing loss absorbing equity anyway.

The Cyprus move makes overt what was already the case.

This is why there is a good chance that depositor funds and creditors of this type will now become a lot more information sensitive.

Depositors should now realise that governments which can’t afford to take the hit on their behalf or support positive deposit returns indefinitely (like the US can by giving away free national equity by means of paying IOER ) mean they are funding the gap instead.

This is the ultimate negative interest rate because it shows that the privilege of having deposits (delaying spending) is associated with principal loss, from the offset.

Which makes me think of a blog I wrote recently, on the crisis and the curse of cheap money.

– – – – – –

More from yesterday:

*It seems there is an ongoing discussion tonight about changing the levy so it won’t fall so harshly on those with low deposits – that the olive farmer will pay less and the oligarch more. OpenEurope blog recounts what went on earlier and how the finger-pointing is going. Weirdly enough, the Cypriot Government does not seem to have been defending the interest of the small deposit holders. BuisnessInsider indicates it fears pricing itself out of the money laundering business (which would be scary).

FT Editorial doesn’t mince its words: “Europe botches another rescue.”

FT Alphaville writes about the novelty of the deposit levy, not a positive surprise though.

WSJ has gathered fascinating details as to how the deal came about – a who, where and when story. A bit of credit to the unpopular Olli Rehn: “Mr. Rehn was the first to take the floor with a specific proposal. To raise funds, Nicosia should impose a special levy on deposits, taxing accounts of less than €100,000 at 3%, those up to €500,000 at 5% and those above at 7%.” – At 1 a.m., after numbers being thrown around and the Cypriot president firmly saying no, the bold and brutally clear Jörg Asmussen spelled out the problem: the two main banks were about to go bust, there was no time to mull over this much longer. Asmussen even pulled up his phone and called Mario Draghi, telling him the ECB might now have to deal with two collapsed banks (was Draghi really on the line or was this just Asmussen’s clever trick?) President Anastasiades gave in but insisted on the levy not going over 10% – and the 6.75%/9.9% deal was clinched.

And now, according to Reuters, it seems there is a real possibility that some of the original ideas, of a much lower or no levy on low deposits, may do a come-back. Here is a news summary of how things stand in Cyprus right now.

Below is what I posted earlier:

– – – – – –

Not much said in favour of the bailout but an outpour of dismay, shock and anger in every direction. Here is an overview of some of it, not in any particular order – but first some varia related to Cyprus:

The statement from the European Council.

Cyprus data from ECB’s statistical warehouse, on Cyprus.

An NYTimes article from April last year, just to add some flavour to the topic “du jour.”

Slides from a January presentation by the Ministry of Finance in Cyprus on the state of the Cypriot economy.

How much Russian money is there in Cyprus? Ekathimerini makes a guess: ca €35bn – in a €17bn economy.

On the bailout package:

The view from Cyprus, via Cyprus-Mail: Cyprus left reeling from the haircut on depositors.

FT’s Peter Spiegel tells the story how the deal came into being – in Berlin.

Hugo Dixon talks about “legalized bank robbery.”

Mohamed El-Arian finds the deal “muddled and risky.”

Karl Whelan wonders if the depositor tax spells the end of the EU.

Joseph Cotterill pulls a phrase from Whelan for his headline: “A stupid idea whose time has come” – rich in material and documents.

Edmund Conway writes on the “Tragedy of Cyprus,” drawing interesting US parallels.

Economist’s Schumpeter calls the deal “unfair, short-sighted and self-defeating.”

Business Insider on reaction from some financial analyst, wondering if the bailout will trigger havoc in Europe.

Felix Salmon writes a substantial piece on earlier developments, concludes that the bailout shows that Germany rules the Med countries.

The anonymous fund manager Pawelmorski talks about “a brutal lesson in RealPolitik.”

WSJ Stephen Fidler adds some points to earlier observations.

The Danish economist Lars Christensen adds some musing to Conway (see above), re NGDP targeting.

FAZ analysis (in German) speaks of loss of trust among European deposit holders.

Economist on the sanctity of bond holders in European bailouts.

My own blog re Cyprus – the unfairness and the loss of faith in the European Union.

I’m not sure what Rehn, Lagarde, Asmussen, Dijsselbloem expected when they announced the deal late Friday night (or early Saturday morning, depending how you divide the hours of the day and night) – but if good friends are those who tell you loud and clear what they think they can at least rejoice that they have many such friends.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

March 17th, 2013 at 8:53 pm

Posted in Iceland

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