Just a short post on one point about the recent Cyprus business. (It looks like Cyprus will impose a "one-time tax" on bank deposits rather than honour its deposit insurance.)
Governments usually provide deposit insurance to prevent bank runs.
If the banking system is too big, and the banks' losses are too big, relative to the government's capacity to pay that insurance claim, that's a problem.
But the problem is very different if the government (unlike Cyprus) can print currency to pay bank deposits that are liabilities in that same currency. If worse comes to worst, the government just prints as much currency as is needed to pay the depositors what they are owed. If that means is has to print "too much" currency, that's a problem, because it means inflation will be "too high". But that inflation will adversely affect the real value of currency and bank deposits equally. So even if people expect it might happen again, this doesn't cause a bank run, where people try to get out of bank deposits into currency.
It's a very different sort of problem in a country like Cyprus where the government cannot print money. If people see a "one-time tax" on bank deposits happen once, they might expect it to happen again. And if they expect it to happen again they will try to get out of bank deposits into currency. Which is a bank run.
The difference is that inflation from printing too much money is a tax on currency too. Cyprus cannot tax currency; it can only tax bank deposits.
If the banking sector is too big, and if bank losses are too big, relative to the country's ability to pay, deposit insurance as a way to prevent bank runs is not credible and won't work in a country that cannot print.
Next week is going to be interesting. And not just in Cyprus. People have seen it has happened once, in Cyprus. Will they expect it to happen again? In other Eurozone countries?
Update; since I can't read Greek, this article and comments in Cyprus Mail is the nearest I could find for judging local reaction. Or maybe this is better.
Worthwhile Canadian Initiative 
This is basically a variation on the “euro as a gold standard” argument often heard in recent years. I didn’t follow economics much a decade ago when euro was replacing the old European national currencies, so I wonder how many economists back then were pointing out that the standard argument against the gold standard as a catalyst of financial panics would similarly apply to the new common currency? (At least for the smaller European countries, whose governments can’t easily get access to the printing press as the lender of last resort.)
Vladimir,
Before his death, Milton Friedman was predicting that grafting the Eurozone onto one currency would cause problems. Here is one example:
http://mobile.euobserver.com/economic/16030
Also, has any mainstream economist ever analyzed government-insured deposits in a fiat money regime by looking at them as a bundle of multiple financial instruments that represent each axis of the depositor-bank-government triangle separately? (I’ll fight the urge to put “insured” under scare quotes, as I like to do for any uses of that word that don’t refer to an actual insurable, i.e. actuarially quantifiable, risk.)
What I mean is that your deposit insured by CDIC, FDIC, or any other local equivalent backed by the printing press, involves a loan from you to the bank and a loan guarantee by the government. Which means, from your perspective, that your deposit might as well be a government-issued voucher for using the printing press to print the given amount of money — and the bank as an institution is of no concern to you, except maybe for some marginal frills it might offer, like conveniently located ATMs, free certified cheques, and nice fish tanks in their branch offices. For all you care, its entire management might be staffed by people freshly out of jail for fraud and embezzlement, as long as you know that your deposit is covered by the CDIC guarantee. The banker is just a bureaucrat who issues your printing press voucher, not someone whom you need to trust in any way.
So, the obvious question is: what’s the point of the whole pretense? Why not just have a government monopoly over demand deposits? (And any other deposits that are covered by similar guarantees — including those that are theoretically not covered, but where everyone understands that a bailout would be the only politically viable option if push really came to shove.)
Or to put it differently, what purpose is served by having this money in the hands of institutions that don’t have to compete for it on any grounds of prudence and profitability? (They sure have the incentive to maximize profits with what money they have from depositors — but this profit maximization is completely divorced from the depositors’ own incentives, and makes no difference as to how much money they’ll get from depositors. Not to mention their own informal and implicit government guarantees in case of trouble…)
Vladimir says “Why not just have a government monopoly over demand deposits?”. Good point. That’s pretty much what the various advocates of full reserve banking propose. E.g. William Hummel advocates full reserve plus he advocates that all transaction accounts should be at the Fed. See under heading “A Single National Depository” here:
http://wfhummel.cnchost.com/monetaryreform.html
An alternative full reserve system is set out here:
Click to access NEF-Southampton-Positive-Money-ICB-Submission.pdf
Under the latter system, all checking or transaction account money at a commercial bank has to be backed by an equal amount of reserves held by the commercial bank at the central bank.
I don’t see a need for central banks to have a monopoly of actually RUNNING checking accounts. But certainly any money that depositors want to be 100% safe or instant access should be backed by reserves / monetary base.
In contrast to 100% safe money, if a depositor wants their bank to lend on their money under full reserve, they are not guaranteed their money back. For example under Laurence Kotlikoff’s version of full reserve, such depositors get mutual fund units, and those units may lose value if the underlying loans or investments do badly. But unlike our existing system where “doing badly” leads to a run on banks, all that happens under full reserve is that those units lose value – much like a stock market set back.
As Mervyn King said, “we saw in 1987 and again in the early 2000s, that a sharp fall in equity values did not cause the same damage as did the banking crisis”.
As to bank subsidies, they disappear under full reserve. The safe money is safe, so there is no taxpayer exposure there. As to investment money, depositor / investors take a hair cut, not the taxpayer.
Vladimir: A lot of economists were sceptical of the Euro when it was introduced (yep, Friedman was one). Though mostly it was a concern about asymmetric shocks, with less emphasis on the lender of last resort problem. I wish i had better memory or record of what I was thinking and saying back then. I do distinctly remember worrying about how a country with a currency board could manage the lender of last resort function, which is basically the same problem.
Most of the sceptics were outside Europe though, and were sort of told it was none of their business. While inside Europe I think there was a lot of pressure not to rain on the Euro parade.
I’m not a good source on that subject.
I think you have it roughly right in your second comment. Banks with government deposit insurance are like a government-private partnership, where the government takes on part of the job but farms out the rest of the job to competition in the private sector, but monitors and regulates those partners. An uneasy compromise. But would you want the government to have total control over commercial bank lending and borrowing?
Ralph: yes, 100% reserves are one solution. But think about the capital stock in a country with 100% reserves. And think about where exactly you would draw the dividing line between deposits that were or were not required to have 100% reserves. Remember the fuss over money market mutual funds “breaking the buck”?
I guess we’ll see, but my gut says the other European countries aren’t going to see bank runs (although we may see a little in Greece).
The Europeans have just taken so much and have basically said OK to everything. Thought the Italian election showed a little grumbling, it still wasn’t enough. The fear of the alternative has keep the voting public in check.
It’s telling that the people setting the policy feel so confident that the people will continue to be sheep, that they would allow this type of measure to move forward.
It’s funny that another article states that the steps they took to head off a problem was to put out a statement saying everyone should take a “calm and a level-headed assessment” of the situation.
Erik: you may be right. I have been surprised at the absence of bank runs in the last couple of years. (Except for the oxymoronic “slow bank runs”.) And the apparent willingness of the populations to stick to the the Euro despite everything. Whether this will be a final straw (in addition to the high and rising unemployment rates) I don’t trust myself to say.
Nick,
I don’t see a big problem in drawing “the dividing line between deposits that were or were not required to have 100% reserves”. The basic rule is that depositors have a choice. If they want 100% safety and/or instant access their money is not invested in commerce: it’s backed 100% by reserves and it earns no interest.
Alternatively, if they want their money loaned on to mortgagors or to commerce, they’re on their own, and they sign a piece of paper saying so. That seems a simple clear dividing line to me.
Re money market funds, they just play the same confidence trick that banks play under the current system: promising depositors their money back while investing depositors’ money in a less than 100% safe manner. And taxpayers footed the bill when that went wrong in the recent crisis (both in the case of banks and MMFs).
MMFs would be caught by the above “clear dividing line”. MMFs invest in commercial paper and government debt. So they’re on the commercial side of the dividing line.
There was actually an article in the WSJ recently which although it didn’t specifically argue for full reserve, did argue that MMFs should be forbidden from engaging in the above confidence trick.
As a Cyprus resident, I think that while the whole situation has been badly mismanaged by everyone involved, the deal itself is pretty fair and reasonable.
First of all, deposits at Cyprus banks are a high-yield investment (3-4% p.a.), so nobody should be really surprised that the depositors may at some point lose some of the principal.
Second, if the banks are not recapitalized immediately they will lose access to the ECB lending facilities and go bankrupt. The Cyprus banking system needs to be recapitalized to the tune of 10 bln euros (60% of Cyprus GDP). Given that the government debt is already close to 90% of GDP, depositors and bondholders represent the only practical source of funds.
Third, if the haircut (conversion to equity) was limited to uninsured deposits, that would most likely give control over the banking system to non-residents (some would say money-launderers) – and nobody in the Eurozone would be happy about that.
So, while the Cyprus deal does create a bad precedent for the Eurozone as whole, under the circumstances it was probably one the best options available. Now, if the plan is approved by the House of Representatives (and that’s a big IF), the recapitalized banks will immediately gain access to all ECB lending facilities and the inevitable bank run will no longer be a major threat.
“If worse comes to worst, the government just prints as much currency as is needed to pay the depositors what they are owed. If that means is has to print “too much” currency, that’s a problem, because it means inflation will be “too high”‘
Why can’t countries without their own currency conduct monetary policy via fiscal means ? They target steady NGDP in their region and use (say) a sales tax to make adjustments to hit the target ?
Nick:
“I do distinctly remember worrying about how a country with a currency board could manage the lender of last resort function, which is basically the same problem.” Sounds a lot like the problems we saw a decade ago in Argentina.
Meanwhile, I’m hoping that Orphanides (the former governor of the Bank of Cyprus) will write something explaining his views on the situtation. I expect that the nature of the problem facing the Cypriot parliament today (aside from the various political intrigues) is the choice between (a) taking the deal they were offered by the IMF & EU & ECB, or (b) abandon the euro in the next 48-72 hours (perhaps a bit longer if they declare a banking holiday.)
My understanding is that the Prime Minister was elected 3 weeks ago on a platform of 100% protection of banking deposits. He and his party no doubt will face considerable (and justifiable) wrath for reversing themselves so quickly and completely. However, the announced deal illustrates the danger of keeping deposits in Cypriot banks. Failure to ratify the deal and have solid EU/ECB/IMF support guarantees a bank run the instant banks open for business. Abandoning the Euro (i.e. declaring this weekend that all deposits have been converted into Cypriot “Rubles” or whatnot) is a politically and economically better option.
The only other out that I can think of is that Putin announces a special deal with Cyprus to save their banks. (No idea how realistic this is.)
given the choice: a 6-10% tax on your euros, or a 50(?)% devaluation of your money, turned into local currency, I don’t think the deal is that bad
Simon: yep, the Euro problem is a lot like Argentina. And the Euro was introduced around the same time as the Argentinian crisis.
Like you, I think a better option would be to abandon the Euro. And I still think it’s going to happen somewhere in the next couple of years. But I’ve been thinking that for the last couple of years, and it still hasn’t happened!
I’ve just heard that Cyprus will have a bank holiday Tuesday as well. (It used to be the “Cyprus Pound” I think, before the Euro.)
Ron: that’s what some of the Euro countries might like to do, if they could only borrow enough Euros to do it! Unfortunately, the very same time you most want to borrow Euros is exactly the time nobody wants to lend to you.
Doctor Why: A resident of Cyprus! Welcome! (And commiserations.)
If they want to remain part of the Euro, I don’t see any obvious easy alternative either.
“Third, if the haircut (conversion to equity) was limited to uninsured deposits, that would most likely give control over the banking system to non-residents (some would say money-launderers) – and nobody in the Eurozone would be happy about that.”
That is a really good point, that I hadn’t thought of, and which I hadn’t seen mentioned anywhere else.
Ralph: so if I understand you, you are not requiring 100% reserves by law. You are just removing government deposit insurance, and leaving it up to the market to decide if depositors want to deposit their money in a bank with 100% reserves, or not?
I can understand that as a libertarian response to the problem. It does mean turning the clock back, to how we used to do things. But sometimes, when you have taken a wrong turn and found yourself in an even worse place, turning the clock back is the right thing to do?
EU citizen: but the 6% to 10% tax on Euro deposits is only part of the cost. The Cyprus government is paying the rest of the cost, through increased taxes and borrowing. Replacing Euro deposits with New Cyprus Pounds, and the ensuing devaluation, would be 100% of the cost. (Plus, I don’t know what the unemployment rate is in Cyprus, but if it’s anything like Greece, a devaluation and easier monetary policy might be a benefit, not a cost.)
Yes, but, it will certainly increase the flow of Greeks, Italians, Portuguese, Spaniards, etc. moving their Euro deposits to USD, gold etc. held offshore. This moves seems hand-crafted to trigger a Euro-wide bank run.
Andrew: It might. There are two possibilities:
1. People run from Euro bank deposits into Euro notes (or out of Club Med deposits into Club Baltic deposits).
2. People run from all Euro deposits and notes into foreign deposits and notes and into real assets.
(Or maybe a mix of both, of course).
Ironically, 2 might be a good thing, for the Eurozone!
Andrew F: “This moves seems hand-crafted to trigger a Euro-wide bank run.”
Don’t forget that policy is endogenous. There are strong forces that will move ECB/IMF/EU policy to avoid Euro-wide bank runs (e.g. by reversing course and simply making whole all deposits in Cyprus.)
I think it is more realistic to see the Cyprus deal as an attempt to minimize the cost of bailing out a very small member state whose situation, for a variety of reasons, evokes very little sympathy from the lenders. As such, it is a trial balloon that will be quickly hauled in if things go badly awry.
‘Unfortunately, the very same time you most want to borrow Euros is exactly the time nobody wants to lend to you.”
But is NGDPO works the way its supposed to (largely via expectations) – then they may not actually have to borrow the money, right ?
Though I suppose if there is doubt about the viability of borrowing then the fiscal authorities commitment to NGDPT might not be credible.
Simon van Norden:
“There are strong forces that will move ECB/IMF/EU policy to avoid Euro-wide bank runs (e.g. by reversing course and simply making whole all deposits in Cyprus.)”
As long as banks are well-capitalized, the ECB can easily deal with a bank run – even relaxing collateral requirements, if necessary.
However, the problem with Cyprus banks is that:
1) their capital is close to zero, and so the ECB cannot lend to them.
2) The capital requirements are too large compared to Cyprus GDP (about 60% of GDP), and so the government cannot recapitalize them.
From this perspective Cyprus is a truly unique case which cannot be extrapolated to other eurozone members.
Ralph Musgrave,
“If they want 100% safety and/or instant access their money is not invested in commerce: it’s backed 100% by reserves and it earns no interest.”
If people really wanted this, wouldn’t it emerge anyway under a deposit-insuranceless system? I.e. people don’t want 100% safe deposits that pay no interest (and are effectively cash that’s easily carried) because under deposit insurance they can get 100% safe deposits that DO pay interest.
Take away deposit insurance and any genuine demand for 100% reserve banking will offer profits to investors. Of course, considerable regulation would be required to ensure that banks offering such services didn’t do anything fraudulent.
Doctor Why:
Interesting point.
I’m assuming that if a bank run in the rest of the euro-zone is at stake, then the EC/ECB/IMF will rapidly reverse the haircut. I’d thought that a take-it-or-leave-it offer to the Cypriot govt. of a “Spanish solution” would do the trick.
(i.e. The Cypriot president is told that if he wishes to recapitalize Cypriot banks with Cypriot govt. EUR bonds, those bonds will be accepted as collateral by the ECB.)
Of course, the President (or the Cypriot Parliament) might refuse the offer and prefer to do an Iceland (i.e. abandon the euro in the next 72 hours.) But either way, the members of the Troika would probably judge that to be enough to kill off the incentive to run on the banks.
If I were to look for early signs of a bank run elsewhere in the Euro zone, I would want to look for a country
– with a big banking sector relative to GDP
– bad banks (or potentially shaky ones)
– on the Euro (i.e. NOT Switzerland)
Anyone know how Austria has been doing?
I’d heard a few years ago that they met all these conditions (lots of bad loans to Eastern Europe.)
Doesn’t that describe Germany and France?
W Peden: “Take away deposit insurance and any genuine demand for 100% reserve banking will offer profits to investors. Of course, considerable regulation would be required to ensure that banks offering such services didn’t do anything fraudulent.”
I agree with the rest of what you say, except the word “considerable” in that last sentence. The government regulators would have a much easier job than at present. They presumably wouldn’t even need to count the dollar bills in reserve, since nearly all would just be electronic liabilities of the central bank.
“Though mostly it was a concern about asymmetric shocks, with less emphasis on the lender of last resort problem.”
I’ve been thinking lately that the biggest failure was not understanding that for a currency union to be a union of equals, with everyone playing by the same rules, the countries have to all be the same size.
Otherwise, the large countries determine monetary policy and this enables them to issue safe debt, while the small countries lack that privilege.
If Germany were smaller, then either it wouldn’t be the undisputed safe haven of the euro zone, or else the ECB wouldn’t worry as much about overheating since it would contribute less to average euro zone inflation.
@ Simon
Ten years yields as of closing this friday
German bunds (as THE triple AAA benchmark): 1.46%
Austria (stellar, unquestioned AAA, http://www.bloomberg.com/quote/GAGB10YR%3AIND) 1.73
Canada (http://www.bloomberg.com/quote/GCAN10YR:IND) 1.90
UK (AA) 1.94
US (AA) 1.99
Our Austrian “Schluchtenscheisser” Brothers and Sisters are doing very well, being only half the credit risk, compared to CAN, UK, US : – )
Our brothers and sisters in Switzerland run an explicit half sided peg to the deutschmark / Euro ( >= 1.2 ), since 1.5 years with the explicit “unlimited” firepower of their central bank.
I have them with 1.35 as “fair value” in my books. I believe that, as in 1978, they could count on our financial artillery support, if they would ever run out of ammo, what I doubt very much.
Genauer: Thanks for the update! But I was wondering more about stress-test results on Austrian banks (or private rather than govt. debt comparisons) as well as their deposits/GDP ratio.
(BTW, Could you please help me with my German….Google translates “Scluchtenscheisser” as “gorge asses” which I suspect might not be correct….)
Simon,
LOL, you should replace asses with “shitters”. And we have those cozy names for each other, “Piefke”, “Saupreiss” from the other side, within close family : – ).
Max,
Austria is the perfect example running an implicit peg of 7 Shillings to 1 Deutschmark, ever since WWII, without any formal ties.
You dont need any OCA or other ivory tower theories for that, just the political will.
Ah….the OENB to the rescue!
The Austrian central bank’s homepage has a nifty report from January 2013 “Facts on Austria and Its Banks” (http://oenb.at/en/img/facts_on_austria_e_jaenner_2013_screen_tcm16-235433.pdf)
In a nutshell, it seems to say
– the Austrian economy is in great shape, thank-you very much.
– Austrian banks continue to be in bad shape due to large loan in CESEE (Central, Eastern and South-Eastern Europe.)
Some quotes from their executive summary:
Austrian Banks Face Crisis-Induced Challenges
• …the operating performance has been weak, reflecting the continued adverse conditions that result from the ongoing sovereign debt problems.
• The capital positions of domestic banks, while having improved further in the past year,
remain below international averages …
• The exposure of the majority-Austrian-owned domestic banks to Central, Eastern and
Southeastern Europe (CESEE1) came to EUR 215.5 billion in June 2012. This exposure,
while still comparatively high, is broadly diversified across the region.
• Compared with Austrian banks’ domestic banking business, the operations of their CESEE
subsidiaries are fraught with higher risks, as is reflected above all by high loan loss provisions.
At the same time, the CESEE-related operations have also been generating higher profits
than the domestic banking operations and thus remain a key profit driver for the Austrian
banking system.
• Foreign currency lending by Austrian banks has been curbed sharply in Austria and has also
gone down in the CESEE area. This notwithstanding, Austrian banks continue to have high
amounts of outstanding foreign currency loans in their books.
From their statistical summary, Austrian banks’ exposure to CESEE is about 2.5x the total capital of the banking sector and about 2/3 of Austrian GDP. (Austria has about a 75% Govt. debt/GDP ratio.)
Not great, but could be worse.
How’s Ireland doing?
Simon, I take issue with your “in bad shape”
they are in some riskier business, with higher profit ratios, but because it is “broadly diversified” across a region including excellent countries like Czech, Poland,
I am pretty sure that their risk premium, as reflected in their yield, reflects the risk.
I will pull some BIS data for you, tomorrow.
The last time, somebody tried to scare me with my German alleged risk, we came up with some more reasonable number 6 times lower. 10% of their GDP is certainly not being sneezed at, but as a one time off, it would not hurt their AAA rating.
Genauer; This is not “my “in bad shape””. This is “my saying that the OENB says “in bad shape””.
I am certainly not suggesting that I know more about the state of Austrian banks than their regulator! That regulator’s public position is
“the operating performance has been weak, reflecting the continued adverse conditions that result from the ongoing sovereign debt problems.”
“the operations of their CESEE subsidiaries are fraught with higher risks, as is reflected above all by high loan loss provisions.”
I roughly translate that as “bad shape”….but feel free to read the report and disagree.
Either way, I’d be happy to see some BIS data.
W. Peden: “If people really wanted this, wouldn’t it emerge anyway under a deposit-insuranceless system?”
Well, it didn’t emerge during the wildcat banking era in the U. S.
I guess the equivalent was putting money under the mattress. 😉
Simon van Norden
“i.e. The Cypriot president is told that if he wishes to recapitalize Cypriot banks with Cypriot govt. EUR bonds, those bonds will be accepted as collateral by the ECB.”
The ECB can accept (illiquid) Cyprus bonds only if Cyprus reaches an agreement with the ESM/Troika. The ESM, in its turn, has to make sure that the government debt is sustainable, and it currently believes that adding extra 60% of GDP to the existing stock of debt (about 90% of GDP) will make the level of debt unsustainable.
Theoretically, the ESM may change its views on debt sustainability, or it may recapitalize the banks directly, but both options look at this point rather improbable.
Nick Rowe,
Good point. I hadn’t really thought through the practicalities of it.
Min,
That tells us a lot about the revealed preferences of 19th century American savers.
Whether the same preferences would be manifested in a largely post-cash economy is another question. Rothbardians, IIRC, think that without widespread financial fraud and deposit insurance and other government interventions, 100% banking would dominate in a deregulated financial system. We won’t know until it happens, especially given that it’s impossible to reliably predict future innovations regarding cash and deposits, and their effects on the demand to use cash.
Simon,
I actually do not see a need to pull the BIS data, because the relevant numbers are pretty much and in detail spelled out in your link. I could not do that any better.
They stayed clear of the GIPSI countries, the Loan to Deposit ratio of their
their CESEE business is 105.8%. So nobody has any interest to do stupid things.
(105.8% – 100)x 216 /308 = 4.1% GDP maximal potential risk exposure from CESEE.
“At the same time, the CESEE-related operations have also been generating higher profits than the domestic banking operations and thus remain a key profit driver for the Austrian banking system.”
The “Macroeconomic Imbalance Procedure Scoreboard” is excellent, keeping in mind that given a “Average current account balance in % of GDP over the past 3 years” of + 2%, a slight reduction in “Percentage change of export market shares” is actually a good thing, “Private sector debt in % of GDP” is just 1% above the 160% threshold, and a national debt of 72% is something most other countries have some years to work to (Chart 13).
Since they have some state assets, their national net interest payment after inflation is ZERO (Chart 14).
Your Canadian situation with sizable pension funds is internationally pretty unique. http://www.nbc.ca/bnc/files/bncpdf/en/2/WEEKLYECONOLETTER_20120206.pdf for a good discussion of those various numbers in an international context.
They correct since 2 years some anomalies like subprime and that weird thing of Romanian mortgages from local subsidiaries of Austrian banks made in Swiss Franc and don’t extend the business in the moment.
So, in summary I think the Austrian banks are in good shape, you have to go some risk, if you want return, and long term growth in new markets.
Getting back to Cyprus, they now also learned, that the mainland Europe taxpayers do not pay their bills.
The credit they get is not so large, that they could get any stupid ideas, about not paying it, and how they divvy up the internal composition is their problem.
My guess is, that they will reduce the operating fee for lower deposits, and stiff the larger, Russian ones, a little more.
Once again, people learned that throwing tantrums doesn’t pay, and that slandering Germany and Merkel does not get them one single cent.
Let them sleep one more night about it, and everybody will find that he got a very good deal.
I forgot:
http://ftalphaville.ft.com/2013/03/18/1426252/teaching-a-lesson-lesson-learned/
Southern depositors will now be crazy not to ASSUME that something like this will happen to them at some point, considering that there is no improvement of immediate conditions on the horizon.
The Eurozone is not a classroom. It is not there to give der deutsche Besserwisser an ego-boost of having played tough love and lifted the shiftless Southerners out of their bad habits. It is playing with dangerous forces. Taxes are difficult to collect in the EuroSouth for a reason, and this Cyprus gong-show is yet another episode in hitting the least responsible. Just because German workers were feckless enough to allow their leaders to enact Agenda 2010 doesn’t mean everyone has to be that way.
How did Cypriot banks get into so much trouble while the German, uh, I mean the European regulators did nothing? Was there no oversight at all?
Patrick,
Banking and Financial supervision and regulation is still national in Europe.
They are now still hackling about the final form for a future ECB supervision.
Mandos,
at http://economistsview.typepad.com/economistsview/2013/03/financial-markets-havent-freaked-out-over-cyprus-yet.html#comment-6a00d83451b33869e2017d420e5b53970c
I calculated, and Mark A Sadowski checked, that similar cash positions would be 6-13% of GDP in the US, I assume similar numbers for most “normal” countries, my rough guess for Cyprus was 350% GDP, refined by Mark to 389%.
Taking 10% of just that makes a solid contribution and is much easier to collect in this statelet.
Taking 10% of only the cash is irrelevant in the other countries and will therefore not be done.
That is because it is a major industry for this island. I fail to see how this is even a relevant fact. Taking 10% of deposits in Cypriot banks not only cheats the ordinary Cypriot in a sudden and indiscriminate manner, it destroys one of the islands “comparative advantages”.
I am not a huge booster of banks, to put it mildly. But this is where we are. Respecting, at minimum, the spirit of the deposit insurance is essential to the vaunted “confidence” that everyone keeps talking about that. If Europe wanted to avoid bailing out Russian investors, it should have come up with a common fiscal and industrial policy before instituting the Eurozone.
Nick writes:
“If worse comes to worst, the government just prints as much currency as is needed to pay the depositors what they are owed. If that means is has to print “too much” currency, that’s a problem, because it means inflation will be “too high”.”
I don’t think “printing money” in order to guarantee deposits that already exist can lead to higher inflation. After all, the banks have already created all that money, and people have used their deposit balances in actual transactions. Making sure that banks remain solvent and that the “money” (balance) in a savings account is actually available to make payments with cannot lead to additional inflation – the money is already there, and until yesterday people did not have any second thoughts about using it to pay for something. The only thing that happens is that a giant destruction of “money” balances is averted, so the overall effect seems to be more to prevent a deflation than to induce any additional inflation.
Mandos,
please just follow the discussion link at the economist view. There is no point in repeating this here.
What I see is, that people I had significant disagreement with in the past are now converging with my point of view, which, I think has not changed much, but I claim to be a learning person.
Even the French guy does now the same calculations as a German Green politician, resulting in calling Merkel to be “too soft”, but I always tell them, please don’t say anything, which could be misinterpreted as infringing on their sovereignity.
Whatever we think about there legal attitudes.
Even a loose mouth Claudia Roth does that most of the times.
I read the discussion and I didn’t interpret it as people agreeing with you, but I suppose it is subjective.
Let’s be clear: I too am also in fact opposed to direct bank bailoutry, much in the manner of Sahra Wagenknecht! I’d be much happer if something like Wagenknecht’s proposal were adopted, more or less, but there is no way it would ever happen like that.
What is instead happening is a one-sided punishment of people on the periphery for failing to meet some peculiar standard of rectitude, an attempt “uninstall” their societies and replace them with German Ordnungspolitik, instead of Germany partially accomodating its German “Ordnung”, which is a very self-flattering term anyway, to the wider European context. This is socially very dangerous and is imposing huge suffering on societies that had other ways of settling accounts, for better or for worse. I always find it strange why people wonder why Berlusconi managed to restore his popularity: to me it is very obvious, a sector of Italian society is giving the world the finger.
German politicians have drifted away from Eurobonds because there is an election approaching in October, and the German public is convinced that this is all about lazy Southerners looting German Bausparpläne. The looting had already been accomplished by the exploitation of the obvious weakness in the Maastricht Treaty, financial globalization, and yes, Agenda 2010. This is the part that is difficult to explain and is not helped by people like Dr. Sinn, who are only now just coming to the astonishing realization that this all may have something to do with demand.
The obvious question is why the bailout of Cypriot banks didn’t just ding uninsured deposits (i.e., amounts over E100K)? At least that would have honoured the deposit insurance committment both in letter and spirt (technically it is still be honoured, it’s just being partly financed with a tax on the insured parties), while giving uninsured depositors the treatment they bargained for (note to investors, when Cypriot banks are paying 5% interest when everyone else is paying 0.5%, you’re buying into risk. Why does nobody get that?).
Sure, that would have meant a bigger haircut for investors over the E100K threshold, but let’s be honest, when you’re talking about a 10% haircut or a 15% haircut (which is what it would have taken), Cyprus’ reputation as a banking jurisdiction is pretty much hooped. It likely would have hit foreign investors harder than Cypriot investors (assuming they aren’t the ones with hefty deposit), which at least makes the bailout politically feasible (more so if some of those foreign investors are generally unsympathetic persons – money lauderers and tax dodgers). It would have reassured Joe Q. Public in Cyprus, but more importantly in Italy, Spain, etc. that at least his deposits were protected. Is it me, or is the EU inclined to do everything in the most counter-productive way possible?
How do you arrive at the 15% number? Foreign/nonresident deposits are only a third of what is in Cypriot banks. AND not all the Russian accounts are oligarchs, or even large accounts. It is the same way with German old people driving with cash to Switzerland, a practice that is now only coming to an end by German tax investigators literally stealing data from the Swiss. (Not that I have much sympathy for the Swiss here.)
Those accounts that are Russian business, as I understand it, probably realize that 5% is a big risk, and the feeling is, I think, that 10% is an acceptable cost of doing business. Especially relative to the benefits of doing business outside Russia. More than that and we’re getting into “is this worth it?” territory.
The 15% figure came up in a news article I read yesterday, whichwas presented as the figure that would have been required to insulate deposits under E100k from any hit while still generating the same level of revenue.
And I’d bet a good chunk of what was in Cypriot banks was held by Cyprus companies which, if you could dig through their shareholdings, are wholly-onwed by foreigners. Not sure why you’re ranting about Russians, I sure didn’t mention them, but Cyprus is a favourite holding company jurisdiction for Russian investors (along with Mauritius).
In any event, the question still stands, why didn’t they pursue this approach?
Bob: two hypotheses:
1. What Doctor Why says in comments above: “Third, if the haircut (conversion to equity) was limited to uninsured deposits, that would most likely give control over the banking system to non-residents (some would say money-launderers) – and nobody in the Eurozone would be happy about that.”
2. Cyprus needs a loan from Putin, and doesn’t want to piss him off too much.
But I don’t know.
shrug Everyone in Europe is obsessed with Russians (it’s very 80s), I assumed you were too 🙂 In German media, it is always about that “German taxpayers should not bear the cost of bailing out Russian investors”, because all the money in Cyprus obviously belongs to Russian tax evaders.
The story from the Cyprus Mail is that the Cypriot president desperately wanted to keep the tax on large accounts smaller than 10%, because he believed that 10% is a magic number that would retain Cyprus’ attractiveness as a banking destination. The other EU ministers decided that they wanted 5 gigaeuros, and in the end told him to go get it somehow. That meant entailing the rest of Cypriotic deposits. I have a feeling that this story is rather self-serving, because the Cyprus Mail (I used to read it regularly as Cyprus was a hobby of mine) chronically loathes whoever is in government in Cyprus at the moment, though not without reason.
Whether you think 10% is a magic number is another matter. Someone did. Cyprus, for one, desperately wants to think that it will still be viable in banking.