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 
hmmm,
they continue this way. Banks are now closed until next Tuesday. No money goes in our out. They are found in violation of repaying loans, get kicked out of Euro, then Europe. After the first hunger riots a civil war starts, between the brits and the russians, which ends with an invasion by the turks, who have already 33% and the brits 3%, dividing it up 50 / 50.
Cyprus disappears as a political entity, is co-administrated by a brit high commisioner, as until 1960 and a turk general. The politicians and russians are rounded up, and then deported.
Peace and Tranquility. Or ?
Simon,
that was exactly the reason, I asked the question this way.
To play a “russian card” within shooting distance of a NATO military base seems to be totally insane to me.
“To play a “russian card” within shooting distance of a NATO military base seems to be totally insane to me.”
I find this argument totally incomprehensible. There is a NATO base in Russia (sort of). So what?
30 years ago there were clear lines, but today geopolitics is really messy.
“And can somebody explain to me, why these drilling rights should be more worthful for Gazprom than for BP, Exxon, or any other western corporation.”
I know nothing in particular about Gazprom, but can think of several candidate explanations.
1) Gazprom might face a lower cost of capital than the western corporations, particularly when the Russian government looks favourably on the project.
2) Gazprom might feel it faces lower political risks operating in Cyprus than western multinationals. In particular, it might feel that a combination of factors make it less exposed, including (a) its close links to political power at the highest levels of a major economic and military power, and (b) the leverage that its home nation has over the Cypriot government in its role as a vital source of credit, and (c) a large and popular communist party on the island whose members look favourably upon ties to russian interests, and (d) a financial and business-services community that relies on russian clientele for its economic well-being.
3) Gazprom might feel that it faces lower political risks operating in the disputed territorial waters of the eastern Mediterranean (where conflicting claims of economic control may well arise in the coming years), again due to its links to the highest levels of power of a nearby economic and military power.
4) Given the familiarity of russian businesses with the region, Gazprom might feel it has better intelligence than therefore faces less adverse selection and moral hazard there than its competitors.
I think those are all pretty straightforward, textbook-type reasons that don’t require much imagination.
“When mainland Europe looks at Greece and Cyprus, we see people and Governments living in some parallel phantasy universe.”
Do they see the same thing when they look north? (I’m just asking…..)
Simon: Do they see the same thing when they look north? (I’m just asking…..)
Certainly that would be a fair assessment of a Canadian’s viewpoint on the whole continent. As Obelix used to say: “these Europeans are crazy”.
NATO does not apply to Cyprus. The Sovereign Base Areas (RAF Akrotiri, the UK’s largest foreign base, and consistently useful even after the Empire died) don’t incur NATO’s protection. The NATO understanding is that the NATO guarantee doesn’t apply to overseas territories, just the domestic homeland.
<iCyprus disappears as a political entity, is co-administrated by a brit high commisioner, as until 1960 and a turk general. The politicians and russians are rounded up, and then deported.
What fantasy world are you living in, genauer? Cyprus was made a protectorate in 1878 by the British, annexed outright by the UK in 1914 and made a Crown Colony (Canada’s status prior to 1867) in 1925. The UK only cares about its Sovereign Base Areas, it does not care in the least about the rest of the island.
Yes, there will be a default. Cyprus will restructure. Why Germany is lecturing anybody on default is beyond me, you’ve gone through all of this before. http://en.wikipedia.org/wiki/Sovereign_default
You are hardly innocent nor in a position to lecture anybody.
And before you lecture anybody about hyperinflation, the Weimar Hyperinflation was in 1923 and entirely political in origin. It was exacerbated by Germany’s choice to borrow to fund WWI instead of raising taxes as Britain, France and Canada did. The Weimar Republic also stabilized (financially, at least) in the late 1920’s before the Depression pushed it over the edge financially and, finally, politically. That is fact.
What you are positing is pure fiction.
If genauer is at all representative of German sentiment, one wonders why they don’t just leave the euro. Seriously, they seem to hold many of their neighbors in utter contempt. What are the economic benefits of the euro that couldn’t be had with New Deutsch Marks and some free trade agreements? Certainly the domestic political benefits are zero at best. And Europe was arguably more stable pre-euro.
After looking at the EU, you have to get down on your knees and thank God that the Fathers of Confederation gave the Government of Canada power over currency, interest, and most especially banking. Oh what those men got right!
And for all our petty rivalries, regional divisions and provincialism (both political and cultural) and a few near-death political experiences, you have to entirely thankful that we have managed to hang together as a country for 150 years with what they conjured up at the Quebec Conference.
“After looking at the EU, you have to get down on your knees and thank God that the Fathers of Confederation gave the Government of Canada power over currency, interest, and most especially banking. Oh what those men got right!”
Don’t get too cocky (OK, maybe on banking, you can get cocky), let’s wait until we see what we do when (not if) Quebec goes bankrupt. The only different between us and the EU (apart from a sensible federal governance structure) is that none of our “member states” have gone bankrupt yet (though there have been some close calls). Any bets on the likelihood of a western-led federal government being to keen on bailing out a separatist-governed Quebec to allow it to fund $7 day care and subsidized tuition for Quebecers (but not other Canadians), all while blowing through, what, $8 billion a year in equalization payments? That’ll make Greece/Germany look like a love-in.
I was getting cocky on banking. Europe isn’t together enough on the other stuff for any comparison to be valid.
all while blowing through, what, $8 billion a year in equalization payments
The equalization formula, at present, only looks at the income side, it compares each province to the tax haul of an “average” province and gives them equalization if they are below it. What a province blows it on is their business. Ontario and the others spend it on lower tax rates. Health and other social stuff is handled through other program transfers, not equalization. $7/day daycare is the kind of policy choice that Quebeckers are free to make.
I have little sympathy for the student protests as I paid much more.
Criticism is fair but it must be well-aimed criticism. Quebec will have to make some policy choices in the future but that’s their business. Equalization is like taxes, it comes with no strings.
Sure they are, but it’s a choice they’re making on someone else’s dime.
Patrick,
“If genauer is at all representative of German sentiment, one wonders why they don’t just leave the euro.”
With 6.5 trillion euros in external assets and an annual trade surplus of almost 200 billion euros, they may lose quite a lot if they leave the euro and the DM appreciates against other currencies.
Doctor why,
net foreign assets of Germany are roughly 38 % of a GDP of 3.3 t$ = 1.2 t$, and that was at 0.4% GDP back in 1998. We would not loose any “old assets”, if crazy people do stupid things : – )
Germany fared well in trade all the years from 1951 to 2002 without a Euro.
Fixed rated , flexible rate, Dollar at 4.2 deutschmark (DM), Dollar at 1.5 DM, we don’t care.
Germany didn’t want the Euro, France / Mitterand wanted it.
We wrote down the rules together, allegedly the 3% deficit comes from some Mitterand minister, Maastricht treaty, TFEU, everybody agrees and signs “no money printing, no bailout”.
A currency snake since 1979, adjusting and tightening the exchange ratios.
then the fix and “euro” cash in 2002.
I wonder a little bit, who exactly is losing anything, if Cyprus does now its disorderly exit?
Now, does the 0.2% deviant, caught red handed with his hand in the club jar, leave the club, or the 30 % rule keeper, with the other 40% rule keeper club board?
Everyone is going to leave the club, one by one or in packs, until a transfer union is implemented. Since that seems rather unlikely, eventually the Eurozone will not exist.
genauer,
let’s focus on Germany for now – and look at some numbers.
Net assets give only the low estimate for potential losses. In the hypothetical case where Germany leaves the euro, a large part of Germany’s liabilities will be converted to the DM, so the losses are likely to be much higher.
Let’s consider a baseline scenario, where the DM appreciates by 50% (which is totally realistic)
– the consolidated German balance sheet will in the worst case take a hit of about 2 trillion euros, or 80% of GDP.
– domestic price level will fall (by as much as 10%) because of the lower price of imports (with imports at 35% of GDP)
– trade surplus will collapse (though you need a model to say by how much)
If the German government reacts with a massive fiscal expansion (how likely is that?), then Germany will eventually look like today’s Japan, if not, then it will be closer to the Great Depression.
Now, returning to Cyprus – if Cyprus leaves, this will probably have very little immediate impact. But if the Cyprus exit begins the process of euro disintegration, then Germany will easily be the biggest loser.
So, yes, Germany may force Cyprus out of the euro and the EU, but it will be taking a huge risk and I don’t understand how a responsible politician may be willing to take such a risk over such a small matter.
“if the DM appreciates against other currencies.”
At least inflation would be low. Germans might like that 😉
If genauer’s appalling attitude is representative, then it’s hopeless anyway. Let’s hope everyone can manage to go their own ways with a minimum of violence.
Friend of mine served as a UN peacekeeper in Cyprus way back when. He compared it to R & R. Aside from eating and drinking pink stuff for the first two weeks and earning his jump wings there, the most dangerous situation he encountered was when a furious farmer tried to cross the green line to plough his fields on the other side.
Regarding the absence of euroscepticism within the system, at least in Denmark, it was made perfectly clear by top officials, when the referendum was held, that anyone opposed to the euro should consider his career opportunities within the public sector limited if not virtually non-existent.
Anyway we still said No.
Bob Smith: I pay more provincial taxes than you. It fund fund the $7 daycare and the low tuition. Equalization has nothing to do with it. And QC receive an amount per capita not much different than ON. We’re both Tier 1.
Let’s not go to the level of a Sun editorial. We’re both better than that… 😉
Hmmm,
I wondered somewhat how to break it here, without some very predictable reflexes, like determinant last night, lecturing ME on how to properly organize an inflation, or rename state bankruptcy as “currency reform”. We wrote the book for this :- )
to this arrogant German Besserwessi , who knows so many things more precise (“genauer”) : – )
Including Canadian pensions, central bank actions.
Who plays capital markets, can look up numbers, like 10 year rates, and interpret them. Besides 10 times more complex statements.
It was certainly also revealing to read Simon’s “Gazprom might” list.
We stared down a mighty Soviet Union, with 3 times as many soldiers, guns, tanks, 10 000 nuclears.
They tried every trick in the book, how to play the mentally weak or various social groups against the other.
We were just making sure, that after each round of theoretical tic-tac-toe in the War games, they never had a solid “firing solution”, even with the evident ability to kill all of us within 24 hours, without even a really solid fear that even a similar number of them would also die.
We listened very carefully to what our allies talked at their home.
Russians were and are good chess players, and understood, finally, that they were never getting net positive out of this “game”.
After 40 years ruining themselves with 15 -20% GDP wasted on military, versus our 5%, they gave up.
And now a Doctor_why comes with a pea shooter, with a strategic horizon of 2- 3 steps, instead of the Russian 6 – 10 steps, and threatens me to commit suicide with it, if he is not allowed to steal from me.
My “parallel phantasy universe” was a solid euphemism for that.
I have a Superbowl video for you: http://www.youtube.com/watch?v=R55e-uHQna0
I’m with Jacques….god knows Québecers pay for low tuition and $7 daycare (and pay….and pay….)
But I just can’t leave genauer’s comments alone….
“We wrote down the rules together, allegedly the 3% deficit comes from some Mitterand minister, Maastricht treaty, TFEU, everybody agrees and signs “no money printing, no bailout”.”
Wrote down the rules together AND broke them together. Let’s not forget that it was Germany and France that ran afoul of the 3% target. And when the EC tried to impose the sanctions for repeated violations that were specified in the treaty, it was Germany and France that resisted…and eventually made the sanctions for irresponsible fiscal policy toothless….over the vociferous objections of the ECB. And now, after gutting a vital feature of the Maastricht treaty, German politicians run their campaigns against “spendthrift” governments in other (southern) countries.
What was that thing that some German guy called Karl said about history, tragedy and farce?
“We wrote the book for this ”
“We stared down a mighty Soviet Union, with 3 times as many soldiers, guns, tanks, 10 000 nuclears.”
I think Germany also wrote the book on how to stare down the Soviet Union…. 70 yrs + 3 months ago…. along the banks of the Volga, wasn’t it?
genauer,
You are living in a world that not only does not exist, but never existed – just
like a game of tic-tac-toe in which you have to plan 10 moves ahead.
And I know it for a fact.
“And QC receive an amount per capita not much different than ON”
Jacques, if you’re going to compare my statements to Sun editorials, you’d better make sure you have your facts straight. In 2013-14, equalization payments to Quebec will be $7.8 billion, equalization payments to Ontario will be be $3.2 billion. I know Quebec is a distinct society an all, but I’m pretty sure that even in Quebec $7.8 billion/8.1 million > $3.2 billion/13.5 million (http://www.fin.gc.ca/fedprov/eqp-eng.asp and http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/demo02a-eng.htm).
If you think that Quebec’s ability to pay for frills has nothing to do with the extra $8 billion a year kicked in by Canadian taxpayers, you’re dreaming in living technicolour (even if you net out the portion of federal funds that originated in Quebec, see my next point).
And that just looks at the expenditure side. On the revenue side, Ontarian (to say nothing of Albertans), on average, pay more to the feds than Quebecers do, by a fair margin. In 2009, the federal government collected $39 billion in tax revenue from Quebec and $85 billion in tax revenue from Ontario (and $35 billion from Alberta). Was Ontario twice the size of Quebec in 2009? Yeah, that’s what I though…
Even federal spending that is done on a per-capita basis ends up being redistributive, since the spending may be done on a per-capita basis, but the revenue raising isn’t (which always used to drive me nuts, when Ontario’s premier would ask for extra money from Ottawa).
If you and Determinant want to have a fact based discussion, let’s have fact based discussion, but it would be helpful if you had some facts on your side.
Bob Smith,
“let’s have fact based discussion…”
Yes, please.
I’ve been thinking about moving to Quebec, and I would not like to relive my Cyprus experience 🙂
Simon, and all !
my logg says that I posted 2:06 pm, and that you posted at 2:08 pm,
given that my post was certainly not a one liner, and yours neither,
It looks to me like you were waiting and blew the fuse within seconds.
genauer,
If you are using a crappy evaluation function, it does not matter how deep you can search.
So, before offering us your strategic insights, make sure you understand basic international economics.
Bob, I’ve been trying to move to Quebec too. Facts are facts. If Quebec or any other province spent nothing on services but still had a below-average tax yield due to lower incomes and less fruitful revenue sources, it would still get equalization. You are confusing expenditure with income.
Equalization as presently constructed ONLY examines the yield of various provincial taxes, royalties and other income sources. Every province has benefited at one time or another from Equalization, including Alberta. Under the formula, you only get significant Equalization if your tax rates are above average and your yield is below average. Nowhere in that equation is expenditure considered. That’s just math.
Anyway, why are we having a family tiff at this stage in the thread?
Oh, FYI, Joe Stiglitz is speaking to the NDP Convention in Montreal on April 12. I’ll be there, both at the Convention and at Dr. Stiglitz’ speech.
Anyway, on to genauer:
We stared down a mighty Soviet Union, with 3 times as many soldiers, guns, tanks, 10 000 nuclears.
You conveniently forgot the utter disasters for Germany that was 1914-1918 and 1939-1945, if we’re going to discuss strategic choices. In fact the UK and the other allies out-organized the Germans in WW2, British mobilization for war production was far more complete and far more comprehensive and thus more effective. See the employment of women, Mosquito, etc….
Your amnesia about history is annoying. It has also eliminated your credibility.
LOL,
I just realized that Simon’s first response was to what I wrote hours earlier.
But the second one was still substantially faster than a nuclear trigger finger should be.
Doctore, for you I have
http://ftalphaville.ft.com/2013/03/21/1433652/ecb-starts-egg-timer-on-cyprus-ela/
With respect to timing, maybe you care a little faster about your 100 hour deadline
than I do about my 100 year worries.
genauer,
Objectively, this crisis is a storm in a teacup. Why are you so over-excited?
All: simmer down a little please.
Self-righteous moral outrage, I suppose. Misplaced, IMO.
Rather than a tempest in a teapot, I think this might be the canary in the coalmine, and that is what worries me. If Germany (or Finland, or France or …) figure that the costs of the euro outweigh the benefits, that’s one thing. So long and thanks for the fish, and everyone goes their own way. The thing that I find worrying is the apparent tendency to dehumanize the victims of a policy shambles which Germany itself had no small part in creating. Also their complete unwillingness to accept that Germany benefited enormously from the imbalances that have ruined many of their EU ‘partners’. Ordinary Greeks/Spaniards/Portuguese/Irish/whoever are not generally perceived as having been failed by the Eurocrats who rammed an ill conceived idea down their throats. No, instead they are stupid, lazy, craven, criminals, etc.
It’s ugly, and given how quickly things came unglued in Hungary, I really worry about where this all leads. Especially given the catastrophic levels of youth unemployment in the EU basket cases. At some point, they WILL lash out.
Patrick: I assume you were writing your comment when I had just posted mine, since they were only 2 minutes apart.
As to whether creditor countries benefit: well, if I produce goods, and sell them on credit, I do benefit, provided I get paid back. If I produce goods, sell them on credit, and then have to forgive the loan, I lose.
My guess is that many Germans (and others) regret (or will regret) having joined the Euro. I would, if I were German.
If the Euro had never been introduced, Germany would (probably) have run smaller surpluses, but would have produced roughly the same amount of goods, but would have consumed more of them at home. (I’m assuming that the Bundesbank would have gotten monetary policy roughly right for Germany, and that Germans would have lent less to other Eurozone countries, in that counterfactual world.)
I too worry where this all leads. But I have some sympathy for Germany. They too are caught up in the same mess, with no easy way out.
Yep. It looks like Cyprus is back to a cash economy. Now (unfortunately) we will get to really see a recession caused by an excess demand for money. Because a large portion of the money supply is inaccessible.
“If Quebec or any other province spent nothing on services but still had a below-average tax yield due to lower incomes and less fruitful revenue sources, it would still get equalization.”
Yes, but it wouldn’t be buried in debt. Recall, I started this digression by suggesting that we shouldn’t be too smug about the Eurozone fiasco, since I could see exactly the same discussion going on in Canada if the feds were approached to bail out an insolvent Quebec government (albeit with a West/East divide, rather than a North/South one).
Bob: Smith equalization is mechanical and varies with oil prices and bank profits and the different impact along the cycle on individual provinces. The point is that, on average still a few years ago, QC was on par with the Atlantic Provinces at roughly 3-5k /cap. It ‘s now in ON waters.
As for the debt : we had a choice: we could stay at an university graduation rate lower than Mississipi blacks ( as in 1940) or join Connecticut. We could stay in 1960 where a Franco earned 52% of an Anglo while an African American was at 54% of a white with a GDP at 60% of Canada( ask Pierre Fortin for the data)…or we could catch up in either 2 centuries or borrow and do it in 50 years. I’d rather have that debt and be a college economist than carrying crates on my back down the hold of a ship in Quebec City harbor like my grandfather who, at my age, was already dead of exhaustion.
“It’s ugly, and given how quickly things came unglued in Hungary, I really worry about where this all leads”
And Greece, with the Golden Dawn party, and Italy, with Beppo Grillo’s five-star movement (to say nothing of having re-elected Berlesconi), and France, with the Front National and… well… you get the point
There are a lot of Euro countries right now who, having cycled through the conventional political parties, might toss their hat in with some charismatic outsider who shares their anger. The other day, I bet that France would be the first country to elect a fascist government. Well, having gone through Sarkozy and the UMP, and being in the process of churning through Hollande and his socialists (who seem to have realized that their campaign promises were typical euro-fantasy), that leaves Marine Le Pen (who finished 3rd in 2012) as the last woman standing. And the radical parties have the advantage of being able to credibly claim that, if nothing else, they had nothing to do with the Euro-zone. That may be all they can credibly claim, but it could be enough.
Jacques, spare me the “Quiet Revolution”/”post-colonial” nonsense. It’s a good story, but it has nothing to do with Quebec’s debt crisis. Most of the increase in Quebec’s net debt per capita (relative to other provinces) has occured over the last 25 years (and the big jump has occured in the past 15 years, see, for example http://www.stat.gouv.qc.ca/donstat/econm_finnc/conjn_econm/TSC/pdf/chap13.pdf).
(Not that I take comfort from the fact that Ontario has been almost as profligate)
Yawn. Bob, I thought you were better than Anglo/Franco Schadenfreude. Every province in Canada has gone through some miserable times.
Yes, but it wouldn’t be buried in debt. Recall, I started this digression by suggesting that we shouldn’t be too smug about the Eurozone fiasco, since I could see exactly the same discussion going on in Canada if the feds were approached to bail out an insolvent Quebec government (albeit with a West/East divide, rather than a North/South one).
We bailed out Saskatchewan in 1991 and Alberta in the 1930’s. Quebec has the means to pay for it and will. Comparisons with Greece are gratuitous. Ottawa has far more financial and political levers with a province and Quebec is not that stupid, schadenfreude notwithstanding.
Kathimerini reports that the text of the law restructuring the banking sector was ready on Jan 15, but the previous president decided to wait until after the elections (which took place on Feb 17 and 24). That explains to some extent the aggressive approach taken by the Eurogroup.
In other news, one of the two problem banks (Laiki) is likely to be restructured with uninsured depositors losing up to 40%, while the other (the Bank of Cyprus) will be recapitalized. This approach should reduce the total recapitalization requirements by about 2 billion euros
It is still not clear where the money will come from, but the government thinks that a haircut on insured deposits is no longer necessary.
“It is still not clear where the money will come from, but the government thinks that a haircut on insured deposits is no longer necessary.”
Necessary, or possible?
Regarding Laiki, Dr. Why, can you give us any insight in the nature of Laiki? Does it seem to have strong political connections? I can’t help wondering why it was not shut down some time ago if it was thought that this could save 2B Eur. This is not something that technocrats suddenly “notice” at the last minute…..
Update: Actually, according to the latest estimates, restructuring Laiki may reduce the recapitalization requirements by as much as 3.6 billion euros (out of about 10 billion euros); but the required cash contribution will be reduced by 2 billion euros (out of 5.8 billion euros).
(This is dangerously off-topic, but the thread seems well-established by now, so…..)
Bob Smith: I’m wondering about how you see provincial spending powers in a system with fiscal transfers. To what extent is it reasonable for, say, Albertans, to transfer funds to Québec (or PEI, or any other province receiving transfer payments) if that province has spending or taxation priorities that differ from Alberta’s? Alberta has sales tax and income policies unlike those of any other province. In what sense is it “unjust” for receipients of transfer payments to set different fiscal policies on either the tax or the spending side? Let’s be clear: I’m not in any way suggesting that Québec is a special case — I’m asking the question in the general context of a fiscal union. (If this has to be about Cyprus, we can imagine that we’re talking about a possible EU fiscal union…)
Simon,
You can read the short version of the story here:
http://eu.greekreporter.com/2012/09/13/eu-oks-recapitalization-of-cyprus-popular-bank/
Simon,
Maybe not possible. After all the criticism, the Eurogroup will probably not approve a plan involving a haircut on small depositors.
I never thought I’d be defending the current govt. of Québec, but….
Aren’t they projecting a balanced budget or surplus by the 2013-2014 fiscal year?
(p. 8 http://www.budget.finances.gouv.qc.ca/Budget/2013-2014/en/documents/BudgetGlance.pdf)
Even Alberta doesn’t expect to balance their budget before then….
The blog was absolutely fantastic! Lots of great information and inspiration, both of which we all need!b Keep ’em coming… you all do such a great job at such Concepts… can’t tell you how much I, for one appreciate all you do!
Speaking of Canadians feeling cocky about banking….I got into an interesting discussion with a student on the subject of bank bailouts. He asked which Canadian banks would be considered Too Big To Fail (TBTF). Without thinking, I replied “the Big 5” whereupon he asked “What about Banque Nationale?” (For non-Canadians, that’s the #6 bank. Unlike the first 5, it is also heavily concentrated in Québec, and owned and run by francophones. That makes it very different from the top 5.)
That stumped me. My gut tells me that TBTF depends on both financial and political factors….just as EU bank restructuring deals do.
What do you think? Is Banque Nationale TBTF? (Let’s be clear: do you think the Governor of the Bank of Canada would feel — for whatever reason — that its survival was of paramount importance?)
Dr. Why: Thanks for the link to the Laiki Bank story.
Do I understand correctly that they issued 1.8 B of new shares in May 2012? Then in Feb 2013 they post a loss for the first-half of 2012(!) of 1.3B?
And that the Govt. of Cyprus temporarily bailed out the bank by …. giving them 12-month govt. bonds in exchange for the shares?
I ask because I’m….surprised….by the reporting standards (you announce disasterous results for the first-half of 2012 9 months late and long after you tried to sell shares to investors!?!?!) and the financing arrangements (no new cash, just a paper swap of bank “shares” for a short-term govt. IOU.)
Do you know who controls this bank?
Simon,
1) The post is dated Sep 13, 2012, so the results were announced in Aug 2012. The losses were probably caused by the Greek haircut.
2) Yes, it was a questionable deal. The swap itself is probably not a problem, but I think by that time Cyprus government bonds became ineligible as ECB collateral – so it did not help with liquidity.
3) After the recapitalization, the bank has been 84% state controlled, but previously it was controlled be a Greek investment company (Marfin Investment Group).