It was sometime in the 1960's. My uncle was teaching in Bulgaria. He wanted to buy stuff in Britain, but wasn't allowed to take much money out of Bulgaria. My father was farming in Britain. He wanted to buy stuff in Bulgaria, but wasn't allowed to take much money out of Britain.
My uncle and father thought up a Cunning Plan. My father went to Bulgaria, where my uncle gave him money, and my father bought stuff. My uncle went to Britain, where my father gave him money, and my uncle bought stuff.
The Cunning Plan was possibly illegal? But it was Pareto Improving. My uncle preferred buying British stuff to buying Bulgarian stuff. My father preferred buying Bulgarian stuff to buying British stuff. The Bulgarian government wouldn't care whether it was my uncle or my father buying Bulgarian stuff. The British government wouldn't care whether it was my father or my uncle buying British stuff. (Even if they had hoarded money, instead of buying stuff, I can't see why either government would care whether it was my uncle or my father hoarding the money.)
The Cunning Plan was economically equivalent to barter. It was exactly as if my uncle had bought Bulgarian stuff, my father had bought British stuff, and then the two had swapped the stuff.
The Cunning Plan worked because my uncle and father knew each other, and trusted each other. What was needed was some sort of internet dating site, so that people like my uncle and my father could find each other, with the host checking that both sides could be trusted. But the dating site would need to be open to threesomes too, for cases where someone in Albania wants to buy stuff in Britain, someone in Britain wants to buy stuff in Chad Cyprus, and someone in Chad Cyprus wants to buy stuff in Albania. Or foursomes. Or orgies with all sorts of people from all sorts of countries taking part to greater or lesser extents.
What would happen if there were more farmers in Britain wanting to meet teachers in Bulgaria than vice versa? You would need some sort of price to adjust, so British farmers would get a worse deal, which would discourage some, and Bulgarian teachers would get a better deal, which would encourage some more.
If the British or Bulgarian governments tried to fix the price in that dating market, that would cause problems. There could be an excess demand or excess supply. Which would create all sorts of problems, and lead to rationing, because some British farmers or Bulgarian teachers wouldn't be able to find a partner. So the governments might need to decide who gets priority in finding a partner. And then people would start to think up even more Cunning Plans to get round those government decisions.
Or, we could forget all about exchange controls and Cunning Plans, and just have flexible exchange rates.
Worthwhile Canadian Initiative 
Genauer: “Papers are as long as they need to be.” Quite so.
Some things can be done in 4 pages (Economics also has a number of “Letters” journals, but they tend to have little impact.) Modern journals in economics try to limit a paper to 20 p. (with the editor usually resigned to accepting 25.) Some large ideas can’t be adequately developed in that space. (Ask anyone who works with large, detailed macroeconomic models like those at the Federal Reserve or IMF how easy it is to publish their results in a 20p. format.) That means either (1) you try to slice them into 20 p. segments or you publish a book. (1) is more typical, but we also see (2) from time to time.
I think the NYT limits Krugman’s columns to 750 words; writing for a space like that is different from writing for a scientific journal. I find that much of what Krugman writes about these days is as much political commentary as economics; I’d apply a different evaluation standard to that. While I’m not a regular reader of Le Monde, I also expect that the writing in that paper is aimed at a more educated reader than the NYT.
But since you want an article and there is no particular need for me to insist on that particular book (other than having studied it carefully when it came out) I’ll choose an article. However, you need to answer my other questions first.
– Can you back-up your claims about Helpman? (If I choose a Krugman and Helpman article, will you complain that Krugman’s contribution was not substantial?)
– Are you going to object similarly about ANY co-authored article? (FYI: in economics, authors are typically, but not always, listed in alphabetical order. There is certainly no general rule that the most important are listed first, or last, etc.)
I’ve also found that Le Monde is a great filter for economic news – if Le Monde does not write about something, it’s probably not worth reading about.
Kevin,
I don’t care what he wrote somewhere before. I want to see his analysis of a Cyprus exit that would at the very least include capital flows and currency reserves(how is Cyprus supposed to finance a current account deficit?).
And, yes, I’m not interested in economics as a theoretical discipline, but I’m very much interested in real life economics.
Dr. Why: ” And they also did not predict that the euro could disappear before the end of 2011.”
Citation please.
Could you also please clarify: did he say “could” or “would likely”?
Dr. Why: I’m teaching a gradute course on financial crises at the moment and (due to popular demand) part of this week’s lecture was on Cyprus. Towards the end of the lecture, I said that whether Cyprus should remain on the Euro after the 10B they have been promised is fully disbursed is an open question. (Paying > 10K per capita to stick with a hard currency for a year or so seems like a good economic incentive to me.)
You’re at ground zero (and a reader of Le Monde): what’s your opinion? Or to focus the question, what shouldn’t Cyprus just “do an Iceland” as soon as they stop being paid richly to stay on the Euro?
– introduce a new currency
– depreciate
– default on EUR-denominated debt
– stay in the EU
(I’m not saying that is the best course of action: I’m saying it is an open question. I also think that the above is pretty much what Krugman is suggesting.)
Simon,
Is it really necessary?
I remember having endless debates about this (e.g. I think I had a strong disagreement with Nick), and Krugman was clearly in the doom and gloom camp; but to find a link I would have to go through his archive in Nov-Dec 2011, and I would probably run out of free NYTimes article views before I find it.
Dr. Why: I thought I read quite a bit of PK’s blog and while he (among others) has been a Euro-skeptic since before the Maastrict treaty was signed, I don’t recall him saying that it “would disappear” by the end of 2011. I can readily believe that he warned that some countries could leave the euro by then…..but that’s very different from predicting a disappearence.
Simon,
I don’t understand how it can possibly work from a practical perspective.
When the dust settles, Cyprus will probably run a trade deficit of about 10% of GDP (exports at 40% of GDP, and imports at 50% of GDP). I have no idea how this deficit can be financed without the ECB, which is happy to accept virtually any kind of collateral.
I also don’t understand what would happen to the banks’ assets and liabilities if Cyprus leaves the euro, including collateral pledged to the ECB.
I don’t know how Cyprus would be able to control capital flight.
I don’t know whether Cyprus would be able to stay in the EU, since adopting the euro is a requirement for the EU membership (unless a country negotiates an opt-out).
So when we get to technical details, the euro membership looks like a one-way road.
Simon,
“I can readily believe that he warned that some countries could leave the euro by then…..but that’s very different from predicting a disappearence.”
Back than those countries would have been Spain and Italy (whose spreads were in the stratosphere), which would have meant the end of the euro.
Simon van Norden: I thought I read quite a bit of PK’s blog and while he (among others) has been a Euro-skeptic since before the Maastrict treaty was signed, I don’t recall him saying that it “would disappear” by the end of 2011.
I’ve read everything about the Euro on Krugman’s blog since it started. I’m quite certain he has never said anything like that.
Kevin, Simon
My impression was that PK predicted the end of the euro at least twice – at the end of 2011 and in the middle of 2012, but I could be wrong (I usually read only reposts in the Econmist’s View). Maybe we should ask Nick.
Dr. Why: “Back than those countries would have been Spain and Italy …which would have meant the end of the euro.”
So we agree that the “end of the euro” phrasing is your personal interpretation, and not something PK wrote?
Kevin Donoghue: I agree with you.
Dr Why: “I don’t understand how it can possibly work from a practical perspective.”
Actually, parts of this have been explained quite recently in non-technical language….on PK’s blog. In particular, read his remarks on the Corralito (sp?) which directly addresses the capital flight question. (Short answer: you’ve already got the capital flight, whether you’re in the Euro or not. That why you can’t take more than 300 out of your bank account today. That’s why you can’t get the cash to visit Australia right now.)
Much of the rest can be learned by studying the history of sovereign default and the experiences of countries who have been through it. As it happens, I did my graduate work in international finance in the mid-1980s, when most of the professors around me were studying the wave of sovereign defaults in Latin America. One of those professors is now Chief Economist at the IMF (where he succeeded one of my former classmates.) Another one of those professors was…..Paul Krugman. (You don’t have to love him or think he’s infalliable or even agree with his analysis in this case to admit that he knows a fair bit about experiences with sovereign defaults.) But if you’d like to learn more about the historical record, pick up a copy of Reinhart and Rogoff’s “This Time is Different” and read some of their analysis.
Dr Why,
“I now think a breakup of the euro, with major players, not just Greece, being forced out, is up to more or less even odds.” Krugman, February 2012. So 50:50 but no date specified.
That’s about the best you’ll do.
Simon,
“So we agree that the “end of the euro” phrasing is your personal interpretation, and not something PK wrote?”
Yes, that’s certainly how I interpreted it – I don’t remember PK’s exact statement.
“you’ve already got the capital flight, whether you’re in the Euro or not”
That’s what the ECB is for. If you can borrow at 0.75% to replace the deposits on which you had to pay 4%, then capital flight is not necessarily a bad thing. My guess is that we have temporarily restrictions now for two reasons:
1) The bank restructuring/recapitalization will take some time
2) Cyprus government bonds are currently not eligible as collateral – the ECB is expected to decide on this matter after Cyprus signs the memorandum.
“But if you’d like to learn more about the historical record, pick up a copy of Reinhart and Rogoff’s “This Time is Different” and read some of their analysis.”
Can you tell me how this historical record is relevant to whether or not Cyprus would be able to stay in the EU?
Or to the fate of the collateral? If Cyprus banks borrows about 10 billion euros from the ECB collateralized with 15-20 billion euros worth of (domestic) assets, then leaving the euro would simply bankrupt the banking system.
Kevin,
thank you, that’s good enough for me. However, I think there must have been other references (maybe between the two Greek elections in 2012)
It’s like global warming. Without a major change in direction, the Euro will come to an end. A major change in direction is not forthcoming. Will politics dramatically change? Can’t predict. Any specific prediction of a date is probably going to be false, except the one that isn’t.
Simon,
In Europe people usually speak many languages (I speak four), so a reference to Le Monde is just as natural as reference to NYTimes (or, for me, to Kathimerini).
Simon, to answer your questions:
1. I have ZERO problems with multi authorship of papers, quite the opposite.
2. I am interested in a positive outcome, to understand the admiration. I have repeatedly said so here.
A few more remarks, suggestions:
A while ago, I believe it was about h-index here, I was actually bitching a little bit about that I am used to more authors than the average economics papers : – )
In my field is is near always team work.
I would strongly prefer a paper somewhat (n years) before the Nobel Prize 2008.
Einstein was n= 1921 – 1905 = 16. I suggest n=12 here, please take your pick.
I obviously prefer better known / perceived papers.
The harder constraint could actually be here, that I get my hands on it over the weekend.
Being practical, how about you suggest one, and I ll see, or we arrange for me getting it, before we get into potentially sophisticated arguments of “ownership”.
I have witnessed academic cabals, even alleged court cases about plagiarism, which have been toxic to academic careers 40 years later.
I have some knowledge about 13 billion dollar lawsuits.
People don’t discuss things like that in public, without need and an extremely high paid lawyer : – ).
patent lawsuits
Dr. Why: Words fail me.
Simon,
???
Simon,
now you are starting to learn “Levant”. The “Fertile Crescent”.
I learned to enjoy reading kathimerini, and yannis blog : – )
Dr. Why: [deep breath] Okay….so let me take some of the things that you wrote one at a time.
(a)”If you can borrow at 0.75% to replace the deposits on which you had to pay 4%, then capital flight is not necessarily a bad thing.” 0_0
Please stop and ask yourself why capital flight is required to get cheap ECB financing. How exactly do you think it is helping the Cyprus economy?
(b) “My guess is that we have temporarily restrictions now for two reasons:” 0_0
Um…no guessing is required on this. You have temporary restrictions to prevent a complete meltdown of your bamking system in the next couple of days. Did you notice that banks have been closed in Cyprus for the last, oh, week or so? Did you realize that was also to prevent a complete collapse? That without that shutdown and current “temporary” restrictions there would not be a single non-bankrupt bank on the island today? (BTW….how long is that “temporary” exactly? I heard a week….then a month….anything since?)
(c) “Can you tell me how this historical record is relevant to whether or not Cyprus would be able to stay in the EU?”
History has many examples of
– fixed exchange rate regimes that collapsed
– monetary unions that collapsed
– countries that defaulted on their foreign debts
The historical record gave you insight into how they did and why.
The choice facing Cyprus is whether to (a) keep the Euro, or (b) quit the monetary union and default on its sovereign debt.
An intelligent way to make that choice would be to weight the economic costs and benefits (among other things.) Or, you know, you could instead listen to what your politicians tell you.
(d) “If Cyprus banks borrows about 10 billion euros from the ECB collateralized with 15-20 billion euros worth of (domestic) assets, then leaving the euro would simply bankrupt the banking system.” Have you asked yourself how precisely a Bank in Frankfurt seizes assets in Cyprus if the sovereign govt of Cyprus really doesn’t want them to? That question goes to the heart of sovereign defaults and the choices your island faces. Please also remember that the minute after Cyprus leaves the Euro, the Bank of Cyprus becomes the lender of last resort to your banking system. They can recapitalize the system in any amount…..with the new currency (Cypriot pounds or rubles or icantbelieveitsnotaeuro’s.)
Bottom line: the transition out of the Euro is costly and traumatic. As you may have noticed looking around your island for the past week or two, staying in the Euro is costly and traumatic too. Presently intelligent people differ about which is the better choice.
Genauer: Look, if you really just want to understand why some people admire Krugman’s contribution to economics, you don’t need me to pick one article; you want to go to the work that the Nobel Prize committee honored. To understand why, you could have a look at
http://www.nobelprize.org/nobel_prizes/economics/laureates/2008/speedread.html
Click to access popular-economicsciences2008.pdf
Click to access advanced-economicsciences2008.pdf
Note that I do not know Krugman’s work on economic geography; I was mostly exposed to his work on collapsing exchange rate regimes (seminal stuff), theory of trade with imperfect competition (related to the economic geography, but Brander and Spence were also big innovators in that around the same time as Helpman and Krugman) and some stuff on sovereign defaults.
Simon,
I don’t understand why you are surprized by perfectly reasonable arguments. Do I really have to explain to you the very basics of central banking?
a) Banks don’t need capital flight, but they can benefit from it, up to a point. Given the size of the collateral haircut, a bank would be typically able to borrow about 50% of its total assets from the ECB at 0.75%. So as long, as capital flight is limited Cyprus can benefit from it.
b) I just explained to you that government bonds (more than 10 billion euros worth) are not eligible as collateral, so the amount of funds the banks can borrow from the ECB is limited – and that’s a technical and temporary problem. As for the Bank of Cyprus and Laiki, their restucturing/recapitalization is not complete.
d) “Have you asked yourself how precisely a Bank in Frankfurt seizes assets in Cyprus if the sovereign govt of Cyprus really doesn’t want them to?”
Now that’s just ridiculous – it would mean leaving the EU, losing access to the EU market, to EU financial assistance, losing freedom of movements for Cypriot citizens etc.
And Cyprus still needs to import 50% of its GDP and finance a 10% current account deficit (probably much more after devaluation). Yes, the central bank of Cyprus can become the lender of the last resort, but it can’t issue euros or dollars, and I doubt Cypriot banks will be able to operate anywhere in the developed world if they owe 10 billion euros to the ECB.
So I just gave you a very reasonable explanation of what is going on and you came up with THIS? You’ve got to be kidding me, right?
Simon,
it was You responding with “your challenge interests me” to my
“I am still waiting for one single positive response to my old question: Please tell me one specific Krugman PAPER, and in a very few sentences, what YOU specifically find good about it.”
Please dont answer tonight.
As I said to Dr_why, …. ” I can imagine to do business” after some sleep over.
Tonight you are just somewhat tangled up between the German accountant and the levant pirate : – )
Doctor Why; why not just leave the euro, and not the EU? I don’t think anyone is advocating dismantling the EU. It’s just that the euro has been such an unmitigated disaster, why not put it out of its misery? Anyway, if the Germans think Cypriots are ‘levant pirates’, I’m sure they’ll hold the door for you on the way out.
Patrick,
the euro = the EU, unless the country negotiates an opt-out
http://en.wikipedia.org/wiki/Opt-outs_in_the_European_Union#Economic_and_Monetary_Union
Genauer: First you say you want someone to defend a single Krugman paper and tell you what is good about it. I offer to do much more (a whole book!), but you’re not keen…you need something this weekend….a paper.
But then, you note “I am interested in a positive outcome, to understand the admiration. I have repeatedly said so here.”
So why would reading the materials offered by the Nobel Prize committee not lead to a positive outcome?
Maybe a county can leave the EU and then try to join with an opt-out, or maybe there will eventually be some legal framework for leaving the euro… but for now leaving the euro most likely means leaving the EU as well.
Dr. Why: the source you cite only states that EU members are obliged to join the European Monetary Union. Cyprus has done so.
Is there any language that says countries have to stay in the union? That they will be expelled if they leave?
I note that Sweden did not negotiate an exemption yet was not thrown out of the EU. Why exactly do you think Cyprus would be?
Doc_why,
1. do you hang out at other blogs of interest?
2. do you understand enough German to enjoy things like Nockherberg
or to even understand
“Eat the rich” is totally mainstream / boring against that.
For you non-Germans, every government change in this country was predicted in this beer hall
Simon,
Some countries have not qualified yet – it’s a different situation.
As for Cyprus, or any other country that would want to leave the euro – nobody really knows. Leave and re-join is the option I hear most often.
genauer,
1) Not really, – whenever there is a crisis in the Eurozone, I usually spend a week or two at the Economist’s View, or sometimes here; and then go back to my normal life.
2) No, my German is very basic (it’s not one of the four languages I speak)
Simon,
because I read the Nobel laudatios already,
before formulating my question, quite some time ago.
I read your
“why would reading the materials offered by the Nobel Prize committee ”
from others, in similar words, about 5 or more times already.
That is why I ask for “in a very few sentences, what YOU specifically find good about it.”
Not some other, anonymous, in general words.
Genauer: but I don’t think you answered my question.
“So why would reading the materials offered by the Nobel Prize committee not lead to a positive outcome?”
My PERSONAL opinion of Krugman is based on my experience in his classes as a student and (briefly) his teaching assistant in the 1980s. But I don’t think you want my personal opinion of him as a professor or person back then. I think you want someone to defend his contribution to economic research. I know a few of his papers. They were not the (main) basis for his Nobel prize, although they offered fresh insights and had an important impact on international economics.
Dr. Why: “As for Cyprus, or any other country that would want to leave the euro – nobody really knows.”
Okay, so we agree that there is no reason to assume that leaving the Euro means leaving the EU.
I should also point out that, at present and for the foreseable future, EU actions that fundamentally alter the nature of the Union (such as expelling a member) require the unanimous approval of all member states. Which would seem to mean that Cyprus would have a veto, no? And is there any reason to think that Greece would not defend your membership?
Expelling Cyprus against her wishes would seem to be a challenging thing to do.
Simon,
The problem right now is that there is no coherent plan for an exit. Maybe, if Cyprus is really lucky, it may somehow default on its obligations and still continue to finance the current account deficit, and its banking system will survive, and it will not be occupied by Turkey etc.
But it’s all completely unpredictable and why would anyone in their right mind try something like this just because a simple international trade model says it might be a good idea?
Dr Why: Cyprus has no coherent plan of any kind.
BTW, your current account deficit is about to get very much smaller fast. (That happens when you can’t send Cypriot Euros to EU suppliers off the island.)
Reuters is also reporting that amounts of deposits over 100K in Bank of Cyprus and Laiki Bank are basically gone now.
– about 40% is converted to equity in the new bank
– about 20% is frozen and held interest-free
– about 40$ is frozen and held but bears interest.
I think it is safe to say that the Island’s days as a banking center have just gone the way of Beruit’s.
“why would anyone in their right mind try something like this just because a simple international trade model says it might be a good idea?” Um….because they’ve studied what other countries have done in this situation? (Strange sense of déjà vu as I write that…..)
Simon,
1) Yes, everyone realizes that Cyprus’s days as a banking center are over.
2) Yes, that’s what a bankruptcy/restructuring looks like – normal operations are interrupted and large depositors take huge losses and (for the BoC, the first 40% are necessary for capital adequacy and additional 20% may be necessary to insure liquidity given the limits on how much can be borrowed from the ECB).
3) déjà vu indeed. I explain to you why leaving the euro would not work and you keep telling me that there must be a way since other countries have done something in a situation that was in some respects similar. Isn’t the burden of proof supposed to be on the people who propose that Cyprus should leave the euro? Let’s forget the legal situation and focus just on the bank balance sheets, capital flows, current account balance and currency reserves.
The actual numbers are 37,5% and 22,5%, which is consistent with the Troika’s final proposal (a 50-60% conversion to equity).
On the other hand, if you are not comfortable discussing concrete scenarios and numbers (which would be perfectly understandable), we could as well stop right here – otherwise there’s a risk that we’ll be just going around in circles.
Dr. Why: We agree that there is no coherent plan for an exit or for remaining in the EMU….and the burden of proof is on the exit plan? Odd way to make policy, …. but I’ll take a stab, below.
“Yes, that’s what a bankruptcy/restructuring looks like … large depositors take huge losses.” As a student of history, Dr. Why, could you please remind me how the losses large depositors will suffer in Cyprus compare to those we’ve seen since 2007 in Greece? in Ireland? in Spain? in the UK (with RBS and Northern Rock)? in Benelux (Fortis?) I was under the impression that this is the first time large depositors have lost a dime (that’s $0.10 USD or CAD.) But, hey, I’m a North American and Europe is very, very far away from here…I’m sure you can set me straight. (Remember…depositors, not bondholders or equity investors. Oh….and you might want to set me straight on how long deposits were frozen for in those other restructurings.)
You want something that focuses on “bank balance sheets, capital flows, current account balance and currency reserves.”
Bank balance sheets: Anything feasable under EMU is feasable with your own currency. The difference is that under an EMU-exit, the CBoC can fulfill its role of LoLR without dealing with the Troika or any other external body. (This is not a free lunch; you’ll pay for it with inflation and depreciation/devaluation. More on that below.)
Currency reserves: None under EMU. None under EMU-exit (CYP floats.)
Capital and Current Account (KA and CA balance.) Ay, there’s the rub. I’m no Cyprus expert and I’ll have to rely on your aid with the numbers, but here’s a sketch.
The days of 10% CA deficits are over regardless of whether you stay in the EMU or leave. I’m guessing (please correct me) that in the past these were financed by a combination of govt. borrowing (esp. since 2008) and private sector portfolio investment (e.g. bank deposits of non-residents) and direct investments (i.e. non-resident purchases of real estate.) Presently the govt. is at its debt limit, the bank deposits would like to leave and the real estate market has cratered, halting sales of new homes to non-residents. Looking forward, private investment inflows will approximately cease (your govt. debt, banking deposits and real estate will attract no net new foreign capital) and you may have a period of outflows, esp. when the temporary capital controls are lifted. Two possible exceptions here are (1) those offshore gas deposits, and (2) sales of govt. assets. No one knows how much either investment either could attract or when they could do so. You’ve also got the potential for domestic capital flight; many residents may decide to move some of their savings off-island “just-in-case” of further banking troubles or an EMU-exit. That means that all Current Account deficits have to be financed by a combination of (1) official lending (bail-out funds from the ECB, IMF, Putin, etc.) and (2) draining deposits from the banking system as Cypriots run down their Euro balances. Note that (2) further craters your banking system. Option (1) is nice — esp. if you don’t pay back the loans — but the EU seems “donor-fatigued” for the foreseeable future and progress towards the goal of an EU Banking Union has stopped.
The only thing that EMU-exit changes in the capital account is that capital flight slows because it puts the worry of a devaluation/depreciation in the past (and in doing so, reduces the wealth of everyone with savings in Cyprus.) To the extent that it lets the govt. of Cyprus act as LoLR to its banking system, it might also reduce capital flight due to worries about further haircuts on depositors.
You’ve also seen a deterioration in competitiveness in export and import-competing industries as unit labour costs have risen relative to other EMU members. The collapse in export demand in trading partners like Greece only makes things worse. But you can’t have a deficit on both the current and the capital account, so how does this thing equilibrate? Depends on whether you are in EMU or out (i.e. fixed or floating exchange rate.) EMU first.
In EMU, the Hume specie-flow mechanism operates. The more you import, the more money (euros) you lose, the less there is in the banking system (bank cratering continues), the worse the credit shortages for Cypriot businesses get. Two forces evenutally choke-off imports. (1) A sustained recession and loss of savings severe enough that the fall in consumption cuts imports. (2) A sustained recession forces down wages (and the prices of other local factors of production) in EUR to the point where exports and import-competing sectors in Cyprus grow.
Out of EMU, the exchange rate floats (i.e. sharp depreciation.) The boost to the export and import-competing sectors takes hold fast (you don’t need a recession of Spanish or Greek proportions.) The downside is (1) lower wealth as the depreciation reduces the foreign purchasing power of domestic savings, and (2) higher inflation in the short-term due to higher import prices (and perhaps also due to the CBoC printing much more money to bail out the banks…)
So there’s your “bank balance sheets, capital flows, current account balance and currency reserves.” It took me 90 minutes to write, so I hope you’ll excuse me if I focus on other things for the rest of the day. (Among other things, I think I owe Genauer a Krugman article.) You may thank me later. And I’m waiting for your reply to the figures on depositor haircuts in those other bank restructurings.
Just to put things in perspective.
It is worth mentioning that there are powerful local business interests that think they could benefit from leaving the euro and are actually lobbying for this option (so it is by no means a purely theoretical debate). Therefore, the signing of the memorandum is not a foregone conclusion, and Cyprus may still end up in Paul Krugman’s ideal world.
I think it is better to let history be one’s guide than to rely on modeling exercises of dubious scientific quality.
Dr. Why: still waiting on your update on depositor haircuts…and your thanks for the roadmap you requested. 😉
Simon,
Sorry, I think your long comment got stuck in the spam filter and wasn’t visible until today (which is a pity since the holidays are almost over). I promise I will read it and reply as soon as I have time – probably tomorrow.
For now, I’ll only try to give you a quick answer on depositor losses.
Normally unsecured depositors don’t suffer losses on the scale we see in Cyprus, but it all depends on the structure of assets and liabilities and the situation in the financial markets (and large companies are fully aware of the risks – that’s why we often see negative yields on short-term government bonds).
There are three main reasons why depositors of Laiki and the BoC were hit so badly:
1) First, on the assets side, both Laiki and the Boc suffered huge losses due to their exposure to Greece
2) Second, on the liabilities side, both banks found it difficult to place bonds and had to rely on large depositors, paying them as much as 9% p.a.(Laiki)
3) Finally, market conditions made it impossible to sell newly issued shares (e.g. Laiki’s placement in 2012 was a flop)
In addition, in Laiki’s case, the situation was made worse by the government’s decision to exempt various non-commercial entities (municipalities, educational institutions) – so in the end large depositors of Laiki may lose close to 100% of their deposits.
As for the bank of Cyprus, forced equity conversion is not nearly as bad as a real haircut, given that the BoC’s equity before deposit conversion was still positive.
So, while the scale of the losses is indeed unprecedented, it should not come as a surprise to anyone who saw both banks’ financial statements (especially Laiki, which has been virtually bankrupt for almost a year).
who said 50 – 100% losses here?
That raises a couple of new questions:
– Will the US extradite Orphanides when he is wanted at home for treason?
– How are the regulations in other countries like Canada, for insolvency?
Here we have the word “Insolvenzverschleppung” with no wiki expression in other languages, basically, if you know, your company is nearing insolvency, and you dont go to the judge to install the liquidator, you go for years to jail.
genauer,
“who said 50 – 100% losses here?”
Makes perfect sense. There is approximately 3 billion euros worth of unsecured deposits at Laiki compared to the recapitalization requirements of 2.7-3.8 billion euros. (For the BoC it is 8 billion euros of deposits and 2.8-3.9 billion euros recapitalization requirements)