Wednesday, March 27, 2013

Bailing-In European Style - Part 2

A deal with Cyprus was obviously concluded. However, some comments were made which were probably unwise or ill-timed (or weren't depending on your perspective).
http://www.680news.com/2013/03/25/eurogroups-dijsselbloem-forcing-losses-on-bank-owners-large-depositors-new-rescue-template/
http://www.reuters.com/article/2013/03/25/eurozone-cyprus-speaker-idUSL5N0CG13N20130325
http://www.reuters.com/article/2013/03/25/us-markets-global-idUSBRE88901C20130325
http://uk.reuters.com/article/2013/03/25/uk-eurogroup-cyprus-dijsselbloem-idUKBRE92O0IL20130325
http://au.businessinsider.com/buiter-euro-recovery-starts-with-cyprus-2013-3
http://finance.ninemsn.com.au/newscolumnists/greg/8632465/the-overnight-report-cyprus-evokes-double-dutch
http://www.smh.com.au/business/cypriot-deal-no-blueprint-says-stevens-20130326-2gs92.html
http://www.bloomberg.com/news/2013-03-25/dijsselbloem-says-euro-troubled-lenders-must-fend-for-themselves.html

A number of ways we can interpreted what was said:
- he was sending out a warning to the rest of the Eurozone to reduce their risk exposure
- he was being honest and direct about future Eurozone policy
- he simply wanted to test the markets to see how they would respond
- he was slightly careless in airing his mind
Either way, it gives an important insight into what the European leaders are thinking. It also tells us that they could probably handle the public relations side a little bit better (leaking certain notes from meetings does not help either. All it does is trigger speculation... unless the point is to guage market reaction to such policies?).
http://blogs.reuters.com/felix-salmon/2013/03/25/the-dijsselbloem-principle/
http://online.wsj.com/article/SB10001424127887324789504578384500381305458.html

Like I said in my previous post, I believe that the public should not take on responsibility for reckless behaviour in the private sector. I'm not in the game of rewarding incompetance, hubris, or sheer foolishness and I don't think that many of the international creditors that are currently in charge of bailouts are either (I probably wouldn't have dipped into deposits though. This would has probably increased the chances of 'capital flight' (there's already an increased number of inquiries regarding movement towards safer options within the EU/Eurozone) and ironically stronger 'capital controls'. No one's saying that they can't have a flourishing financial sector. We just want a stable/healthy (even if it is a 'bloated' sector)). We can't keep on trying to fix debt with more debt if there is no growth that stems from it. Moreover, by taking public money and using it to bail out banks whose business models/practices are simply not functioning/working is not doing anybody any favours. Even if we had bailed them out and did exactly what they wanted who says we wouldn't be in the exact some situation several months down the line? The thing that I've noticed is that during times of stress/volatility people often double down and they either end up winning big or losing big. For the moment, we'll play things by the book until things stablise.
http://www.guardian.co.uk/business/2013/mar/26/cyprus-bailout-eurozone-clash-savers
http://www.reuters.com/article/2013/03/26/eurozone-cyprus-luxembourg-germany-idUSL2N0CI1FW20130326
http://en.wikipedia.org/wiki/Capital_control
http://online.wsj.com/article/SB10001424127887324373204578376502337439038.html
http://www.irishtimes.com/business/economy/europe/euro-zone-remains-stuck-in-a-horrific-mess-1.1339928
http://www.guardian.co.uk/world/2013/mar/24/cyprus-economic-model-broken-advisers
http://www.businessweek.com/news/2013-03-26/cyprus-capital-controls-first-in-eu-could-last-years

For those people who think that the deal was 'bad' for them and basically destroys their financial sector and economy (We need to think about this within context. If a retail chain, car manufacturer, or defense contractor suddenly falls apart does the government step in? Only in rare cases do they step in and even then it is only with heavy conditions imposed that they are granted government support. The same applies here.). They need to understand what exactly what was on the line. The country was basically a day (hours actually) away from 'bankruptcy'. Not only would you have lost both banks but government services, and a good proportion of other things that you take for granted as well. Moreover, my understanding is that much of the equipment that is required to create your own currency is destroyed upon entry to the Eurozone which means that a graceful exit is unlikely to be smooth nor simple. People need to understand the implications of going it alone. It's clear that the apetite is not there to test the waters and see what an exit from the Eurozone would be like. They also need to undertand that others were basically overexposing themselves to more risk than required. They should be part of the solution. You can't blame someone else for making bad decisions. If the market is there for other banks surefly they shoud consider especially in light of the light of the stress the existing bank is under?
http://au.news.yahoo.com/thewest/business/a/-/world/16443742/anxious-cypriots-blame-eu-fear-for-the-future/
http://blogs.reuters.com/felix-salmon/2013/03/25/cyprus-its-not-over-yet/
http://www.guardian.co.uk/commentisfree/2013/mar/26/cyprus-europe-love-tougher-austerity
http://www.theaustralian.com.au/news/world/superhuman-bid-to-reopen-cypriot-banks/story-e6frg6so-1226607319532
http://www.theaustralian.com.au/business/wall-street-journal/cyprus-bailout-may-not-be-the-last/story-fnay3x58-1226607477703

It wasn't a question of Cyprus being forced/co-erced into anything (negotiations have been going on in the background for some while now though. Had they accepted an earlier offer things may have been a little less painful as well. Whether it was necessary or useful to target depositors with such a haircut is in question. Confidence is just as important in financial markets as are fundamentals. Would have only targeted creditors. Re-structuring can mean very many things but part of it is getting rid of toxic assets and trying to restore the health of the EU/Eurozone as quickly as possible.). The people running those banks chose to increase their risk exposure. It would be fine if they were still growing but with the EU/Eurozone being relatively unstable/seak over the last few years they took on too much than they could chew and they basically lost. While the solution that has been found may not be perfect it has staved off the uncertainty that comes part of a Eurozone exit. Something which neither European nor Cypriot leaders seem to be willing to countenance at this particular moment in time. Even in the case of Iceland/Finland while things may have recovered, things aren't exactly 'normal' now. Capital controls that were imposed long ago are still present (they have a odd way of dealing with foreign exchanges), many of their former billionaires are no longer, and a good chunk of their bloated financial sector is now gone.
http://www.bdlive.co.za/world/europe/2013/03/27/osborne-criticises-slow-eurozone-rescue
http://www.independent.ie/business/world/no-more-billionaires-as-iceland-purges-itself-of-old-values-that-brought-ruin-29144720.html
http://www.marketwatch.com/story/how-the-european-union-killed-cyprus-in-one-day-2013-03-25?link=MW_home_latest_news
http://www.marketwatch.com/story/cyprus-lenders-agree-bailout-deal-reports-2013-03-24
http://www.bloomberg.com/news/2013-03-27/cyprus-capital-controls-first-in-eu-could-last-years.html
http://www.reuters.com/article/2013/03/24/us-eurozone-finland-idUSBRE92N0BY20130324
http://www.kwrintl.com/library/2010/thesovereignchallenge.html
http://www.upi.com/Top_News/Analysis/Outside-View/2013/03/25/Outside-View-Cyprus-would-do-better-to-leave-the-euro/UPI-88431364216756/
http://www.businessweek.com/news/2013-03-26/german-10-year-bunds-decline-before-dutch-italian-debt-auctions

The other thing that needs to understand is that if that we go towards the bail-in model we won't be propping up unsustainable businesses models/practices any longer but actually gaining genuine, sustainable, real growth that actually helps the citizens of Europe in the long term. They may not have the ability to devalue but they do have other countries/people who have the strength and hopefully the desire to help rebuild their economy. The thing they need to know is that they aren't going to be alone as they rebuild their economy (perhaps with the right incentives and supervision another bank may be able to fill in the void?).
http://www.neurope.eu/article/taskforce-cyprus
http://www.incyprus.com.cy/en-gb/Top-Stories-News/4342/33834/eu-to-help-cyprus-rebuild-economy
Moreover, since they are such a small country:
- they are in a position to make rapid changes (regulation, taxes, investment)
- any changes that do make will have an almost immediate impact
- the results of any successful programs that the ECB implements in Cyprus can be used in aiding other Eurozone members
http://www.guardian.co.uk/business/2013/mar/24/cyprus-bailout-lehman-demise
http://www.slideshare.net/as248/the-myopia-of-hope-bob-swarup-presentation-feb-2013?goback=.gde_116172_member_219439575
The key questions are of course:
- the timing of investment (do we try to break the fall or do we let it bottom out?)?
- what form of investment (private, public, what sections of the economy?)?
- and how much investment?
There are several purposes for this investment. Among them are trying to balance the ledger (cuts Vs growth) and social/political change (if policies here are sucessful and they are able to recover rapidly, then we can extend them back upwards up the hierarchy if need be in places such as Spain, Portual, Italy, and Greece. Will also help strengthen enthusiasm/confidence for the policies that are currently being pursued.)
http://en.wikipedia.org/wiki/Cyprus
http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

If we're going to have capital controls (even if only temporarily) the ECB, EU, and other relevant stakeholders (British actually flew in Euros to their military bases) should make provisions to deal with basic necessities/goods as well. It's another compounding problem, if people can't withdraw enough money how are they going to pay for goods and services, what reasons are their to bring money in if they can't bring it out, etc?
http://en.wikipedia.org/wiki/Capital_control

Should probably hold off on adding new members to the Eurozone for the time being unless it can be proven that it will be beneficial to both the Eurozone as well as the country in question.

Interesting that the EU/Eurozone seems to have the ability to do things quickly if/when required. Suggest they do it more often and more proactively (perhaps even get the bank supervisor going by the end of the year as opposed to mid-2014?). Helps avoid critical situations like this weekend (though obviously co-operation admittedly wasn't strong early in the piece in this case) and allows us to use the Eurozone/EU in the way in which it was originally intended, for the benefit of other states.

Market manipulation/money laundering problem not a simple problem to solve.
http://euobserver.com/magnitsky/119156
http://euobserver.com/justice/119567
http://dealbook.nytimes.com/2013/03/26/europe-expands-investigation-into-derivatives-market/

Interesting perspective of political ramifications of Cyprus situation.
http://www.dailymail.co.uk/news/article-2297258/If-Cyprus-falls-Putins-grip-West-lost-battle-new-Cold-War.html?ito=feeds-newsxml
http://www.telegraph.co.uk/culture/books/bookreviews/9287904/Deception-Spies-Lies-and-How-Russia-Dupes-the-West-by-Edward-Lucas-review.html
http://www.washingtonpost.com/blogs/worldviews/wp/2013/03/25/a-bailout-for-cyprus-a-geopolitical-failure-for-russia/

http://blogs.reuters.com/edward-hadas/2013/03/27/banker-think-in-welcome-retreat/http://www.dailyfx.com/forex/fundamental/article/weekly_spotlight/2013/03/26/What_if_Were_Wrong_About_Cyprus_and_Jorgen_Dijsselbloem_Christopher_Vecchio.html
http://www.euroweek.com/Article.aspx?ArticleID=3181653&LS=EMS807498&eventcookielogin=Login&cookielogin=1&actionname=cookielogin&eid=E017
http://au.businessinsider.com/dijsselbloem-reveals-the-euro-end-game-2013-3 
http://www.ibtimes.com/five-ways-euro-zone-has-changed-eu-imf-ecb-known-troika-financially-rescued-cyprus-1149931
http://www.smh.com.au/business/world-business/euro-rises-after-cyprus-agrees-to-deal-20130325-2gpq6.html
http://www.consilium.europa.eu//uedocs/cms_data/docs/pressdata/en/ecofin/136487.pdf
http://www.news.com.au/breaking-news/world/europe-money-crisis-leads-to-poor-health/story-e6frfkui-1226607555265
http://www.smh.com.au/world/wholesale-theft--in-the-name-of-saving-the-euro-20130326-2gr7a.html
http://www.smh.com.au/world/cypriots-fear-austeritys-big-hit-20130327-2gumm.html
http://www.smh.com.au/business/motley-fool/the-end-of-the-financial-crisis-20130326-2grlw.html
http://www.telegraph.co.uk/finance/debt-crisis-live/
http://www.theaustralian.com.au/news/world/cyprus-plays-safe-as-markets-spooked/story-e6frg6so-1226607114069
http://www.reuters.com/article/2013/03/23/us-eurozone-cyprus-precedent-idUSBRE92M09N20130323
http://www.businessinsider.com/kotok-europe-is-in-trouble-2013-3?IR=T
http://www.independent.ie/opinion/analysis/shocking-treatment-of-cyprus-has-exposed-eurozones-inherent-flaws-29150368.html
http://www.chicagotribune.com/business/sns-rt-us-eurozone-cyprus-dutch-pollbre92n091-20130324,0,3155890.story
http://www.nytimes.com/2013/03/25/business/global/25iht-dixon25.html?_r=0
http://www.reuters.com/article/2013/03/24/us-eurozone-cyprus-worldbank-idUSBRE92N09T20130324
http://www.smh.com.au/business/world-business/revamped-cyprus-deal-to-close-bank-force-losses-20130325-2gp41.html
http://www.washingtonpost.com/world/cyprus-bailout-deal-reached/2013/03/25/1e11f04a-9530-11e2-95ca-dd43e7ffee9c_story.html
http://www.smh.com.au/business/world-business/as-euro-zone-suffers-emerging-markets-thrive-20130325-2gokq.html
http://www.iol.co.za/business/business-news/emerging-states-risk-catching-cyprus-cold-1.1490930
http://www.spiegel.de/international/europe/cypriot-parliament-investigates-government-after-dubious-transactions-a-891168.html
http://www.reuters.com/article/2013/03/25/eurozone-cyprus-barnier-idUSL5N0CH24M20130325
http://uk.reuters.com/article/2013/03/21/uk-eurozone-cyprus-call-idUKBRE92K0DW20130321
http://www.chicagotribune.com/business/sns-rt-us-eurozone-cyprus-banksbre92o0r8-20130325,0,1480820.story
http://www.abc.net.au/news/2013-03-26/cyprus-banks-remain-shut-michael-pettis-offers-his/4596150?section=business
http://www.guardian.co.uk/business/2013/mar/26/eurozone-crisis-cyprus-banks
http://www.ft.com/cms/s/2/fcd3f62e-953b-11e2-a151-00144feabdc0.html
http://www.ekathimerini.com/4dcgi/_w_articles_wsite3_1_26/03/2013_489977
http://www.reuters.com/article/2013/03/26/piraeusbank-cyprus-idUSL5N0CI0D420130326
http://www.guardian.co.uk/commentisfree/2013/mar/27/cyprus-germany-cause-eurozone-crisis
http://www.guardian.co.uk/commentisfree/2013/mar/26/cyprus-bailout-eurozone
http://www.foxbusiness.com/news/2013/03/26/cyprus-rescue-marks-game-changer-for-europe-banks/
http://www.nytimes.com/2013/03/27/business/global/europe-officials-seek-to-contain-cyprus-damage.html?pagewanted=all
http://www.bloomberg.com/news/2013-03-26/canada-says-six-largest-banks-are-all-systemically-important-.html
http://www.guardian.co.uk/business/2012/nov/22/paul-tucker-splitting-banks-retail-investment
http://www.hm-treasury.gov.uk/press_46_12.htm

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