Sunday, March 17, 2013
Cyprus Update
by Bill McBride on 3/17/2013 04:00:00 PM
Update: There is a plan to revise the deposit tax, from Matina Stevis "Exclusive: plans to revise #cyprus deposit tax on wires: under 5% for €0-100k, under 10% for €100-500k, around 13% for €500k+"
A must read account of the Cyprus negotiations by Peter Spiegel at the Financial
Times: Cyprus depositors’ fate sealed in Berlin
A couple of interesting posts from Pawelmorski, Cyprus: A Brutal Lesson in RealPolitik and Cyprus: What Were They Thinking? and some other notes. "Don’t need a European bailout in a German election year"
From the WSJ: Cyprus Races to Prevent Bank Crisis
(especially since Cyprus doesn't have their own currency). First, if
the largest Cyprus banks failed, all depositors would be wiped out (in
effect, there really isn't any deposit insurance from Cyprus). Second,
in the US, problem banks are restricted on the interest rate they can
pay on insured deposits (to avoid weak banks trying to draw in deposits
by offering excessively high yields). As a few people have noted,
Cyprus banks have been paying very high interest rates on deposits. I
found a 5 year jumbo CD yielding 11% per year. To solve these problems
they really need Euro Zone wide deposit insurance and to restrict yields
on insured deposits held by problem banks.
A must read account of the Cyprus negotiations by Peter Spiegel at the Financial
Times: Cyprus depositors’ fate sealed in Berlin The European Central Bank had another shock for [Cyprus’s new president Nicos Anastasiades]: the island’s second-largest bank, Laiki, was in such bad shape that it no longer qualified for the eurosystem’s emergency liquidity assistance ... The message ... meant that if no deal was reached, Laiki would collapse ... saddling Nicosia with a €30bn bill to reimburse accounts covered by the country’s deposit guarantee scheme. It was money Nicosia did not have. All of the island’s account holders would be wiped out.So basically the offer was: accept a levy on depositors or all depositors would be wiped out.
A couple of interesting posts from Pawelmorski, Cyprus: A Brutal Lesson in RealPolitik and Cyprus: What Were They Thinking? and some other notes. "Don’t need a European bailout in a German election year"
From the WSJ: Cyprus Races to Prevent Bank Crisis
Uncertain it has the votes to pass the measure, Cyprus's government postponed an emergency parliamentary session on Sunday that had been called to vote on the levy, while the cabinet petitioned the central bank to extend Monday's bank holiday by at least another day, a move that was likely. ...A final comment: This points out several problems with deposit insurance
Anastasiades—sworn into office just a little over two weeks ago—directly controls 20 seats in Parliament through his center-right Democratic Rally party. He is supported by the Democratic Party with eight seats as well as the European Party with two seats and third environmental party—which has balked at the levy-with another one seat.
To pass, the measure must have at least 28 votes in Cyprus's 56-seat Parliament, with a tie vote going to the government under Cypriot parliamentary rules. But with some coalition lawmakers wavering, others demanding some sort of compensation for deposit holders, and at least one parliamentarian currently out of the country and unable to vote, passage is by no means assured.
(especially since Cyprus doesn't have their own currency). First, if
the largest Cyprus banks failed, all depositors would be wiped out (in
effect, there really isn't any deposit insurance from Cyprus). Second,
in the US, problem banks are restricted on the interest rate they can
pay on insured deposits (to avoid weak banks trying to draw in deposits
by offering excessively high yields). As a few people have noted,
Cyprus banks have been paying very high interest rates on deposits. I
found a 5 year jumbo CD yielding 11% per year. To solve these problems
they really need Euro Zone wide deposit insurance and to restrict yields
on insured deposits held by problem banks.The Cypriot Haircut
You can sort of see why they’re doing this: Cyprus is a money haven, especially for the assets of Russian beeznessmen; this means that it has a hugely oversized banking sector (think Iceland) and that a haircut-free bailout would be seen as a bailout, not just of Cyprus, but of Russians of, let’s say, uncertain probity and moral character. (I think it’s interesting that Mohamed El-Erian manages to write about this thing, fairly reasonably, without so much as mentioning the Russian thing.)
The big problem, however, is that it’s not just large foreign deposits that are taking a haircut; the haircut on small domestic deposits is a bit smaller, but still substantial. It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying “time to stage a run on your banks!”
Tomorrow and the days immediately following should be very interesting.
http://www.bloomberg.com/news/europe/
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Europe braced for renewed turmoil as outrage in Cyprus over an unprecedented levy on bank deposits threatened to derail the nation’s bailout and spark a new round in the debt crisis.
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The euro weakened against the dollar and the Swiss franc after euro-area finance ministers agreed to an unprecedented tax on Cypriot bank deposits as part of a rescue plan for the country.
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MasterCard Inc., which is under pressure from France to cut card payment fees, said European consumers are increasingly using credit and debit cards for purchases, dismissing the sovereign debt crisis.
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European stocks advanced for a fourth week, the longest winning streak in almost three months, as the region’s leaders eased constraints on national budgets and U.S. retail sales and jobless-benefit claims pointed to a recovery in the world’s biggest economy.
Everybody who knows any thing about Cyprus also knows that the domestic banks were a parking lot for Russian hot money. I wrote about this back in 2011 (Link). There are a gazillion other articles saying the same thing.
That being the case, the seizure of some of the black Russian money as part of a bailout for Cyprus is not really a surprise. With dirty money flowing in, the stupid banks in Cyprus used the deposits to buy crappy assets like the sovereign bonds of Greece. To a significant extent, the hot money caused the problem – and therefore the E5.8b ($7.5b) hit to depositors is justified.
The folks in Berlin, Brussels and Paris all understood that Cyprus was a Russian front. To bailout Cyprus is one thing, but to bail out Russian Oligarchs is quite another. What else could the Euro Deciders do?
I struggle to come up with a valid comparison for what has happened in Cyprus. Think what the backlash would be if somehow the FDIC/Federal Reserve were forced to step in to bailout an entity that was a depository for the Mexican drug lords. If faced with a similar situation, America would do the same as the EU. Screw the hot money crowd.
And now the other side. This is a huge development, a potential game changer. If the seizure of accounts had happened in Greece (or the other PIGS) the European Monetary Union, as we know it today, would not exist. The EU would have imploded within months. This outcome would have resulted in some form of Euro break up, and a return to national currencies. That scenario has broad global implications.
The decision to clip depositors was not taken lightly. The ECB, and all the other Finance ministers contributed to the decision to take the depositors money. While making that decision, they had to have considered the consequences. Certainly there was recognition that this was an unprecedented step, and that it was extraordinarily hostile to bank depositors.
How are markets going to react to this? Will people care if some Russian money was stolen? Will they conclude that this was a unique event, and the depositors in Italy, Spain and France will never face the same losses that depositors in Cyprus have realized?
Given the significance of what has happened it would be logical to assume that a huge safe-haven trade could be the market’s response. If the Cyprus seizure had happened a year ago, the market would have reacted with:
- The Euro trades cheap against all crosses.
- The Yen strengthens against the Euro and the dollar.
-European bond spreads widen. Money moves to Germany, while Spanish and Italian bonds get crushed.
-The EURCHF comes under attack. The Swiss national Bank floor of 1.2000 is tested, and the SNB is forced to intervene to maintain the peg.
-US bonds trade rich.
-Money moves to the UK (where banks are ‘safe’) and Sterling strengthens.
-Money moves to gold, and other PMs.
-Stocks would take a beating globally.
While all of those things might have happened a year ago, I’m not sure that is the case today. As of Friday, the markets hated gold/PMs, Sterling, the Yen against everything (including the Euro), the EURCHF, US bonds and everyone loved stocks.
Is it possible that everything that was in the market on Friday is going to be reversed? I would think not, but these are very unusual circumstances. Nothing like the seizure of depositor’s money has ever happened before, so we are on uncharted ground.
Given the fact that the EU deciders were well aware of the potential consequences to financial stability within the EU, I wonder if some additional “market friendly” steps might be in the offing. (There must be a plan 'B" in place - that or the guys pulling the strings are idiots.)
Because of the Russian money angle, the step to seize deposits might be glossed over. On the other hand, there is a great risk that what has happened is a turning point in modern finance. I’m not aware of any precedent for what has occurred. I say again, if this had happened in any other country in Europe – the monetary union would be dead within months. That possibility still exists, even though it was just crooked Russian money that was stolen. We shall see the market’s reaction in a matter of hours – I can’t wait.
In other news:
Clean-Car Battle Shows How to Fight for Emissions Reduction
Friday, 08 March 2013 13:08 By Dan Becker and James Gerstenzang, Truthout | Op-Ed
(Photo: specksinsd / Flickr)Becker
and Gerstenzang take some pages out of the playbook successfully used
to obtain tough new auto pollution and mileage standards to suggest next
steps in reducing greenhouse gas emissions in the United States.President Obama signaled in his State of the Union address that global warming holds a top spot on his second-term agenda. To rescue a climate under assault, the lessons of the fight that has delivered tough new auto pollution standards can guide us as we tackle the next climate challenges: slashing power plant emissions and oil use.
Those clean-car rules will cut gasoline use in half, create 500,000 jobs, and boost energy independence. The safeguards will deliver new cars in 2025 that average an impressive 54.5 mpg. Most important, compared with 2010 models, these cars will halve their emissions of carbon dioxide, the major heat-trapping pollutant.
The program represents the biggest single step of any nation against global warming. The take-away from the president's action is unmistakable: We can cut fossil fuel emissions.
But scientists say the United States must make far deeper cuts in carbon dioxide emissions than those of the auto program to avoid the disruption of ever more severe climate change - think Superstorm Sandy, the continuing drought, rising sea levels and the inexorable spread of tropical insects and disease.
We will accomplish this next, critical step by using electricity and oil more efficiently, ultimately lowering demand until we can meet our needs with wind and solar power. As renewable energy is phased in, natural gas may help replace heavily polluting coal, but only if developed and transported cleanly and safely.
The waves of extreme weather gripping the nation align disturbingly with scientists' warnings that this is what global warming will look like. The auto campaign provides three key lessons on how to take the next steps to fight it.
Lesson 1: Choose the right goal and stick to it.
The clean-car campaign set an ambitious goal in 1989: Cut deeply into global warming pollution by wringing oil from the economy. In 2002, President George W. Bush inched up standards for SUVs and other light trucks by 2.4 miles per gallon, to 24 mpg. He left the car standards unchanged. But science showed us that a safe climate demanded much more.
Not settling for negligible progress, environmentalists pressed for improvements that would genuinely reduce emissions. The stringent new 54.5 mpg standard shows it was worth fighting on.
Next step: Cut oil use in half over the next 20 years and slash emissions from power plants.
Greater efficiency and new technologies will be central to achieving these goals. Utilities must switch from highly polluting coal to renewable energy - wind and solar. Communities can reduce demand for electricity with efficient lighting, and cooling and heating technology. Everything that uses oil must be made more efficient - whether trucks and airplanes or furnaces and factories.
Lesson 2: Fight the fight you can win.
In the auto campaign, circumventing Washington was crucial.
For years, the auto industry lobbied successfully against strong national fuel economy rules. After car mileage standards reached 27.5 mpg in 1989, Congress and three presidents refused to increase them. So, environmentalists moved the campaign to politically receptive California, figuring that stronger pollution rules in the nation's largest auto market - and eventually in other states - would force car makers to relent.
The campaign found an advocate in then-Assemblywoman Fran Pavley, a Democrat representing a Los Angeles suburb, who shepherded to enactment the first statewide auto emissions cuts.
With environmentalists' encouragement, 12 other states signed on. Automakers sued. The Supreme Court ruled against the companies, clearing the way for tough federal as well as state standards.
Next step: Shift the focus to the Obama administration and urge the president to adopt tough EPA standards controlling power plant pollution.
This is a fight we can win. At a minimum, power plant standards should cut emissions by at least one-quarter by 2020 - a course we explored in an op-ed in The New York Times The New York Times. The Natural Resources Defense Council says this would cost $4 billion, but save $25 billion to $60 billion in 2020. The president can establish these safeguards under the Clean Air Act authority he used to set car standards.
The environmental victory in California was critical to the auto industry's decision to drop its opposition to national emissions and mileage standards. Facing stricter standards in California that could get tougher over time, automakers eventually agreed to negotiate with the Obama administration. The result? A strong program that car makers came to see as a step toward a thriving future.
Similarly, strong measures that force the country's coal-burning power plants to improve their efficiency and switch to cleaner fuels should lead utilities to realize that broad, strong standards that fight global warming may help them modernize - and achieve long-term economic health.
Lesson 3: Hold polluters accountable.
While automakers fought the states in court, environmentalists chastised the industry for selling guzzlers that raised consumers' costs and subsidized oil oligarchs. They pilloried Ford for producing vehicles that averaged worse mileage than the Model T and General Motors for its Hummer. Image-conscious automakers cringed.
But the clean-car campaign also applauded technology leaders, turning the hybrid Prius into a rolling advertisement for good corporate citizenship. The message: If Toyota could build a clean car, why couldn't Chrysler?
With auto manufacturers' reputations corroding and the Supreme Court ruling against the companies, Nissan broke ranks, supporting improved standards.
Next step: Help Americans understand how much the oil, utility and coal industries jeopardize our security, harm our health and raid our wallets - as well as damage our atmosphere.
Federal subsidies to the oil industry only encourage further reliance on gasoline. By ending them, the federal government will help end our oil addiction - and save taxpayers at least $4 billion a year.
Global warming is already wreaking havoc with the planet and threatening far greater destruction than we have already seen. But the clean-car campaign proves that the United States can successfully tackle this environmental crisis. It provides a road map that we can use to pressure the polluting industries to change - just as the car makers say they are overhauling their operations to compete in the 21st century.
In 2010, the auto industry was struggling. Facing stringent state rules, attacks on its performance and integrity, and internal divisions, it accepted strong standards it had claimed for two decades it could not meet. Today, the oil and utility industries insist they can't stop poisoning the atmosphere. They, too, are wrong.
To meet the new auto rules, manufacturers will use advanced internal combustion engines and transmissions, and strong, lightweight materials. They will build more hybrids and some electric vehicles. The electric power business must follow suit.
To protect the climate, we must match the steep cuts in auto emissions with equally dramatic improvements wherever we burn oil and generate electricity. The auto fight teaches us that tinkering around the edges won't work. We must set bold goals and fight to meet them as if the whole world is at stake. Because it is."
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