Tag Archives: debt

The Aftermath Begins

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Spiegel Online International is describing it, albeit with some misconceptions.

Not even savings accounts are safe, as was recently seen in Cyprus. Such deposits are actually guaranteed to up to €100,000, but the euro rescuers cared little about this as they desperately searched for funds.  Cypriot small savers may have escaped this time around, but the realization remains, even beyond Cyprus, that a state teetering on the edge of bankruptcy will resort to all available means to raise money—and a guarantee is only worth something as long as the entity that stands behind it remains solvent.

Nothing is safe from being seized by the state, no savings account, but also no house or apartment.  …  Governments have even banned the possession of gold during currency crises, forcing citizens to exchange the precious metal for the national currency.

That’s the nub of the aftermath.  No one’s private property is safe from an overweening government.

Those paragraphs, though, carries SOI‘s first misconception: the original demand to expropriate private savings came from the Euro Group, not Cyprus.  Cyprus’ Parliament rejected it at the start.  However, Cyprus’ government, including its Parliament, is complicit in the present theft—it could have rejected that attempt, too.

Then there’s this:

Greece and Cyprus have millionaires and billionaires of whom many profited from the artificial boom fueled by low interest rates after the introduction of the euro—a boom that subsequently went bust.  Why shouldn’t they help finance efforts to deal with the aftermath?  Is it fairer to place the burden on the euro bailout fund, and thus distribute it among the taxpayers of other countries?

Why shouldn’t they?  The question is a demonstration of the lack of understanding.  Why should folks who played by the rules placed before them, and with no other responsibility for the companies, have to pay for the failures of the companies, at least as part of the first resort?  Why should not the companies’ investors and creditors be the only ones to suffer the consequences of the failure of their investments and loans—or at least be wiped out entirely  before depositors—those not responsible at all—suffer any loss?

Is it fairer to place the burden on the euro bailout fund?  To ask this is to demonstrate, again, a lack of understanding.  The euro bailout fund should not exist at all.  The taxpayers of other countries should not even be under consideration of paying for the failure of one country.

Finally, this:

A levy on assets would immediately reduce the debts of crisis-stricken countries, whereas bailout packages pool risks and shift them to the future.

Those risks can become dangerously explosive.  The more countries that have to be bailed out, the fewer countries remain that have to bear the burden—as long as they are able to.  This could even prove to be too much for Germany at some point.

The second answers the first, but only partially.  A levy on assets does not cure the reason the crisis-level debts exist in the first place, but it does destroy property rights.  Neither does any bailout address the underlying causes.  Levy or bailout, they merely perpetuate the situation—as we’re seeing in the euro zone and in the US.

A Thought on Cypress and the Euro

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After having offered his church’s assets to a solidarity fund proposed by Cyprus’ government pursuant to Cyprus’ efforts to find a way out of their current economic debacle, Archbishop Chrysostomos II, Archbishop of Nova Justiniana and All Cyprus (the Greek Orthodox Church in Cyprus), has one.  The Guardian quotes him:

The euro cannot last.  I’m not saying that it will crumble tomorrow, but with the brains that they have in Brussels, it is certain that it will not last in the long term, and the best is to think about how to escape it.  It’s not easy, but we should devote as much time to this as was spent on entering the eurozone.

The Orthodox church is the island’s biggest landowner, and it has serious investments in a broad range of endeavors—from hotels and construction to a brewery, to a majority stake in Cyprus’ third largest bank, Hellenic Bank (right behind Laiki Bank (Popular Bank) and the Bank of Cyprus, the former of which would be seized by the government and reorganized under a version of Plan B, and the latter of which is just as insolvent and needs reorganization).  Chrysostomos’ opinions are worth listening to far beyond his position as Cyprus’ moral leader.

I agree with the Archbishop.  It’s a bad fit, Cyprus and the European Union, Cyprus and the euro zone, as has been written elsewhere.

The badness of fit has now been demonstrated, by a midnight deal between the eurozone Finance Ministers and Cyprus President Nicos Anastasiades.  The deal, according to Spiegel Online International:

…focused on the island’s two insolvent major banks.  It will wind down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shift deposits below €100,000 [$130,000] to the Bank of Cyprus.

Deposits above €100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki’s debts and to recapitalise Bank of Cyprus through a deposit/equity conversion.

[Euro Group (the finance ministers of the eurozone acting together) President Jeroen] Dijsselbloem says that

[t]he raid [that’s exactly the right word] on uninsured Laiki depositors is expected to raise €4.2 billion [$5.5 billion].

There’s more extortion and theft to come.  The takings inflicted on large depositors—those holding deposits greater than €100,000—will be determined at a later date by the Cypriot government and the troika.  Those €4.2 billion represent the target for recapitalization and bank debt resolution; the “tax” on those deposits required to achieve the target has yet to be determined.

And, because this setup is being handled as a bank restructuring and Cyprus’ Parliament had already passed a bank restructuring law that allows it during a panicky weekend session prior to this…arrangement, the Parliament cannot now block it, as it did the original raid.

It’ll be interesting to see where the Russians put their money in the aftermath of this.  It’ll be interesting to see where any large depositor, or any other depositor with the capacity (which includes most middle class folks and small/medium businesses) puts his money, now that Cyprus has been banished from the international financial center business.  The little man—those with the small deposits—have no choice.

It’ll also be interesting to see who in the rest of the eurozone or the broader EU profits from this.

SOI suggests that in the end, Anastasiades had no option but to accept to these terms.  This, though, is to misunderstand what has happened and to misunderstand the immorality of it.  This is just government theft of private money from folks—depositors—who had nothing to do with the decisions of the bankers and government functionaries that put Cyprus in this box in the first place.

Anastasiades indeed had a choice.  He could have accepted bankruptcy and the (painful) recovery of a Cyprus then free of EU and eurozone restrictions on Cypriot sovereignty.  And free of exposure of his country’s banking system to international distrust from fear that the next time it becomes convenient to government, the next batch of deposits will be similarly confiscated.  The banks in the rest of the eurozone, if not of the EU at large, must face this distrust today, especially since the original demand by the Euro Group was to confiscate significant portions of the little man’s deposits, also.

Cyprus needs to listen to the Archbishop.

Another Look at the Senate Democrats’ Budget

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The Heritage Foundation has looked at it.  As has already been pointed out, Senate Budget Committee Chairwoman Patty Murray’s (D, WA) budget has little good in it; although it does preserve the sequester cuts in their magnitude and general allocation.  However.

Cynically, it raises taxes on Americans—and amazingly, on our businesses, which already are subject to the highest rates in the world—by a shade over $1.5 trillion.  This isn’t new, but their budget is worse than originally thought.  The Democrats’ guess (and I use that term advisedly) of getting $155 billion per year over the next 10 years is based on their erroneous static analysis.  A dynamic analysis, which includes the actual and ongoing effects of taking this much money out of the economy, indicates that this “budget” would only get $88 billion per year.  Heritage’s graph below illustrates the year-by-year revenue flow.                                          

This only exacerbates the impact of the Democrats’ continued increases in spending on our debt and on our economy.  Their 5% increase in spending, in every year of those same 10 years, increases the Federal budget deficit, and it contributes to a continued explosion in our national debt—to the tune of $7 trillion more added to an already ruinous level.

But that’s all to the good, anyway, right?  The Democrats say so.  The Senate Republicans have a different analysis.  Overall, they point out that this budget would

  • Lower GDP by $1.4 trillion over 10 years.
  • Cut job growth by an average of 853,000 jobs each year.
  • Slash after-tax incomes by $1.9 trillion over 10 years.
  • Shrink household income by $1,512 per year.

They also look on a state-by-state basis, and the outcome is clear and even starker (it’s important to note here that the state-by-state analysis was done by the Senate Budget Committee’s staff economists, not by Republican staffers).  Here are the outcomes for, oh, say, California and Texas.

California:

For the state of California these tax changes mean losses in personal income, household disposable income, and job opportunities:

Texas:

For the state of Texas these tax changes mean losses in personal income, household disposable income, and job opportunities:

There are no states—none—in which the Budget Committee’s staff economists projected gains in personal income, household disposable income, or job opportunities.  Every state suffers losses as a result of this Democrat budget.

They All Could Learn from the Poles

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In the aftermath of the Cyprus Parliament’s rejection (wholly correct IMNSHO) of the troika’s “bailout” offer—a “one time” “tax” on bank deposits held by Cyprus banks—talks are failing (breaking down?) within the government, between the government and the troika, and between the government and Russia on a Plan B to avert Cypriot bankruptcy.

Amid this crisis, and exacerbated by the rejection and potential failure of the subsequent talks, panic is growing in the EU, and especially in the euro zone, that a Cypriot bankruptcy will force Cyprus out of the euro zone, and that will lead to the doom of the euro.

That panic is both palpable and foolish (see here, also).

Polish Foreign Minister Radoslaw Sikorski has the right of it.

There is no obligation to accept help.  Cyprus has the possibility of living with its own mistakes.

He knows—Poland does not use the euro.  Greece and the EU should take this advice to heart, also.

Why Not Just Take It All?

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Spiegel International Online notes that the Cypriot government may be figuring out some of the foolishness of the troika’s (ECB, EC, and IMF) demand concerning the latter’s “offered” bailout as well as some of the variants under discussion.  Some of those variants include reallocating the confiscationtax according to more deposit account sizes than just two, and hitting the highest—still those over €100,000 with a 15.6% claim.

[C]oncerns have emerged that a large number of foreign investors and depositors will withdraw their money from the country en masse.  Critics warn this would devastate Cyprus as a financial center and also threaten the country’s entire economy.

Well, yeah.

Still, even the current proposal has central bankers nervous.  Officials at the Cypriot central bank are still fearing a massive capital flight.  Central bank head Panicos Demetriades said he expects that at least 10 percent of deposits will be transferred abroad during the first few days after the banks reopen, according to lawmaker Roula Mavronikola who attended the session.

Demetriades is optimistic.  The Cypriot banking system would be fortunate to retain a single euro, were this institutionalized theft to go through.  The only way to stop the capital flight would be for the government to steal it all.

In the event, though, the Cypriot Parliament rejected any sort of levy, rather resoundingly.