Tag Archives: european crisis

Political Honesty

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The German poet Matthias Claudius commented some years ago,

Say not all that you know, but know all that you say.

Spiegel Online International thinks that’s good advice in a particular circumstance today:

That would be a good lesson for those politicians who are handling the euro crisis.  Absolute honesty, which many are now demanding of the German government after its most recent comments on Greece, is simply not wise.

SOI justifies their position this way:

…the EU approaches the euro crisis through negotiations between member states.  And a fundamental principle of these negotiations is that not all cards are laid on the table at once.  It’s a classic way in diplomacy of avoiding bursts of outrage.

And, citing an aspect of Robert Putnam’s Two-Level Games Theory,

Politicians have to sell their policy goals both at home and abroad.

Which is true enough in winning games, but it overlooks one essential secular fact, and one fundamental moral fact: the only place the sale has to go through is at home—those are the folks who will be forced to pay for the politician’s…decision.  The fundamental moral fact is this: the folks at home are the ones who will have to give up a significant portion of the security and prosperity they’ve hard-won for their families in order to pay for the politician’s…decision.

Such a policy might have been defensible early, in the run-up—even the after math—of the EU’s first Greek bailout.  But now, after the debacle of two failed Greek bailouts and amid talk of yet a third, the policy has outlived its usefulness.  It’s time to lay it all out.  Let the people who will be required to pay for yet another bailout with their hard-earned money taken as tax know what the politicians know and think they know about the situation.  Let the people whose money it is decide for themselves whether a third bailout is warranted.

Else, what are the politicians covering up?

The Consequences of Unintended Consequences

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It used to be that when Jeroen Dijsselbloem, President of the Euro Group, would talk to reporters, he’d open with

Maybe it’s good, if I say something.

And then recently he did say something.  He said that the Cyprus model of raiding depositor accounts to bail out failing banks—in addition to holding the failing banks’ investors and creditors responsible—should be the model for all of the eurozone.

In future aid packages, one must look into whether bank shareholders, bond holders and large depositors could participate so as to spare taxpayers from having to foot the bill.

Now we get the hue and cry from the left—Spiegel International Online included.  Because, you see, it’s somehow wrong to spare those taxpayers—folks who had no investment, no control, no relationship at all with those failing banks—from their Left-manufactured responsibility to indemnify private investors and creditors from the failures of their investments.  After all, it was Very Important People who were benefitting from having their hands in the taxpayers’ pockets.

The advantages were enjoyed not only by actors on the global financial markets, but also by major banking centers, such as those in Luxembourg and London, which could count on seeing governments prop up teetering financial institutions.

And so we see a consequence of unintended consequences made manifest: the naked greed of politicians and their accomplices.

And another, more favorable, consequence of these unintended consequences is being forced to the front:

A growing number of politicians and experts are demanding an end to this arrangement.  In the future, German Chancellor Angela Merkel said, “banks must save themselves.”  And German central bank board member Andreas Dombret is convinced that the financial sector can only regain health once there are no longer “implicit state guarantees for banks.”

Even the Luxembourg Finance Minister, Luc Frieden, his financial constituency notwithstanding, is figuring out a larger result of raiding depositor accounts to pay for businessmen’s and politicians’ failure to perform.

This will lead to a situation in which investors invest their money outside the euro zone.  In this difficult situation, we need to avoid anything that will lead to instability and destroy the trust of savers.

After all, the political futures of these foxhole-converting politicians depend on it.  Because in yet another consequence of these unintended consequences, the voting public—those taxpayers—are noticing the grubby political fists in their pockets.

And there’s the potential for another consequence of these unintended consequences.  The IMF has released their latest report on the currency reserves held by the various nations of the world.

Third World economies unloaded $45 billion worth of euros in 2012 in an accelerating trend.  Some of that, certainly, is related to the failed global recovery from the Panic of 2008.  However, Europe’s decision to raid Cyprus depositors’ funds to bail out failing banks, together with the Euro Group’s view that such raids are appropriate solutions for other eurozone bank failures, won’t encourage folks from outside the EU to place their money with eurozone—or EU—banks.  Which will contribute to continued dumping of euro holdings.  Which will continue the EU’s de facto dependence on the $US as the reserve currency, rather than elevating the euro in importance and from that, elevating the EU.

Unless Merkel, Frieden, et al., can prove themselves serious.

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.

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.