Dates that go down in history: Tuesday March 19, 2013

[Ridgley]

I wonder which coutry be next country to fall?

[Huguenot]

What, like Somalia?

[silverfox]

Good link Huguenot.

Like the Troika, those Somali pirates know a thing or two about fleecing you of your money

[El Pibe]

Is this like the New Years death lists? Can we have ceased existences as well as failed states?

I'm going to put Bahrain, Pakistan and S. Korea as the coupon buster on mine.

[El Pibe]

invalid comparison sf, the growth rate is too high.

[silverfox]

Fair point El Pibe.

I note however those Somali pirates are too crafty to put their ill-gotten gains into Eurozone banks

[Top Banana]

To say this situation is "nothing to do with the EU", or is against the deal is utterly absurd. I notice no links to support the claim.

To quote Olli, 4/03/13 -:

"In parallel, the Commission will continue to work intensively with our partners in the Troika and with the Cypriot authorities with a view to concluding talks on a programme that can help to steer Cyprus though the difficult adjustment it is now undergoing.

I welcome the support of the Eurogroup to accelerate our work on the building blocks of the programme and we target an agreement to conclude this process in the second half of March."

http://europa.eu/rapid/press-release_SPEECH-13-183_en.htm

Who is Olli? He is Olli Rehn, Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro.

What is the Troika? The tripartite committee led by the European Commission with the European Central Bank and the International Monetary Fund, that organised loans to the governments of Greece, Ireland and Portugal.

http://en.wikipedia.org/wiki/Troika

Plus of course Spain and now Cyprus.

What is the Eurogroup? The Eurogroup is a meeting of the finance ministers of the Eurozone. This group is related to the Council of the European Union and was formalised under the Lisbon Treaty.

http://en.wikipedia.org/wiki/Euro_Group

To say the EU was against this option, or to say this was Cyprus's own choice is wrong. The original deal was imposed on the Cypriot Government by the Troika on Thursday 14th March, against the wishes of that Government. Indeed, it was first meant at 40% as Germany's Finance Minister Schaeuble and the IMF demanded.

Also, it is against the Cypriot Constitution -:

Article 24, Section 3

No tax, duty or rate of any kind whatsoever shall be imposed with retrospective effect: Provided that any import duty may be imposed as from the date of the introduction of the relevant Bill.

http://www.kypros.org/Constitution/English/

And, of course, there is the russian element.

(humour)

http://dts4h52y4acn7.cloudfront.net/7566654164141004A28DD00A36598B4Df.png

I'm with Boris on this one.

(/humour)

[Huguenot]

Specifically I am refuting the suggestion that somehow a political and trade union of European states is responsible for the crisis in Cyprus.

It is not.

Nothing that you have referenced suggests otherwise.

For a Noddy summary, please see here: http://www.bbc.co.uk/news/world-europe-21817197

The Cypriot banks have overextended themselves and effectively find themselves bankrupt, this situation was not created by the EU or the Euro, but by banking (and possibly regulatory) malpractice.

When this happened in the UK, the government bailed them out. Unfortunately Cyprus doesn't have enough cash in the economy and the money markets won't lend to them because the bailout requirement is such a significant multiple of GDP.

That situation was not created by the EU or the Euro either.

The ECB and the IMF were approached as lenders of last resort. Since the ECB's reserves are the reserves of the sovereign governments then the finance ministers of all contributors have a say in any loans it makes.

The EU's committees are appropriate for this discussion.

BUT as I've now pointed out 3 times, the EU and the Euro had nothing to so with creating this crisis.

A condition of the loan being made was that the government must fund some of the bail out themselves. Since the Cyprus government had no funds available, and since the bailout would bring the banks into public ownership, the Cyprus government thought it appropriate that savers should have some of their savings translated into shares.

They thought this would be better than the alternative, which was losing ALL their money.

I agree with them in general - especially since the alternative is they lose everything (there's no way Cyprus could afford to honour savings guarantees), and citizens who do not have their money in these banks should not have to bear the burden.

The EU disagreed with their approach, and have stated this publicly, but would not concede a situation where they would bail out the banks to 100% - especially when the major beneficiaries would be Russian crims.

Thus, as I have tirelessly pointed out again and again, neither the EU nor the Euro created this situation, they are being turned to as a lender of last resort, and the loans are offered on the completely reasonable basis that the Cypriots would find some of the cash themselves.

It is entirely up to the Cypriots how they find this cash - although I have no doubt that Germany and the UK would prefer it came from Russian crims NOT ordinary savers.

The EU and the Euro have nothing to do with creating this crisis.

The problem is that emotionally overcharged UK citizens have a habit of nationalistic fervor and laying the blame at foreigners doors when the going gets tough. The national press feed this desire by printing lies and half truths.

It's tragic and stupid.

[silverfox]

Well argued Huguenot - but wrong.

The EU and Euro are responsible in the sense that the political aim of an expanded Europe allowed countries such as Cyprus (and Greece) into the Euro when they weren't ready and their institutions weren't in order. The European elite knew this at the time but turned a blind eye for reasons of ideology and naked ambition.

The beneficiary of this fiasco will be Germany, as people withdraw their funds and place them in German banks.

[DaveR]

Huguenot is right and wrong. The specific problem in Cyrpus is that their decision to make themselves a tax haven means that their banking sector is far too big compared to their domestic economy for a bail out with austerity conditions a la Ireland, Portugal - nothing to do with the EU or the euro. On the other hand, the reason their banks are in the sh!t is (in part) because they bought lots of Greek govt bonds and lent money to lots of Greeks - lots to do with the EU and the euro.

H's problem is that he's turned himself blue insisting that nothing to do with the eurozone sovereign debt and banking crisis has anything to do with the EC or the euro project that he's lost any credibility, even when he's (a bit) right.

[Huguenot]

Not at all DaveR, in fact it seems that my own humble predictions about muddling through these common currency teething problems seem to be the only ones that are proving accurate. Where is the apocalypse relentlessly pursued by the isolationists?

That even goes so far as predicting 6 years ago that we would see increasingly centralized fiscal control and political convergence.

It is worth pointing out to financial isolationists that excluding finance, the UK economy is in great health. The problem is that the international finance industry is such a big chunk of our GDP that we're struggling to recover.

Insular financial isolationism will only make this worse - so those attacking finance don't recognize that like any failing corporate I've seen tens of times before, when they going gets tough they start eating themselves alive.

Europe will be fine. Europeans are intrinsically socialist. The British Anglo Saxon right just don't seem to get that.

[????]

"Err, what are you talking about. Buying Spanish bonds has nothing to do with the bank deposits. The ECB has already provided an unlimited 3 year liquidity facility to all European banks (including Spanish banks) to deal with disruptions in the wholesale funding market. Should deposits shrink, the same liquidity facility can and would be used as this would represent a liquidity rather than a solvency issue."

So the Bundesbank or the ECB hasn't being buying southern european debt? and the 100bn capital injection for spanish banks was provided by? Underpinned by?

[DaveR]

"in fact it seems that my own humble predictions about muddling through these common currency teething problems seem to be the only ones that are proving accurate. Where is the apocalypse relentlessly pursued by the isolationists? "

comic gold

[LondonMix]

Again, what are you talking about? My point was that deposit flight from the banks would not necessitate Germany buying bonds in Southern Europe as you suggested.

Buying bonds on the secondary debt market wouldn?t do anything to deal with any potential deposit flight because the two things are not directly connected. Deposit flight would lead to a liquidity crisis within the banking sector. However there is already a liquidity facility available to deal with funding gaps (deposits are a type of bank funding). Therefore your conclusion below makes no sense:

"Money will be flying into German banks from all

> Southern European economies as we speak, this then

> means that to counterbalance this the Germans have

> to buy more bonds in the southern european

> economies, a potential risk spiral not unlike, um,

> 2007......"

To answer the questions you raised (though again I don?t see how they support your original assertion).

1. The ECB hasn?t intervened in the secondary bond market in the last 12 months but did so intermittently between 2010 and early 2012. Draghi has pledged to do so again if yields (due to market disruption) rise to unsustainable levels as long as certain preconditions are met. This has in and of itself resulted in a reduction in bond yields as the perceived risk in the market is lower. Please note that the ECB can?t buy bonds directly issued by the government and never has but only has bought them via secondary trading (i.e. buying them from investors thus indirectly influencing yields).

2. The ESM (European Stability Mechanism which replaced the EFSM) has pledged to provide up to 100b to recapitalize Spanish banks. Of this 40b is believed to be needed and that is all that has been used. All Spanish banks have a core capital ratio of 9% or higher and ESM capital has dealt with the solvency issues affecting the banking sector (not solvency vs. liquidity). The ESM has funding pledges from all Eurozone countries.

Again, I don?t see how any of that supports the assertion that a liquidity crisis caused by deposit flight will result in Germany buying Southern European bonds. It will result on further drawdowns by the banks on the ECB?s LTRO 3 year liquidity facility. Nothing more, nothing less. The potential risk spiral you outline doesn?t exist. I?m not saying there aren?t any risks in Europe, just not the ones you?ve outlined.

???? Wrote:

-------------------------------------------------------

> "Err, what are you talking about. Buying Spanish

> bonds has nothing to do with the bank deposits.

> The ECB has already provided an unlimited 3 year

> liquidity facility to all European banks

> (including Spanish banks) to deal with disruptions

> in the wholesale funding market. Should deposits

> shrink, the same liquidity facility can and would

> be used as this would represent a liquidity rather

> than a solvency issue."

>

>

> So the Bundesbank or the ECB hasn't being buying

> southern european debt? and the 100bn capital

> injection for spanish banks was provided by?

> Underpinned by?

[????]

So, I repeat, which country largely underpins the ECB and its Security Markets Programme and the ESM. And, if there was a run on the Southern European banks and a subsequent cost of borrowing rise to various 'sovereign states' short of abandoning them, the ECB would have to start buying their bonds again, you join up the dots....

[LondonMix]

No, if there was a run on the banks (meaning withdrawal of deposits), the banks would draw down on the liquidity facility. There is no reason to believe that there would be an increase in government bond yields and therefore, there would not need to be any intervention in the bond markets.

When things kicked off with Cyprus the bond markets didn't react. There was no impact on sovereign debt yields. The only thing that occurred was that share prices for banks dipped (this has no impact on solvency or liquidity) which reflects the economics -- banks might have to offer higher interest rates on deposits going forward to maintain their existing deposit base, this reducing profitability marginally.

The entire point of the measures that have been put in place throughout the EU over the last 18 months was to break the link between the banks and the sovereign. Its the express goal of everything that has been put in place and has been working.

[????]

What are YOU talking about, seriously ! If the EU were genuinely trying to break the links between bank and sovreign the ECB would have guaranteed Cyprus' banks weeks ago, problem sorted (it's only 20bn) and the existential crisis would disappear. It is precisely that German politicians know that German tax payers and voters won't swallow this, as they think the next will be Portugal/Italy etc that the whole issue has blown up.

We can happily argue about wether this will or won't cause a run on southern european banks and by connection their bonds, but to say that IF it did it wouldn't effect Germany is bonkers.

[LondonMix]

God, all I am saying is that a liquidity issue in the banks (such as deposit withdrawals) wouldn't be addressed by buying bonds. What you described in your original post simply isn't accurate and is rather misleading.

If you want to move on from that original point, we can discuss Cyprus as well as the specific measures the EU has put in place to try to break the link between a banking crisis inevitably leading to a country being locked out of the bond markets.

Cyprus' banks are insolvent and need to be restructured and recapitalised. The banks are also an off-shore tax haven. EU politicians want Cyprus to accept the terms of the bail-out they propose and want the depositors (mostly Russian) who have been using the island as a tax haven to cover some of the costs. The ECB is threatening to cut off Cyprus's banks' access to emergency funding which would cause the banks to collapse. They will do this if Cyprus doesn't accept the terms. They are using all of this as a political tool to force Cyprus to adopt needed measures.

The situation is totally different to what the EU has been trying to do on other fronts. The link between banks and the sovereign that they want to break is this-- certain Spanish banks were on the verge of insolvency because of the property crisis. These banks also hold a large amount of their country's sovereign debt and when yields rise, banks make marked-to-market losses that can further threaten their solvency necessitating a recapitalisation. Fears that a country will need to recapitalise its banks and won't be able to successfully issue bonds can cause yields to increase and you are back at the beginning of the vicious circle. These links create the possibility of a a self-fulling prophecy. The ECB,in Spain, has agreed to provide more than double the amount that is necessary to recapitalise certain banks and Spain has created a national bad bank to clear the toxic real estate assets off the banks balance sheets. Therefore, everyone now believes the banks are solvent and if they needed more capital to deal with solvency issues it would readily be available without Spain having to specifically issue sovereign bonds. Similarly, no country will need to rescue its banks for a liquidity issue (lack of wholesale funding or withdrawal of deposits) because the ECB has provided a 3-year liquidity facility- this was necessary across all of Europe. The main concern over Spain was that it would need to rescue its banking sector like Ireland- the country's actual debt isn't that high relatively speaking and wasn't the main concern. Now that the link described above is broken (as well as other measures), Spanish yields have plummeted to 4.85%. In other Southern Eurozone countries, higher yields weren't the result of concerns about the solvency of the banking sector but reflected concerns about the sustainability high levels of debt to GDP and contagion fears.

[Huguenot]

Stick with it LM :) you're doing an excellent job!

[silverfox]

LondonMix said:

"...The entire point of the measures that have been put in place throughout the EU over the last 18 months was to break the link between the banks and the sovereign. Its the express goal of everything that has been put in place and has been working..."

Stephanie Flanders said:

"...Angela Merkel doesn't want the European Stability Mechanism to step in to recapitalise Cypriot banks, because she doesn't really want to sever the link Between Europe's banking problems and its sovereign debt problems.

You might have been under the impression that the move to "banking union" was supposed to do just that. If so , you were mistaken..."

http://www.bbc.co.uk/news/business-21901948

[LondonMix]

Read my previous post....

The goal is to break the link when they believe the fundamental issues have already been addressed. They want the appropriate reforms in place first of course.

[New Nexus]

Given Jeroen Dijsselbloem statement today, it would be prudent for anyone holding euro assets to repatriate said assets.

[Huguenot]

That's nothing short of trying to instigate a run on banks.

It's a shameful and morally corrupt approach that serves only to satisfy your deep seated desire to see society fail.

How many people would you like to see suffer to satisfy your Armageddon fantasies?

There is something to be said for investors who select apparently fast tax dodging returns from offshore banks in under capitalised countries to recognize that their fast bucks come at a risk - and the taxpayer isn't going to bail them out if they come unstuck.

Get rich quick schemes come at a price, and I'm pleased that finally we're seeing irresponsible investors pay it.

[LondonMix]

Jeroen Dijsselbloem had to retract that statement very quickly. I wouldn't say he speaks for the EU but he's managed to do a lot of damage in short period of time!

[New Nexus]

Lets hope that there are some funds remaining in the Cyprus banking system, when at some point in the future the banks do eventually open.

Reuters:

http://www.reuters.com/article/2013/03/25/eurozone-cyprus-muddle-idUSL5N0CG13920130325