European leaders' decision to impose losses on depositors in Cyprus banks may be ominous for the region's future...in the same fashion that Bear Stearns' collapse foreshadowed the Lehman events a few months later.
The time is now for initiatives such as the fiscal compact, banking union, etc. to start taking shape. Assuming, of course, that was the real intention of those who signed the agreements (if they themselves ever had a clear view on this, one might add...)
1. 'Too big too fail' bank bailouts, using taxpayer money.
Politicians' credibility is getting ever weaker in Europe...but the 'blunders' keep coming:
- Deauville in October 2010; Merkozy 'agree' on imposition of losses on the private sector, only to show 'regret' at a later stage.
- Denial over the need for Greek debt restructuring ('re-profiling' was first timidly suggested as an option as late as in May 2011).
- Distorting the meaning of 'voluntariness' (e.g. voluntary buyback of Greek debt in Q4 2012).
- Cyprus deposits.
Why is the Cyprus decision a blunder? Some first thoughts:
1. Over and above the catastrophic consequences for confidence in Cyprus, it introduces huge uncertainty for depositors in other periphery countries. Even the 100k euro deposit 'guarantee' is getting scrapped 'at will', shaking the foundations of confidence in the eurozone banking system, in general. Commissioner Rehn's assurances are simply not 100% credible; and anything less than 100% credibility will not work in such situations. Banking stability risk is again on the table, and visibly so, while a 'banking union' still remains far in the horizon.
2. It is a move that is likely intended to convey a 'hard-line' political message regarding austerity program implementation, esp. in Greece (dragging its feet regarding public sector layoffs). But this is a time when consensus seemed to be getting more open to a 'softer' stance on the pace of austerity policies, which have so far had 'self-defeating' results (low tax revenues, high unemployment, etc.)
3. If making a point on money-laundering (i.e. Russian funds) was at the heart of European leaders' motivation, then, at the very least, 'horizontal' deposit haircuts are too blunt a tool to communicate such intentions.
The average working-class depositor is being treated very unfairly; and it should not matter that Cyprus represents only 0.5% of the Eurozone GDP (the issue is qualitative).
The average working-class depositor is being treated very unfairly; and it should not matter that Cyprus represents only 0.5% of the Eurozone GDP (the issue is qualitative).
4. This was certainly no last minute move on the part of Germany. Mr. Schaeuble's view that a bankruptcy in Cyprus would not present a source of systemic risk was reported in the press as early as January.
For example, Der Spiegel reported on 28/1/2013:
The head of the European Central Bank, Mario Draghi, warned German Finance Minister Wolfgang Schäuble last week not to dismiss Cyprus as not being 'systemically relevant' and said a failure to bail out the island nation could threaten the wider euro zone.....
...Draghi was backed by the European Economic and Monetary Affairs Commissioner Olli Rehn as well as the head of the European Stability Mechanism, Klaus Regling....
...The three pointed out to Schäuble that the two biggest banks in Cyprus had a large network of branches in Greece. If any doubt were cast on the safety of deposits held with those banks, the uncertainty of Greek savers could quickly spread to Greek banks, which would represent a major setback for Greece.
So the stance on Cyprus may be a harbinger for what may follow in policy space. This is
For example, Der Spiegel reported on 28/1/2013:
The head of the European Central Bank, Mario Draghi, warned German Finance Minister Wolfgang Schäuble last week not to dismiss Cyprus as not being 'systemically relevant' and said a failure to bail out the island nation could threaten the wider euro zone.....
...Draghi was backed by the European Economic and Monetary Affairs Commissioner Olli Rehn as well as the head of the European Stability Mechanism, Klaus Regling....
...The three pointed out to Schäuble that the two biggest banks in Cyprus had a large network of branches in Greece. If any doubt were cast on the safety of deposits held with those banks, the uncertainty of Greek savers could quickly spread to Greek banks, which would represent a major setback for Greece.
It seems the German side was merely content to exclude Cyprus banks' greek branch deposits from the 'haircut', thinking that this would make things alright.
This is clearly dangerous, short-sighted thinking, illustrative of the lack of leadership in Europe at the moment. It also reminds me of the excess zeal with which rating agencies tried to regain credibility following their demise during the financial crisis by 'overcompensating' during the Eurozone debt crisis ('strict' downgrades/commentary); ironically, this often also acted as an amplifier of the crisis.
Importantly, we seem to have reached the limits of solidarity and the edges of 'self-preservation' in the Eurozone, as economic recession is at Germany's door.
So the stance on Cyprus may be a harbinger for what may follow in policy space. This is
of systemic importance.
Of course, elections are also playing a role, as usual. Mrs. Merkel would surely like to show that she is (finally) standing up for the German taxpayer after all...before the autumn.
No doubt the Cyprus decision will have consequences; history reaches us that 'systemic' is dynamic....what may have appeared as small/inconsequential may have huge impact, in unforeseen ways.
Unfortunately, it might not take many more blunders to set off a chain of social disruptions that will prove hard to contain and have deep impact on Europe's future.
No doubt the Cyprus decision will have consequences; history reaches us that 'systemic' is dynamic....what may have appeared as small/inconsequential may have huge impact, in unforeseen ways.
Unfortunately, it might not take many more blunders to set off a chain of social disruptions that will prove hard to contain and have deep impact on Europe's future.
The time is now for initiatives such as the fiscal compact, banking union, etc. to start taking shape. Assuming, of course, that was the real intention of those who signed the agreements (if they themselves ever had a clear view on this, one might add...)
* * * * * *
As an aside: this news serves to highlight the common thread throughout the global financial crisis: a deepening polarization between, one the one hand, (uninspiring) governments / the 'elite' and, on the other, the middle/working class population:
1. 'Too big too fail' bank bailouts, using taxpayer money.
2. Quantitative easing relied on as the only stimulative policy response.
- Beyond QE1 (necessary existentially) and, maybe, QE2 (deflation threat, signal that the Fed is 'present'), subsequent rounds of Q.E. have largely been enacted in order to 'replace' a confused/inadequate fiscal/political side.
- Monetary stimulus has not really found its way to the real economy, basically benefiting the financial side: asset market players, banks and corporations (reflected in record stock buyback activity).
- Monetary policy cannot act as a substitute for fiscal and supply-side policy; the fact that central bank stimulus has 'worked' in avoiding an economic meltdown does not mean that it can be relied upon indefinitely (although this would certainly offer a kind 'wishful thinking' kind of convenience to elected leaders).
- As a result, we have been witnessing an essentially 'time-inconsistent' debt-reduction urge among the political class (a 'post-traumatic' shock reaction, in the midst of a balance-sheet recession).
So, in all, savers have been getting hurt both directly and indirectly; but the Cyprus decision is outright blunt, taking the 'game' to a whole new level (for example, see what The Economist says on the news).
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