Saturday, 16 March 2013

Habemus Referendum: The sad case of Cyprus

We are witnessing finance history ladies and gentlemen: It is the first time in history where risk-free assets (i.e. cash) will be traded with risk-bearing ones (i.e. shares); and this appears to be a good deal! According to some sources, the German Finance Minister, Wolfgang Schäuble, entered the negotiations demanding a 40% deposit haircut and threatening to cut all ECB funding to the Cyprus Popular Bank (which amounts to about €6 billion) at once if Cyprus returned to the pound. 

It appears that Germany has assumed the role of "The Master and Commander" of the EU without notifying anyone else. Why else would they support a plan which would promote such an issue? The same leaders who promoted a plan which has taken away €4-5 billion from Cypriot banks through the Greek PSI are now planning to re-capitalize them by taking money from people who have been working all their lives to save some. Where is the democratic accountability in that?

The rationale behind decisions of this kind is: your banks are in a bad position, we mess-up in Brussels, the banks are now in deep trouble, we delay things to make the markets uncertain and thus making the economy contract and as a consequence every citizen with more than €1 has to pay.

Pawel Morski has already published an excellent article stating the alternatives and most of the outcomes of the Cyprus case. Now, let's have a look at the numbers:

Total Deposits in Cyprus: €126 billion.
Total Foreign Deposits: 34 billion. 

Who exactly is this measure supposed to be punishing and who is exactly is it protecting? Because it appears that the people who are about to be worse-off are Cypriots and not the "Russian Oligarchs". From what Pawel states it appears that they are promoting this to set the Russians at ease that it is not just their money that are going to get the haircut. Well, I am sure that Cypriots are thrilled by this! 

As with the Greek case, the only ones who benefited from these kind of solutions are hedge-fund managers who have gambled excessively with the probability of a Cyprus default. Ah, the grandeur of capitalism. The rich and the risk-lovers will get their rewards while those who have been saving small amounts of money will lose. Why isn't their a limit in the deposit cuts? Will the "oligarchs" feel the injustice if people with less than €10,000 or 20,000 in the bank do not have to pay? Do you really believe that the "billionaires" would care for such trivial amounts? Yet the average Joe or Jane, who earns €1000 euros a month and saves €50 for a rainy day does. I have already explained why a deposits haircut is a terrible idea. What makes this deal even worse is that it also hits lower income people; everybody has to pay.  

Where is democracy and accountability if a those who are unemployed and living off their savings until the recession is over have to pay for something they did not create? How are they going to spend, how are they about to eat or drink until a recession, promoted by others is over? Some may think that 6.75% is not much. Well, for a person with €10,000 in the bank, 675 euros could have supported her/his family for a month until a job was found.

The other question is why did Cyprus had to go to a Eurogroup to have a decision like that? Couldn't they have made it on their own? What is the point of discussing with possible creditors for a €16bn package when 6bn are going to come from a deposits haircut, an additional from increased taxation on interest received and an extension of the 2.5bn loan from Russia. Oh, wait, the IMF is going to chip in the "enormous" amount of 1.3bn. Which may not be of any use after all.

It appears that Machtpolitik has not been eradicated from Europe yet. Leaders may preach of solidarity, accept and support but it appears that talk is all they do. The ESM has not been used yet, the hope is that the OMT will not have to be applied and we really abide by the principle of having a "bazooka" ready but never firing it; not even when we are in danger of blowing up. 

I would not dare say that Cypriot politicians do not have their share of blame as Protesilaos Stavrou has already stated. However, the responsibility for correcting crooked decisions lies in the hands of the regulators who should come up with better ideas to rescue a country if the Eurozone is to have a future. Neither the solution of Ireland, nor Greece nor Portugal nor Cyprus was a good one. Yet, we keep on implementing on solutions which have been proven wrong even by their proponents.

Yet, measures of these kind will have huge effects on the economy. Is it not an extreme form of austerity? The one that even the IMF has said it does not support? Or is indirect austerity better than the direct one? I guess that a reduction in savings does not automatically mean a reduction in funds available for lending, nor does it mean a reduction in consumption or it does not force consumer confidence to take a free-fall. Or how will the loans which are based on term-deposits react? Will those be considered as "bad debts" or not? How can a country which cannot stimulate its economy via government spending achieve short-term growth? How many people realize that this may cause a bank-run? And exactly why don't they realize that this can only hurt the economy as it does not promote economic growth? Are we bloggers the only ones who can think 2 steps ahead?

Two months ago I had stated that the referendum would be given to Cyprus after the February elections. I was right on that. Yet, rest assured that the troubles for little Cyprus will not end here. If an influx of new cash in the economy does not occur then the crisis will be prolonged. The only hope for Cyprus is for the natural gas drillings to go through. Otherwise, the recession will last for more than 2013-2014...

Now, I would also like to ask the geniuses in Brussels the following: what should the risk-weighting of cash deposits be? 

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