My warning yesterday was that the Cyprus memorandum would not be sustainable; this morning the Standard&Poor's rating agency rushed to agree with me. In their report, they state that the two-notch downgrade to CCC+ is because of a considerable and rising risk
that the country, may default. Heavily exposed banks (with the banking system assets around €95 billion), an optimistic forecast of a 3.5% contraction in GDP and EU indecisiveness with the agency calling it "hesitant attitude of Cyprus' Eurozone partners toward sharing the cost of a
severe banking crisis" are what the S&P see as causing the most trouble.
Well, this isn't something new: the EU leaders speak of more union and yet fail to keep up with what they suggest. The EFSF/ESM funds have been created exactly because sovereign governments should not be liable to rescue banks unassisted; official EU assistance should be made available in order for the underlying country not to assume large debt burdens. Yet, the funds have not yet supported neither Greece nor Cyprus and thus far I am not quite sure about what they plan to do with Spain.
Spiegel states that the IMF officials have demanded a debt haircut before anything is signed. Unfortunately, these people appear to be as stubborn and unwilling to change their minds as the EU colleagues. It would appear that narrow-mindedness is in the job description.
Question 1: Who owns the majority of the Cyprus sovereign debt?
Answer: EU banks, notably Greek and Cypriot banking institutions
Question 2: Who is going to be in trouble when a debt haircut occurs?
Answer: The Cypriot and Greek banks who are already in life support.
The point of the above two questions is that if a haircut occurs, then the IMF and the EU will need even more money to support the system. What has happened to Greece will be repeated in Cyprus as well. Two or more years of a huge recession, which will destroy the economy's production capability, throw consumption down the drain and minimize investment. Austerity measures will lead to more austerity measures and the result will be like a vicious cycle.
The EU officials fear that a haircut will undermine investor trust in the Eurozone. You think? Undermine is putting it softly. What do you believe a major investor will think when every time a country faces trouble the EU forces it to cut down its debt? Obviously there are safer markets and better returns to put his money in. Now my question becomes: what do you think will be easier than the EU supporting the Cypriot or any other country's banks directly, just like it announced it would do? Incredibility once again. And then politicians wonder why markets do not trust them. Even if direct support from the EFSF/ESM funds cannot happen (if this holds then just shut them down why keep them?) then why not lend the country with an interest rate of 1% or lower, or even cancel interest payments for the first two years? Either of these should work and this was what they should have done with Greece.
In a short note, moving to a different country, Italy's Prime Minister Mario Monti is expected to resign tomorrow and new elections are to be held. God only knows if things will ever get better in the country as one of the most popular candidate appears to be former PM Silvio Berlusconi. If any of the readers has ever watched Frank Capra's "Mr. Smith Goes to Washington" then you will certainly see the similarities. Old, rich guy tries to gain more power for himself by manipulating the media channels he owns. In the movie, however, we were pleased to see a happy ending; now it is time for the Italians to choose their own.
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| S&P headquarters in Manhattan, New York. Source: Wikimedia Commons Author: Beyond My Ken |
Spiegel states that the IMF officials have demanded a debt haircut before anything is signed. Unfortunately, these people appear to be as stubborn and unwilling to change their minds as the EU colleagues. It would appear that narrow-mindedness is in the job description.
Question 1: Who owns the majority of the Cyprus sovereign debt?
Answer: EU banks, notably Greek and Cypriot banking institutions
Question 2: Who is going to be in trouble when a debt haircut occurs?
Answer: The Cypriot and Greek banks who are already in life support.
The point of the above two questions is that if a haircut occurs, then the IMF and the EU will need even more money to support the system. What has happened to Greece will be repeated in Cyprus as well. Two or more years of a huge recession, which will destroy the economy's production capability, throw consumption down the drain and minimize investment. Austerity measures will lead to more austerity measures and the result will be like a vicious cycle.
The EU officials fear that a haircut will undermine investor trust in the Eurozone. You think? Undermine is putting it softly. What do you believe a major investor will think when every time a country faces trouble the EU forces it to cut down its debt? Obviously there are safer markets and better returns to put his money in. Now my question becomes: what do you think will be easier than the EU supporting the Cypriot or any other country's banks directly, just like it announced it would do? Incredibility once again. And then politicians wonder why markets do not trust them. Even if direct support from the EFSF/ESM funds cannot happen (if this holds then just shut them down why keep them?) then why not lend the country with an interest rate of 1% or lower, or even cancel interest payments for the first two years? Either of these should work and this was what they should have done with Greece.
In a short note, moving to a different country, Italy's Prime Minister Mario Monti is expected to resign tomorrow and new elections are to be held. God only knows if things will ever get better in the country as one of the most popular candidate appears to be former PM Silvio Berlusconi. If any of the readers has ever watched Frank Capra's "Mr. Smith Goes to Washington" then you will certainly see the similarities. Old, rich guy tries to gain more power for himself by manipulating the media channels he owns. In the movie, however, we were pleased to see a happy ending; now it is time for the Italians to choose their own.
