The story goes that in ancient Greece, Archimedes was in the bath when he realized that you could measure the mass of an irregular object (himself!) by measuring the displacement of the water when he got into the bath. To this day, we have an image of him running down the street in the nip, shouting “Eureka!” or “I have found it!”
In modern southern Cyprus, politicians have fashioned what they believe is a plan to solve their country’s funding needs and they believe it will be finalized today, and that tomorrow, the ECB will approve it and continue to provide liquidity to their banks, and that on Tuesday, the banks will open after a 10-day hiatus, and all will return to normal. Sure, there may be some panic withdrawals of deposits from Tuesday onwards, but the ECB is presently providing €9bn of liquidity in an economy with a GDP of €18bn and remember that at our peak need in Ireland, the ECB was providing €190bn or 120% of GDP so the ECB has some room for providing further liquidity to Cyprus. The politicians will have convinced themselves “Mission accomplished”
But politicians have been locked in their privileged environment for the past week, with economists and bankers shoveling advice into their ears. They’ve been subjected to tunnel vision where the only objective is to devise a funding solution. Politicians have the luxury of being in charge, and knowing that solutions are in their remit to devise and implement so threats to their livelihood have been theoretical and distanced. But here you have 56 politicians in a country of 1.1m, not any larger than Dublin, and their finance minister a week ago thought that a levy on all deposits of at least 6.75% was a good idea. They haven’t covered themselves in glory.
As they finally relax with having devised a solution later today, let us go then, you and I when the evening is spread out against the sky like a patient etherized on a table, and see what Cyprus looks like this Sunday evening. The banks are shuttered but they are usually closed on Sundays anyway, so no change there. There are lines outside most banks and people are withdrawing cash. The €260 daily limit is regarded as a target, not a maximum, but people are sometimes unable to even get this limit despite having funds in their accounts. On a Sunday evening, a politician might be tempted into a restaurant where they will find that trade is down 50% on a fortnight ago. They might see signs saying “no credit, debit cards or cheques” or “cash only”. In shops, they will notice perishable foods like strawberries being cut in price by 60% which should really set off alarm bells – people are not hoarding or panic-buying food which would drive up prices, they are hoarding cash. There are 8,500 employees at Bank Laika alone, most in Cyprus and most have not been at work this past week. The estimate on here is that 40,000 bank workers in a country with 1.1m have not been working in the past week. There have been no standing orders or direct debits since Friday 15th March 2012. Most people are paid at the end of the month, but anyone else hasn’t had payment, and even if they had, they would have been restricted in accessing their wages. Credit cards are not being paid, large purchases are not possible. And of course, ordinary people don’t know what politicians will eventually devise; after all, a week ago, they were willing to take 6.75% of all deposits regardless of size or “guarantee”,so someone with a €10,000 balance faced losing €675.
The betting on here is that over the next 24 hours as politicians emerge from their tunnel vision, and at last examine the practical impact of the last 10 days on the banking system and its domestic and foreign depositors, that they will conclude – “in their waters”, at least – that Plan B won’t work. Being politicians, who stubbornly cling to a vision and agreed way of doing things particularly at supranational level, they will be reluctant to abandon their Plan B however, and you might expect a few days of experiment with draconian capital controls, before the inevitable happens and a Cypriot pound is introduced with a newly independent central bank of Cyprus. Economically and politically, it doesn’t make sense for Cyprus to abandon the euro, particularly if there is a funding deal in place and the ECB is continuing to offer support, but in a reverse of that Men-in-Black philosophy of “a person being smart, but people being dumb” in the Cypriot case, each household and business will act in its own interest based on what has been a traumatic 10 days, even if for Cyprus generally, it would be better for households and businesses to support the banks.
Just when will they shout “Eureka!” and run down the streets in the nip.
NAMA Wine Lake 
“you might expect a few days of experiment with draconian capital controls,… ”
That about it. Doubtful if even capital controls can get them beyond next week, a public holiday weekend!
For public perception and self (EZ/ECB/IMF/German) damage limitation, the ECB will assist their reintroduction of their own currency. They will not want Cyprus to recover too quickly. But Punishment is the order of the day. Skinning alive will be avoided, not because they wouldn’t like to, but because it may not enhance the Orwellian ‘partner’ image of EZ countries institutions.
The long term consequence of the Cyprus debacle?
The European project is dead.
Sacrificed on the creditors alter of German/Netherlands/Finland etc.
All compliments of the generation that never had it so good.
German FinMin Schäuble today using Welt am Sonntag today 130324 to further the frustration which Merkel openly expressed on Friday. He says in an Article ‘Cyprus has Itself to Blame’: http://www.welt.de/print/wams/article114716938/Schaeuble-Zypern-ist-selbst-schuld.html
‘It’s going to be difficult for Cyprus either way. But that is not because of EU stubborness but because of a business model which does not function.Cyprus has had practically no access to markets since 2011, Govt bond status is junk and the two big Banks are practically insolvent.’
‘We will not let ourselves be blackmailed, from no-one or nothing.’ He understands his responsibility in relation to the stability of the Euro.
As it stands [in this report] there will be 20% on deposits over €100k with Bank of Cyprus 4% in other institutions. The pension fund will remain untouched.
Hans-Werner-Sinn the German economist who some people know since he appeared on Irish telly is quoted in the article as saying:
‘There’s a danger that there will be a Bank run because south European Banks are affected. Several countries and Banks are bust and are only kept alive by Exceptional credit through the ECB. The catasrophe has long since happened but the public is keeping its eye shut.’
Reports are that the Cyprus requirement exceeds the €17bn.
Re. weather: it’s minus 2 in Hamburg, sun snow still there, arctic wind chill factor. Just went for a run through Germany’s biggest ghost estate, product of the property bubble here behind Hafencity. This will come back to bite Germany in the bum. Big Time.
Looks like censorship is alive and well in Madrid. El Pais removed an article from its web edition today that referred to Dr. Merkel as Hitler like in her attacks on Cyprus. I think Germany has greatly underestimated the consequences of their actions. Or, maybe this is their plan all along. As JR points out, it is now a given that the EU is dead.
http://ecoteuve.eleconomista.es/ecoteuve/prensa/noticias/4698567/03/13/El-Pais-retira-un-articulo-de-Juan-Torres-Lopez-por-comparar-la-Alemania-actual-con-la-nazi.html
Here is Google’s version in English. Not great but you get the idea. The Internet is an interesting thing, no?
The article by Juan Torres censored:
“It is very significant that usually talk of” punishment “to refer to measures that Merkel and her ministers impose on the countries most affected by the crisis.
They tell their compatriots who have to punish our irresponsibility for our waste and not pay our debts now the Germans. But the reasoning is false because the irresponsible people have not been to that Merkel is determined to punish but German banks who protects and those of other countries they lent, they do with irresponsibility, to gain billions.
The European economic groups managed to establish a model of monetary union very imperfect and asymmetric quickly reproduced and enlarged original inequalities between economies that were involved. And thanks to its huge investment capacity and the great power of governments large Northern companies were able to keep many companies and even entire sectors of the periphery countries, such as Spain. That caused huge trade deficits and surpluses in the latter especially in Germany and to a lesser extent in other countries.
In parallel, the policies of successive German governments concentrated more income on top of the social pyramid, increasing its already high level of savings. From 1998 to 2008 the wealth of the richest 10% of Germany from 45% to 53% of the total, 40% below the 46% to 40% and the poorest 50% from 4% to 1%.
These circumstances made available to German banks huge amounts of money. But instead of dedicating it to improve the German domestic market and the situation of lower income levels, they used (about 704,000 million euros until 2009, according to the Bank for International Settlements) to finance the debt of Irish banks, the Spanish property bubble, the corporate debt or to speculate Greek, which made private debt in peripheral Europe is fired and that German banks are loaded with toxic assets (900,000 million euros in 2009).
At the outbreak of the crisis were seriously disrupted but got their insolvency, rather than appear as the result of his great recklessness and irresponsibility (which never refers Merkel), is presented as the result of waste and public debt countries where banks were those who had served. The Germans quickly withdrew their money from these countries, but the debt remained in the balance sheets of the banks. Merkel emerged as the champion of German bankers and help launched two strategies. A, bailouts, they sold like they were aimed at saving the country, but actually consist of giving governments loans money paying people to pass it on to domestic banks so that they recover as soon as possible and pay immediately the Germans. Another, prevent the ECB root cut off speculative attacks against the debt of the periphery to the rise in risk premiums of others down the cost is financed with Germany.
Merkel, like Hitler, has declared war on the rest of Europe, now to secure their economic living space. We punished to protect their corporations and banks and to hide the shame to their constituents of a model that has made the poverty level in the country is the highest in the past 20 years, that 25% of employees earn less than 9.15 euros / hour, or half of the population it is concerned, as I said, a miserable 1% of the national wealth.
The tragedy is the massive collusion between pan-European financial interests that dominate our government, and that these, rather than defend with patriotism and dignity, betray us to act as mere extras Merkel. “
What makes you say that? Politically they have been abandoned and ostracised by the EU. Economically, tying themselves to a German currency offers no benefits whatsoever. They’re better off going, and I think a lot of Cypriots will conclude the same.
@OMF, economically much of the Cypriot economy is tied to offshore banking and insurance and both would be badly hit if Cyprus had to abandon the euro in favour of the Cypriot pound. Foreign deposits attracted by the strength of the euro currency in the interest rate/regulatory environs of Cyprus would depart. Economists believe the economy could contract 10-20% with a euro exit.
“Politically” is more debatable, but if you’re a 1m population country with an economy worth just €18bn, at the far end of Europe with a difficult political situation with northern Cyprus and Turkey, you would tend to think more integration with a more powerful union would give you better security and a better governed society, not to mention the impact of the health of your economy on your society. That’s more debatable though.
Archimedes realised he could measure the VOLUME of a irregular object by measuring the amount of water displaced.
He could already measure the mass by weighing the object.
Cyprus debacle exposes the rot/lies further. More than 1/3 of Cyprus’ debt is securitised by the ECB following its buyback policy, which leads to an exposure of about 12bn€ of the 31bn€ ECB capital according to Hans-Werner Sinn. The worst thing that can happen for the ECB is a crash which would see its own capital dramatically reduced. http://www.deutsche-mittelstands-nachrichten.de/2013/03/51128/
Apparently the ATM limit has now been reduced to 100e.
Perhaps tomorrow it will be down to 20e.. then on Tuesday down to 1e.
After that the ATM will report… “go away we do not know you”
Cypriots would be better off just taking the 6.75% and 10% levies right away and just get on with life.
Cyprus banks also closed tomorrow in London.
Good “Russian” angle point on here.
http://www.aljazeera.com/news/europe/2013/03/201332410502100171.html
Forgive me, but I find it very difficult to understand the sanctimoniousness of the Germans. They are hell bent on punishing the Cypriots because they had the “temerity” to invest in Greek sovereign bonds that went belly up. If I am not mistaken Greece was and is a member of the EU. It is not as if Cyprus had invested in the bonds of Argentina.
As we all know, a great deal of the debt in the PIGS went to purchase German products. Additionally, if we want to talk about punishment, what is murdering of millions of inocent civilians compared to making a unfortunate investment decision? There is no EU and there never was. It is a German colony. I am waiting to see if the Russians will again come to the rescue of Europe.
@Houndini apparently a “deal” bank of cypress-ahem quite Russian-lives on,will provide link.,from Reuters.
“BRUSSELS (Reuters) – Cyprus, the European Union and the International Monetary Fund have agreed a new plan to resolve the island’s bank and finance a rescue of the country, an EU official said early on Monday.
The proposal, which will now be presented to euro zone finance ministers for discussion, will involve setting up a “good bank” and a “bad bank” and will mean that Popular Bank of Cyprus, known as Laiki, will effectively be shut down.
Deposits below 100,000 euros in Laiki will be transferred to Bank of Cyprus. Deposits above 100,000 euros, which under EU law are not insured, will be frozen and will be used to resolve debt. It remains unclear how large the writedown on those funds will be.
The EU spokesman said there would be no “levy” imposed on any Cypriot banks, with the package requiring a full “bail-in” of uninsured depositors, which is likely to mean heavy losses for those with large holdings in Laiki and potentially Bank of Cyprus, where many Russians hold bank accounts.”
@JG
Yes, a bank restructuring rather than a tax, thus no vote in Parliament. Fine, so let’s give it to the oligarchs with both barrels, 40% haircut. However, there is a big difference between a 101,000 account and a 500 million account. As I said before, I can only hope that the Russians have the cojones to take on the Germans. Obviously, no one else does, least of all, Noonan, who would faint at the crashing sound of a napkin hitting a marble floor.
I think this entire scenario requires the use of an urban hipster gem, ludicrosity.
No Eureka moment so. No parliament approval needed for the ‘deal’ as it is a bank resolution not tax in accordance with the law passed in Cyprus just a day or two ago. Main differences from last week’s deal: Only deposits over €100K are hit, only in Laiki and Bank of Cyprus. Approval by the EU FinMins now after their pizza delivery.
Noonan said this eve in Brussels that the crisis Cyprus means ‘Very Little for Ireland’ http://www.irishexaminer.com/breakingnews/ireland/noonan-crisis-in-cyprus-means-very-little-for-ireland-589031.html So that’s the level of understanding of one of the people who are set to vote now.
Playing God with peoples’ lives.
@DJ a little confusion over approvals….can get confirmation on the “hit” 40% suggested but not confirmed.
@Houdini,at least no insured gettin a haircut,that truly the end.The underlying numbers quite compelling for a bail in,the interest rates risk free,reminiscent of a Ponzi scheme.
@JG
Correct me if I am wrong, but the interest rates in Cyprus are/were around 5%. Hardly in the neighborhood of nosebleed Madoff’s promised returns, former president of NASDAQ. That certainly should have had more cache than a Cypriot bucket shop.
I hate to be so redundant, but my Russians friends are not going to go quietly into the night.
Regardless, the algos will have the market up a 100 points tomorrow.
On a savings AC in euro with a guarantee….I wish I had got in and out.
Looks approved,watching SKY TV excellent coverage,still unsure on level of haircut….Bernie viz. a viz. the implied risk profile similar,that’s why they were so pregnant and all in on Greece bonds/RE-yield chasing to cover their vig always ends in tears…no such thing as a free…
Brrr… Brrr…Brrr….. “UBS? Guete Morge, Kasch Du Schwitzerdütsch reede?”
So the Cypriots have a plan B authorised. More fair and acceptable to a public that has just completed a trip to the edge of the abyss. One bank to shut and the other to be recapitalised. Small depositors to be made whole. Capital controls agreed by the EU. Haircuts for bondholders. The small good banks to be left alone and unlevied. A cypriot NAMA to be created.with the toxic loans.
Just one big retail bank is now left: Bank of Cyprus. Will there be a run on this bank? I think it will be limited mostly to foreign and corp depositors. Retail bank runs really spiral when the banks run out of credit. But BoC will now be backstopped by the ECB with cheap virtual cash so it cannot run dry.
The view of the Cypriot future suggested on this blog was too pessimistic. Everything will be OK – they just need a couple of austerity budgets (lubricated with cheap bailout loans) to get their national accounts under control and they’ll have a sustainable future within the euro.
@Ian C
A couple of austerity budgets, this to make up for the 20 odd billion taken out of the banking system, bank stocks and bonds, plus the deposit runs as soon as funds are credited. And, the thousands of Russian businesses on the island that will be shut down. On the contrary, everything will not be OK. I assume that Ireland should be humming at full speed since it has had at least four austerity budgets.
You talk about a Cypriot NAMA for toxic loans. This shows how little you know about the situation. The bad loans are mainly Greek sovereign debt, not real estate at all. However, the big picture here is not just Cyprus, but the entire EU banking system. It is open season on every depositor.
The “20 odd billion taken out of the banking system” is the removal of 20 billion of bank liabilities – it strengthens the banks at the expense of large creditors.
Ireland has had 6 austerity budgets. Compared to 2010, Ireland is humming along. We are on track to a balanced budget. We are returning to market funding. Economy has grown slowly for last 2 years. Employment up, population up. Disposable income down but hey, I’m sure we all put something away in the low tax high income years and didn’t just spend it all on trips to New York and BMWs.
Cyprus is creating a national bad bank, also known as a national asset management company. It is not to manage defaulted greek bonds, which require no more management than spilt milk. Instead it is to manage bad debts principally money lent to property developers during the cypriot property bubble.
Let’s see if there is a run on the entire EU banking system just because one f*cked cypriot bank has been shut down for being useless.
So they are shutting a bank. They have come a long way from the “No bank shall fail” mantra of a few years ago. If we had this thinking before rescuing the Irish zombies, we would have saved a lot of money.
So cat well of of bag this morning 130325:
– Deposits no longer sacred
– Parliaments do not have to pass the legislation if it is seen as a Bank Resolution rather than a tax [Hint: get countries to pass necessary legislation in advance to get around that pesky Art. 25 of the Lisbon Treaty]
– Human dignity does not matter. Seeing the ordinary citizens of Cyprus subjected to this and more to come is unjustifiable
– Playing God feels good. FinMin Schaeuble this morning saying they got what they wanted; Eurocrats purring.
And Cyprus may still default given the numbers ELA + Bailout + 2b + local…..
http://www.businessinsider.com/moodys-cyprus-could-still-default-and-leave-the-euro-2013-3
Far from over yet.
It isn’t about one zombie bank be shut down because it’s useless. Bondholders and shareholders can expect losses. They are taking a commercial risk. Depositors are not. They rely on trust and are looking for a safe haven when they give their savings for safe-keeping. That is why there will be an exit of deposits from the european banks. The trust has been breached.
No jurisdiction provides infinite uninsured depositor protection. If you put more than 100K in a bank run by a country whose banking system is a multiple of its GDP then you are taking a risk.
In Ireland we had people whining when the state made all the bank creditors whole at taxpayers’ expense – now we have the same people whining when the the banks places losses on their creditors. The losses have to be made up somewhere. The trick is to regulate your banks better , particularly when their asset bases are growing too quickly or beyond the size of your nation’s GDP.
Debt absolution is a fantasy even for Catholic countries. Debts are not destroyed, they are transferred. It’s hard to blame the ECB for insisting on a programme before they backstop the banks. Why should they pour euro citizens’ savings down a hole?
@Ian C
“The trick is to regulate your banks better , particularly when their asset bases are growing too quickly or beyond the size of your nation’s GDP. ”
Coming from what looks like Ireland’s greatest delusional cheerleader, this says it all. You are lecturing Cyprus on bank regulation, what a joke.
Regarding asset base to GDP, you might want to look at Switzerland or the Cayman Islands. I really would be scared shit less in either case. I am moving my money out of there into the rock solid Bank of Ireland.
Your reference to Irish “whining” over the state making bank creditors whole is a total misrepresentation of the Cyprus case. In Ireland, the problem was with making the BOND holders good. In Cyprus, the issue is burning the depositors, which obviously did not happen in Ireland.
“Debts are not destroyed, they are transferred.” This statement is so utterly ridiculous, I wouldn’t know where to start a reply.
Oh..Sweet…Divine…after Dijssel-Gate yesterday German FinMin Schäuble now comes out with this ‘beaut’ :[N-TV piece: ‘Schäuble says his critics are “jealous”]”It’s always like this, it#s also like this in school. When one gets better results, the others who have difficulty are a little jealous.”