WITH the ECB issuing Cyprus an ultimatum on a bank bailout, our correspondents discuss whether the country faces financial ruin
About Charlemagne
Our Charlemagne columnist and his colleagues consider the ideas and events that shape Europe, and the quirks of life in the Euro-bubble
Advertisement
Explore trending topics
Comments and tweets on popular topics
Latest blog posts - All times are GMT
Advertisement
Economist blogs
- Analects | China
- Americas view | The Americas
- Babbage | Science and technology
- Banyan | Asia
- Baobab | Africa
- Blighty | Britain
- Buttonwood's notebook | Financial markets
- Charlemagne | European politics
- Democracy in America | American politics
- Eastern approaches | Ex-communist Europe
- Erasmus | Religion and public policy
- Feast and famine | Demography and development
- Free exchange | Economics
- Game theory | Sports
- Graphic detail | Charts, maps and infographics
- Gulliver | Business travel
- Johnson | Language
- Lexington's notebook | American politics
- Newsbook | News analysis
- Prospero | Books, arts and culture
- Pomegranate | The Middle East
- Schumpeter | Business and management
- The Economist explains | Questions answered daily
Products & events
Advertisement
Readers' comments
The Economist welcomes your views. Please stay on topic and be respectful of other readers. Review our comments policy.
Sort:
If excess holdings are headed into with low interest rate holdings well, at least those are a little more inelastic to regulatory shenanigans. Sort of like capital gain realizations, ‘the rich’ are wealthy for a reason. Regardless, forcing people to assume investment risk with revenue over $X after Fannie Mae is pretty awful.
Must be because the people who elected this retard didn’t actually lose anything a few years ago. I took a 70 percent hit for having faith in the markets and not dumping out, because I know that if everyone withdrew from the market it would have caused free fall. Maybe if transfer payments suffered commensurate abuse there would have been a regime change.
Get your fiscally irresponsible hands out of my retirement account.
https://www.facebook.com/pages/SAVELAIKI/291694860960554?fref=ts
We are an advertising holding with companies in Canada and Ukraine.
One of our companies has been banking with LAIKI (Cyprus Popular Bank) and we have had current accounts with the bank. This morning we were notified by our bank that our CURRENT accounts have been also frozen and will be subject to a haircut.
Our opinion is that there is a robbery underway because the general understanding and the deal done with Eurogroup clearly specifies DEPOSIT accounts to be levied.
It is hard to understand how Cyprus authorities can steal people's money form Deposit accounts but it can be somehow explained: you trust your bank, you sign deposit agreement, you risk, you loose. But stealing form current businesses that are running current accounts is something different – this will bankrupt many companies that were JUST banking with LAIKI or BOC.
90% of the money on current accounts belong ot our clients and were heading to our suppliers so we are facing lawsuits and further bankruptcy because of this stealing.
On top of this there is no decent and proper explanation from Cyprus authorities or banks about what is going on. And there is growing suspicion that they might just steal everything on the basis that they have already lost their customers in the banking sector.
We would like to ask you to take this information public and share it with European society and other companies that have suffered from RELIABLE CYPRUS BANKING.
To contact: chaban.ira@m2f.ca
Tragically, I think that the future of Cyprus is just the tip of the iceberg. It must be expected that Brazil Russia India China and South Africa who are now huddling in Durban, must be discussing whether or not such large deposits that they are holding in German, Dutch, French, and other eurozone 'global' banks are going to be safe from the predatory grab of Mrs Merkel's thieving henchmen. Best advice would be to play safe and withdraw gradually but deliberately over a number of months. The eurozone is now set to die from lack of oxygen, that element being the trust of foreign depositors. No one in their right mind will keep their savings with any eurozone bank ever again.
Cyprus is not bankrupt. Its banks have assets of €120 billion. Cyprus is facing a bank run caused by the ineptitude of eurogoup politicians. They believed Dr. Schauble, a lawyer by training, that Cyprus was not systemic and that they could have a party at the bank depositors expense on the pretext that they were Russian. They thought it was a legal question. This is what happens when lawyers are allowed to meddle with economics. If Cyprus is not systemic, why are you all people still talking about it? Most of you did not even know what Cyprus was before this great stupidity! An initial minor €17 billion issue was lead to balloon to €50 billion and who knows where it is heading. I wish I could see the data how much is costing the ECB to support the euro these days. This is what happens when blockheads want to run the world!
http://economcy.blogspot.com/
i find reading better than looking. Videos make you wait for ads and speakers are not always clear. Please fewer videos and more text reporting. I can read. I like to READ my news.
I am an American and I don't get this. If I'm down on my luck, homeless, and hungry (Greece, Cyprus, Spain, etc) and a guy walks by and gives me $10 (Germany), I don't protest and demand he give me $20 instead. I SAY THANK YOU !!
Hard to understand indeed but in fact the Southerners seem to have a different way of thinking and a different philosophy.
So quite another good reason why the Southern countries should never have been able to join the EU and Euro-currency.
But I think the Northern countries never again will repeat this huge mistake.
The EU is a good idea, but hard to pull off. Cyprus is one of the bumps along the way. A difficult journey but a reasonable solution is emerging. The savers over 100K should pay the required match. These deposits are not protected by contract. Everyone pays a price and there are no big winners or losers. Name calling helps no one. The satisfaction is empty.
Being an absolute novice at economic matters, I would like to ask a question. If outsiders have shoveled money into Cypriot bank accounts where has that money gone? Has it been relent to prop up say flagging economies like Greece, in Greek bonds? Why does it matter that the banking industry is bigger than the GDP of Cyprus. As an industry isn't it in fact part of the GDP???
Puzzled?
It matters because the nation-state (currently, at least) funds the deposit guarantee. To put it in numbers:
Cyprus annual GDP: €17 bn or so
Amount that the troika debt sustainability analysis showed as the maximum burden for the cypriot state: €10 bn
Total deposits in all cypriot banks: €80 bn
Estimated amount of deposit insurance payable by the cypriot state, should the two big banks fail: €30 bn
As for where the money has gone: all over the place. But the majority of it (€41.7bn 2007-2011, apparently) has probably been reinvested in Russia.
Some background:
http://krugman.blogs.nytimes.com/2013/03/20/round-trips-to-cyprus/
Thank you ballymichael - most interesting.
The money was used to buy Greek government bonds. And other sovereign debt. With the prices of those bonds in rapid decline, the banks are in big trouble. Not only in Cyprus, but throughout Europe.
I have no idea why the Economist is not saying why. I guess they must love big, corrupt, socialist governments as much as the next Euro zone leader.
The answer is to stop buying socialist government debt, but its too late for that. Now, the rest of Europe is beginning to creak.
GM
If what Cyprus did with its banking is against the Eurozone rules, then why did the Eurozone allow it to go on? And if it is *not* against the rules, then why is the Eurozone treating it as an exception now that it has crashed and burned?
.
If you don’t enforce rules that are being broken in plain sight, then that is an implicit condoning of the practices that are against the rules. To come along later, after something has gone wrong, and dump the blame on the rule breaker, is to be blind to your complicity in the wrong-doing.
.
However you look at it then, the Eurozone was complicit in this Cypriot mess, and so it should clean it up properly. *And* Brussels should explain to the taxpayers who are bailing this mess out, who exactly in the bureaucracy messed up, what penalty they are going to face, and how such laxity will be prevented in the future.
.
Every time one turns around in this Eurozone mess, somebody has broken the rules while everyone looks the other way, and then the consequences avalanche down and drown the taxpayer. When are we going to get *accountability* for this sort of egregious incompetence that is tearing nations apart and destroying the livelihood and prospects of a generation? When are these high-living, pompous but incompetent bureaucrats going to be sitting in a prison cell? If the past is any indication, the answer is *never*. Yet democracy is supposed to be about *accountability*. That there is none here, tells the bigger story about the Eurozone mess.
"If what Cyprus did with its banking is against the Eurozone rules, then why did the Eurozone allow it to go on?"
a) "Germany tries to enforce common standards, it's aggressive!"
b) "Germany has not enforced common standards in the past, we have to blame Germany!"
Answer: The EU is not a federalized. The countries are responsible in the first line - so if anything is wrong, blame the respective country first.
"And if it is *not* against the rules, then why is the Eurozone treating it as an exception now that it has crashed and burned?"
It was unbearable for tax payers to bail out shady billionaires. The eurogroup therefore said they would only provide a part of the money needed, the rest was to be paid by a levy on high deposits. The President of Cyprus wanted a lower levy, which then had to be placed on more people, including those below the magic 100,000. That failed - understandably - in the parliament. Cyprus then stopped talking with the EU and begged Russia for money, resisting to eurogroup calls. Turned out that Russia is not helping them, so they wasted days for nothing and then came back to the eurogroup with weird proposals like that "solidarity fund".
When the first bill failed in the parliament, you could have said that 50% is the fault of the eurogroup and 50% is the fault of the Cypriotic President. Now it's 90% the fault of Cyprus - they decided to dance on the nose of the people who actually offered them money while their country was burning.
The situation in Cyprus is special because Portugal, for example, does not have an oversized banking sector with shady foreign money.
"Yet democracy is supposed to be about *accountability*."
The gov't of Cyprus was elected and behaves like a nasty child, even sacrificing pensions for mafia money. The others are accountable to their national electorates and you cannot demand that those taxpayers save a failed and dubious business model.
Democracy is working quite well, it's just democracy vs. democracy. If the EU WOULD be a dictatorship, the dictator would just have used northern money to bail out Cyprus and the European media would have been ordered to be quiet.
Public elections of this or that official are not sufficient grounds to consider a state as being democratic. What underlies democracy is the notion that the People are *Sovereign*. That is, the People ultimately rule. And an important aspect of that rule is that the People can hold officials accountable for what they do. In modern democracies, the People generally delegate their sovereignty to elected officials to make laws on their behalf, and being able to vote officials out of office is one aspect of that official being accountable to the public.
.
However, because the People are Sovereign, public officials *also* have the fiduciary responsibility to act in the best interests of the People, and if they do not, then they can be brought to account beyond just voting them out of office. The Eurozone crisis is an example of where public officials have created a system that has proved ruinous to the general population, both in terms of design and in terms of execution. As such, the officials responsible need to be brought to account for failing in their fiduciary duty.
But if public officials who fail egregiously in their public duties are *not* brought to account, as is apparently the case in Europe, then those public officials can ignore any supposed fiduciary responsibility to the People with impunity, and so they have declared themselves to be *above* the People. That is, they have declared *themselves* Sovereign. That means that the People in Europe are *not* Sovereign, and thus that a democracy does not obtain there.
Here is an end of Cyprus' troubles. Abolish Taxation and calm will return.
Proof:
The costs of borrowing for a nation to fund public expenditures, if it borrows solely from its resident citizens and in the nation’s currency, is nil.
Why? Because if, in adding a financial debt to a community, one adds an equivalent financial asset, the aggregate finances of the community will not in any way be altered. This is simple reasoning confirmed by
simple arithmetic.
The community is the source of the government’s funds. The government taxes the community to pay for public services provided by the government.
Cost of public services is $10 million.
Scenario 1: The government taxes $10 million.
Community finances: minus $10 million from community bank accounts for government expenditures.
No community government debt, and no community government IOU.
Scenario 2: The government borrows $10 million from solely community lenders at a certain interest rate.
Community finances: minus $10 million from community bank accounts for government expenditures.
Community government debt: $10 million;
Community government bond: $10 million.
At x years in the future: the asset held by the community (lenders) will be $10 million + y interest. The deferred liability claimed against the community (taxpayers) will be $10 million + y interest.
The value of all community government debts when combined with all community government IOUs or bonds is zero for the community.
Theoretically, at some point in the future, the government could collect taxes in the amount of all debts and interest from the community, i.e. the taxpayers, and simply hand the collected funds right back to the community, i.e. its lenders, erasing the acquired
community government debts and assets.
It is the same $0 combined worth whether the community pays its taxes immediately or never pays them at all.
If a community borrows from its own citizens to fund worthy public expenditures rather than taxes those citizens, it will not alter the aggregate finances of the community or the wealth of the community. Adding a financial debt and an equivalent financial asset to a
community will cause the elimination of both when summed.
Whatever financial benefit Taxation possesses is nullified by the fact that borrowing instead of Taxation places no greater financial burden on the community.
However, the costs of Taxation are immense. By ridding the nation of Taxation and instituting borrowing to fund public expenditures, the nation will shed all those costs of Taxation for the negligible fee of borrowing in the financial markets and the administration of public debt.
"Abolish Taxation and calm will return."
Stopped reading there. Average anarcho-libertarian make-believe. Go to Somalia and check how a country without taxes looks like.
PS: Issue in the eurozone was that some countries opted to be low-taxed to attract companies (Ireland, Cyprus) - they went bust. Go to Scandinavia and check high taxes combined with high-living standards.
Hello Gotsomemittens,
A country of no taxation is not a country with no government expenditure. You should recognize the difference.
Scandinavia has an abundance of resources split among a rather negligible few. When the resources run out, so shall the socialist nation.
GM
"... whether the country faces financial ruin." (.com duo)
Umm ... wake up and smell the ouzo, comrades - the place is already ruined.
It's not Cypriots who have to "buckle", boys - they've already proven there's nothing too degrading to be beneath them. It's some other chump who has to who has to be conned into putting up the last 7-billion needed to paper this thing over. Good luck and good hunting.
If Cyprus leaves and falls to pieces that's sad but not really a problem for the EZ. If it leaves and is seen to be better off for having done so, that's got really bad implications for the Zone, don't ya' see?
"If it leaves and is seen to be better off for having done so, that's got really bad implications for the Zone, don't ya' see?"
"What if...?" Good question, but you are comparing a country with 800,000 people and a gas field to a country like Italy with 60 million people and a bust south. I don't think that Cyprus could act as example. Too small, too special.
And if Cyprus leaves the EZ they will either default or massively devaluate. Their banks are bust and need to be saved via the EZ. If they leave, they will lose everything and going to be a 3rd world country. (Nigeria has resources, too...) I expect Russia would then step in, but to 100% Russian conditions. After the levy discussion no-one will ever "invest" in their banks, so their business model is finished.
Have no issue to see them leave, just to say that.
"They've already proven there's nothing too degrading to be beneath them"
They are insisting that they are proud people and not Germany's slaves. Their behaviour is seen as a just rebellion against the horrible offer of 10 billion euros on quite a lot of sites.
You see, Europe is truly united. For a German, there is nothing more spooky than giving Southern Europe money; and for the people there, there is nothing more spooky than accepting German money. Better default or ask Gazprom for help. And never forget the mandatory mustache.
If Cyprus leaves they would do especially the biggest favour to Germany they ever could do.
Nobody in Germany will stop Cyprus in its decisions.
So there is no need burning German flags and threatening German soldiers because the Germans are willing to withdraw from Cyprus whenever they like and tell that the Germans as well as the German patriots will get lost much quicker from Turkey as the Turkish can say.:)
Germans are polite and do not want to embarrass anybody in Europe with their presence if they are unwelcome.
The rest of the Europeans only need to say that the Germans should get lost - and probably they will do it instantly.
Being in countries where Germans are obviously unwelcome and treated as enemies is no more a business of Germany.
We just leave if you like.
You only need to tell us:)
You Germans are getting a taste of what it's like to be American - nobody else has the 'muscle' to handle problems, and all the Lilliputians are ever so resentful of those few who do - none more so than French, but Greeks and their Cypriot-drones are close behind.
You forget one important difference:
America was welcome for some time:)
Germany never has been welcome in any Western country since more than 70 years and it has been the strictest basics in all West European countries producing the utmost kind of hatred and hostility against Germany and therefore Germany is the most hated country in Western Europe by tradition and so it was easy to foresee how the Greeks, Italians, French and Cypriots will react when they feel in trouble.
So Germany has been used since ever how it feels being hated.
So indeed nothing new or every German.
Generations of Europeans have been educated to hate the Germans and now if they think the Germans could be useful to them they hate them much more.
So an increasing part of the German population is just fed up being blamed for the incompetence of foreign governments by people who were voting for their own inept, corrupt and incompetent politicians.
I think these developments make it clear to anybody in Germany that the European project has completely failed.
The German flags which are burned each day in Greece and Cyprus
give the best proof of the real attitude of the Greeks and Cypriots.
And the daily anti-German rants of Mr. Hollande and his whole government are backing the Greeks and Cypriots in their opinion.
"Friends" of this type who are burning their flags, Germans can find anywhere.
I think it is only a matter of time until the EU will disband or until the rest of the EU will kick out Germany of the EU and Euro:)
This would be even the best solution and it looks like Germany has a very good chance getting kicked out as Mr. Hollande and the rest of the EU are fighting for this goal.
Why don't you Huns just 'get smart' - and get the hell out of the EZ? You don't belong with them, and the others can't leave - you can. Do it.
I agree with your advice and fortunately we have a quite effective movement which is executing your and my opinion.
Perhaps they can bring a change after the elections in September.
25 % of theGerman voters are supporting this any-European movement.
And you are right, leaving the EU and the Euro and becoming neutral would make Germany indeed much smarter.
I hope it will happen.
You don't need to leave the EU - IMO that would be a bad idea just now. You do need to GTFO of the EZ - right now.
So do I. The sooner you get out the better for us the Europeans. But in case you want stay in Europe to continue benefitting from the open market the europeans offer you, the preconditions will be Germany to split in small statelets and you will be accountable to EU democratic institutions. In this way you will receive what you are truly worth and that you believe that you are worthy.