Results for “cyprus” 66 found
Will Cyprus end up with free banking and a parallel currency (for a while)?
The lack of internal convertibility of euro notes (through the limitations on cash withdrawals and on electronic payments) will, if they persist for more than a few weeks, likely lead to a search for alternative media of exchange for internal transactions. IOUs of large, respected enterprises could for example be countersigned and start to circulate more widely as media of exchange and means of payment. This was the case, for instance, during the 1970 bank strike in Ireland, uncleared cheques were made negotiable (like bills of exchange) and pubs and shops served as credit verifiers. These could later develop into more full-fledged parallel currencies, if internal euro liquidity in Cyprus remains very scarce.
Sentences about household wealth (Cyprus fact of the day)
On average, the wealthiest households are in Luxembourg, but Cyprus, which last month came close to a complete financial meltdown, was second.
That is from the eurozone. And this:
Median net wealth is the lowest in the bloc’s paymaster, Germany (51,400 euros), less than a third of that in Italy (173,500 euros) or Spain (182,700 euros), due to the relatively low level of home ownership in Germany.
As I’ve said many times in the past, much about the future will depend on whether wealth taxation turns out to be politically feasible to a greater degree than at present.
It can’t happen here?: Cyprus and money market funds
Cyprus of course differs from the U.S. in many significant ways, and furthermore I recoil at the notion that America is the “next Greece,” or who otherwise make inappropriate international comparisons.
Still, what if we try to look for the closest parallel possible? What is the closest the United States could come to a Cyprus-like situation?
The all-too-vulnerable arm of our U.S. financial system is money market funds. That is about $2.7 trillion on the books, much of it driven by regulatory arbitrage.
Ten percent of the assets of money market funds are supposed to be liquid. Yet the average capital cushion is quite low, as the industry resists attempts to impose a legal one to three percent buffer (here is one proposal for capital cushions and a class A/class B structure). Post Dodd-Frank it is much harder, arguably impossible, for the Fed to bail out money market funds, as was done in 2008. So our control over our own currency may not pay off on this issue.
There are repeated and largely unheeded warnings of money market funds as a source of systemic risk. Some of the common proposals for money market funds involve “standby liquidity fees” and “temporary redemption gates.” Sound familiar? Of course losses on these assets could not approach the Cyprus level but still we could have a disastrous run.
I am not suggesting there is an easy way to solve this problem, or that a crisis will happen anytime very soon. I am simply noting that, along at least one dimension, we are more vulnerable than is commonly realized. We are just a little more like Cyprus than one might think.
Should Cyprus leave the euro?
Krugman argued yes and I am inclined to agree. From fortheisland, here is a case for no:
All of Cyprus’ physical inputs are imported. Everything; from feed to steel and from fertilizers to computers. Raw materials are imported. Intermediary goods are imported. Capital goods also imported.
This is an island economy with a GDP smaller than Vermont and a population 200.000 short of a million. So, when I say, “imported”, I mean “close to 100%”. While the primary surplus that Krugman mentions is a 2013 projection unlikely to materialize (again), the trade deficit spikes with GDP growth and declines rapidly with recessions. This is not unusual, and Krugman would say that it reflects FDI flows as well. But a closer look reflects the extreme dependence on imported factors of production.
This changes the entire picture and makes one wonder about the level of inflation under a new currency, as well of the impact that this would have. All of the obvious concerns about a nascent currency borne out of crisis are suddenly multiplied into a nightmare.
In fact, as if all of this weren’t enough, note that Cyprus is also 100% dependent on energy imports. Gas prices have been rising at a dizzying pace in the last two years, although from a lower starting point than in most other countries. Electricity is another issue –prices accurately reflect how profoundly reckless Cyprus has been in managing its infrastructure: We managed to blow up our main electricity plant by storing munitions outdoors, nearby. Ever been in Cyprus in the Summer?
Krugman notes that Cyprus has two main exports- tourism and banking services. And, he is right in saying that banking was wiped out overnight, at least as export. On the other hand, the main question about tourism isn’t so much whether a devaluation will help the industry; of course it will.
The question, though, is more basic than that: After the glorious 1980s, can the industry be revived? One wonders, after the sun-sea-and-sex tourist wave 30 years ago, what the prospects are for Cypriot tourism. With a few bright and special exceptions, the industry has been in a steady wane since the early 1990s.
Barkley Rosser makes some similar points. If I’m not convinced, it’s because I don’t see how the current regime of “Cypriot euro with capital controls” will boost either tourism or enable significant imports. Nonetheless, at the very least, you can take these paragraphs as a further indication of just how much trouble Cyprus is in.
For the pointer I thank Dries de Smet.
What to look for in the Cyprus deal
1. Output on the island could easily decline by 25% or more, and I don’t think that will involve much subsequent mean-reversion. There will be a deflationary shock, an uncertainty shock, an “austerity shock,” a credit contraction shock, and a few other negative shocks as well. The Cypriot government will not be fiscally well situated to support the safety net or automatic stabilizers.
2. It’s never a good sign when a deal is structured so that no one has to vote on it. (Correction: various European legislatures may be voting on it, but no one in Cyprus.)
3. The deal itself still doesn’t cough up all the money, but rather relies on subsequent tax increases and privatizations to come up with at least another billion euros. Believe it or not, the numbers don’t add up.
4. “This was not a good weekend for Russian billionaires.”
5. I wonder if the two main banks even have the money they claim they do. Who tells the truth going into a deal like this?
6. Capital controls in Iceland are expected to remain in place at least through 2015, which would make seven years (and counting). That is a better run country with lots of fish and aluminum smelting. You can expect the same or longer from Cyprus, and that’s assuming this deal can last that long, which I doubt.
7. ELA assistance is now, all the more obviously, contingent rather than certain. Who would keep their money in the “good bank” which is being folded into Bank of Cyprus? Why would anyone do this? Given a shrinking economy, surely this bank cannot afford to pay very much to retain deposits, since rates of return on domestic assets will be negative and capital controls will limit or prevent investments in foreign assets.
8. The capital controls will have to be strict. What will the price of a Cypriot euro be, relative to a German euro? 50%? I call this Cyprus leaving the euro but keeping the word “euro” to save face. And yet they fail to reap most of the advantages of leaving the euro, such as having an independent monetary policy.
9. Given that the nation is uh…corrupt, and the account holders are very often money launderers (duh), how effectively will those capital controls be enforced? Won’t the banks end up drained, one way or another? Of course remittances will need to be sent abroad to purchase “essential services,” right? Who picks up the tab for the total collapse of all the banks? Won’t the euros that are left depart Cyprus altogether?
10. Next up may be Slovenia…
Addendum: A summary of the deal is here. And here are some very good comments. Here are more details on capital controls.
NGDP in Cyprus
It seems to be falling:
Luscious strawberries – €3.50 a box on Monday – are now €1.45. The prices of other perishables have also plummeted. “People are buying only what they needed.”
No one knows how telephone, water and electricity bills paid monthly on instructions to banks will be settled. No one knows when and if they will be paid their salaries.
Here is more.
“Cyprus needs to lay its hands on one-third of its gdp by Monday”
From Kevin Drum, that is a very good blog post title.
It seems, by the way, that the basic Cypriot strategy is to pile together a load of illiquid and indeed even imaginary assets into a “fund,” claim they have met the target, and dare the ECB to cut them off on Monday.
I wonder what is the nominal rate of interest on Cypriot street loans?
What does a Cyprus deal look like?
Felix Salmon considers some possible scenarios, some of which involve the EU giving ground. (Sadly the “sell northern Cyprus” option won’t be seriously debated.) Daniel Davies offers numerous complex scenarios, some of which end badly. Zero Hedge offers options.
How much is Cyprus per capita gdp lower if the country has no future as a financial center? That is likely the case anyway.
If this is one of those waiting/bargaining games, for whom does the situation worsen most as time passes? For how long can the Cypriot banks stay closed? Can they ever really reopen again without a major bailout? Germany seems to hold most of the cards. Maybe Cyprus wins the stare-down game only if the costs of Cypriot collapse — to the Germans — appear higher as time passes. That’s a difficult scenario to foresee, since it seems that only by having a Cypriot collapse do we get a much better sense of what those costs would be.
The broader problem of course is that Italy, Spain, and Portugal all have their eyes on any possible renegotiations. It is very costly for the EU to give serious ground because then further and much larger demands come out of the woodwork. Italian voters and political parties are encouraged too and I don’t have to tell you in which direction.
Cyprus concern of the day
How will the price-specie flow mechanism operate in Cyprus?
If you imagine Cyprus as a closed system, the levy is deflationary. Prices will fall, and for the purposes of argument, let’s say they fall ten percent (just a number).
That deflation likely will crush the economy, but many individuals will find the real value of their bank balance intact, at least when it comes to spending in the home market. In this regard much of the incidence of the levy is quite indirect. The most obvious effect is that purchasing power command over imports falls immediately.
From the first-order static effects alone, it is not clear that the chosen program hurts the poor more than would exchange rate depreciation under a floating rate system. That too lowers the command of bank balances over imports.
To the extent Cypriot bank deposits are proportional to wealth (a debatable proposition, and at sufficiently high levels of wealth the surplus may all go abroad), the initial levy is actually progressive in its impact, at least relative to taxes on income. Wealth inequality is usually much more pronounced than is income inequality, so a linear tax on a proxy for wealth will be more progressive, perhaps considerably more progressive.
Many of the most regressive effects will come from the second-order economic devastation, unemployment, and so on.
Of course Cyprus is not a closed system. Still, I would think in the short run and probably in the medium run too, foreign money and foreign labor and tourists are now somewhat afraid to enter Cyprus, thus there will be a persistence of the deflation. The deflation should be strongest on the side of the non-tradeables. Exporters are likely to do better than workers in the service sectors. The ongoing negative income effects, from the secondary consequences of the levy, will muddy predictions.
Since the levy has been a surprise, I do not see a “Ricardian” argument that the value of the bailout offsets the deflationary pressures. The bailout had been expected anyway, plus much of its value is reaped by parties other than Cypriot consumers. Nonetheless the “transfer” is running in two directions here, and not just one.
There are many tricks and traps in the analysis, and numerous other angles to consider. These issues were debated a good deal in the 1920s (see Jacob Viner, the section on the transfer problem), and also by Mill and Torrens in the 19th century.
Cyprus update
These points are from scattered but I think reliable tweets, of course stay tuned for updates. The Cypriot Parliament wants more time to debate, so they will not be rubber-stamping the depositor haircut measure today, as had originally been the plan. In theory they are now voting Monday, although presumably that stands in doubt too. The German Parliament would not have passed the bailout at all, without the depositor haircut or something similar. This stance could cause other eurozone nations to reevaluate their future policies and also current bargaining strategies. The EU will not rule out “deposit assessments” for future bailouts. As I’ve written, the smooth running of this gambit would not be good news either but would lead only to a raising of the stakes with a replay of the basic game. Barclays thinks that significant bank runs elsewhere are unlikely; in my view the longer-run ramifications most likely operate through changing the incentives of other eurozone member governments, which now can expect a lower share of the surplus from any bargain. Morgan Stanley is less optimistic. Note that Cyprus had met the Maastricht hurdle before the crisis.
The broadest lesson of them all concerns the dangers of framing when you play the same game over and over again (attn: U.S. fiscal policymakers). German policymakers/voters have felt backed into a corner by repeated bailouts and that is when stupid choices start being made. This could go down as a blunder of historic proportions. It also shows that EU governance already is a disaster and profoundly anti-democratic in the worst sense of that term. A second general lesson is that modern politics cannot sustain wealth taxes very well, unless those taxes have a very long history (property taxes) or are extremely non-transparent, such as the lack of inflation indexing on U.S. capital gains levies; the intolerability of the deposit confiscation is closely related to the issues surrounding the stickiness of nominal wages.
Further update: Cypriot bank holiday further extended through Tuesday…And here are thoughts from Matt Yglesias.
A few Cyprus questions
Week-to-week, holiday-adjusted, how much will Cyprus gdp go down? Is it the case, as it seems so far, that the small (and large) depositors take a whack and the senior credit holders are spared? Does that set a precedent for future bail-ins?
How much nicer will the other EU countries be to Merkel now? To her face? Behind her back? How many more votes does she win in September?
What counts as “good news” or “bad news” coming out of Cyprus? Let’s say things go badly. That could cause market panic and contagion and of course misery among the Cypriots (and Russian oligarchs). Depositors might pull out of Greek and Spanish banks to a much greater extent.
Alternatively, let’s say the economic transition from the “Cyprus deposit tax” is relatively smooth and orderly. Will not some other countries start wondering whether their transition out of the euro also would be relatively smooth and orderly? Keep in mind that, as it stands, Cyprus is suffering deflationary effects, bank closure costs, capital controls, yet without getting the redenomination benefits and independent monetary policy benefits of leaving the euro. If that appears “OK” (do note however that Cyprus is spared the burden of creating a new currency), won’t the notion that leaving the euro is practical after all start to spread? Which could cause bigger bank runs than if the Cypriot transition goes badly?
Can good news end up being bad news? Or vice versa? What would Jeff Ely say? What would Garo Yepremian say?
Addendum: There is much more of interest here. And a good critique from Schumpeter here.
The Cyprus surprise
Announced Friday night of course:
Final details being inked on
#Cyprus bailout as we speak. Most significant measure: 9.9% levy on bank deposits over €100,000, says source.
That is from Peter Siegel. (Addendum: and here is more information.) I believe that is not the full deal (do depositors get some kind of equity claim?) and there is more information to come. Elsewhere, all four games were drawn in the Candidates Match for the right to play against Anand for the world chess championship. It will be interesting to see who makes the next move.
p.s. I don’t like to give investment advice (other than “diversify” and “buy and hold”), but if you have any deposits in Cyprus banks, I would recommend asking yourself whether you are sure that this is the final haircut or step one in a series.
The Cyprus bailout
No one wants to bail out Cyprus because it is “Greece with dodgy banks,” one third Russian depositors, a tax haven, corrupt, and the banking system is measured at eight times the size of the real economy. Even a pro-bailout politician may not wish to soil the name of bailouts by handling this case. The Germans are balking.
But if depositors take losses in Cyprus, what kind of precedent does this set?
One risky scenario is that it sets off a run on some of the weaker eurozone banks.
A better case scenario is that the market distinguishes Cyprus from the other cases (all of them? some of them?) in the eurozone and European Union. But that too involves a trick. Let’s say the market can distinguish Cyprus from Spain. Can the market also distinguish Greece from Spain? Is it good to break the expectation of “we’re all in this together,” even when doing so is justified?
A systemically costless fail of credit obligations in Cyprus is itself risky. It leads people to start wondering what else might be a systemically costless fail and testing that boundary. (“If we let Greece go, maybe they’ll know we are still committed to Spain…”) Which means a Cyprus fail might be systemically costly in the first place.
Developing…
Cyprus sentences to ponder
Now many on this tiny island nation, whose banks and government are facing economic insolvency, are hoping for financial salvation from Russia rather than Germany and the European Union.
“I would much rather be saved by Moscow,” said Elena Tsolia, 30, an attendant at the department store Debenhams, where Russian shoppers snap up bottles of Dior and Chanel perfume. “We are a small island and we don’t want to be owned by Germany.”
Here is more.