Counterparties: Insane in the Mediterrain

March 18, 2013

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Innocent Cypriots, arguably guilty Russians and possibly clueless British expats may be about to have their bank deposits taxed (read: partially taken) to recapitalize Cyprus’s struggling banks.

The island of just under a million, whose central bank governor is actually named Panicos, has closed its banks until Thursday in order to stop its citizens from, well, panicking. Less than a month ago, Cyprus’s newly elected president vowed none of this would be spoken of, let alone happen: “Such an issue isn’t even up for discussion.”

It’s now a reality. Still, the Cyprus bail-in deal looks marginally less crazy if you squint in a particular wonky way. As Lex notes, the cornerstone of modern banking — that deposits are untouchable and risk free — was never really true. This risk-free deposit notion was particularly dubious, Simon Nixon suggests, for a country that’s “one of the most leveraged in the world,” with banking assets eight times the size of its GDP. “Cyprus is not in a position to rule out any ideas, even stupid ones,” Nixon wrote earlier this month. Joseph Cotterill calls the plan, whose official title is the “upfront one-off stability levy”, a “stupid idea whose time has come”.

There has been lots of talk that Cyprus situation is a dangerous precedent. Citi’s Willem Buiter thinks it’s a good precedent that we’ll see repeated many times in the next few years. His logic: bank bail-ins, in which depositors, not bondholders, suffer losses, are the quickest route to restructuring Europe’s debt. Buiter also argues that taxing ordinary folks’ savings accounts is less politically offensive than taxpayer-funded bailouts. Germany, for its part, appears to hate idea of taxing ordinary savers — though Germany presumably hates the idea of paying for the full Cyprus bailout even more.

Jim O’Neill of Goldman Sachs wonders “whether this means investors can trust European politicians at all.” Judging by the the latest official statement on Cyprus, it may be impossible to even understand Europe’s politicians. (Somehow, the Eurogroup has contrived to say that it “reaffirms the importance of fully guaranteeing deposits below €100,000”, while at the same time agreeing that Cyprus should expropriate a significant chunk of those very deposits.)

Matt Levine sees upside in Europe’s consistent inconsistency. The European crisis, he writes, is  essentially “a series of rescues that inflicts pain in new and surprising ways each time sends ambiguous messages to the effect of ‘everything might be screwed but you can’t really know that you’ll be the guy who’s screwed.’”

There is some late word that some senior bank debt holders may take losses, not that they hold much debt in the first place. But, don’t worry, if Europe can’t save Cyprus, maybe a Russian state-owned energy giant can. Gazprom has reportedly offered to bail out the country’s financial sector in exchange for rights to its natural gas. — Ryan McCarthy

 On to today’s links:

EU Mess
Cyprus is now trying to make its tax on bank depositors slightly less unfair – Reuters
“F*cking Europe again” – Josh Brown

There are now 600 more phone-hacking allegations against Murdoch’s News of the World – Guardian

Top low-income students aren’t even bothering to apply to elite colleges – NYT

Billionaire Whimsy
Twitter founder Jack Dorsey wants to be mayor of New York City – Vanity Fair
“You’re very pretty and you should enjoy it,” Bloomberg told her. “It’s something you’ll look back on all your life.”” – Gawker

The Fed
The Fed isn’t going to be unwinding anything any time soon – Jon Hilsenrath
The labor market is improving, but not enough for the Fed to stop easing – Binyamin Appelbaum

HSBC has “no fantastical new strategy”, so it’s just going to fire up to 5,000 people – FT

Financial Arcana
Programming a computer to trade securities with itself is probably illegal – WSJ
“If you think that running banks with so little loss-absorbing equity is crazy, you are right” – Martin Wolf

Revolving Door
Who better to regulate China’s securities market than the chairman of the Bank of China? – Bloomberg
How Promontory Financial became a shadow banking regulator – American Banker

At Last
Private equity could be coming to your 401(k) – Dan Primack

Right On
State attorneys general want the White House to fire Ed DeMarco – NYT

Local TV news is 40% sports, weather, and traffic – AP

Wanted: People willing to die on Mars – CBC

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