Cyprus’s bad haircut day

By Felix Salmon
March 19, 2013
Cyprus has said όχι to the idea of taxing deposits: good for them.

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Cyprus has said όχι to the idea of taxing deposits: good for them. And the parliament did so decisively, as well: 36 “no” votes, 19 abstentions, and zero “yes” votes. Even the president, who initially said that Cyprus had no choice but to say yes, was already moving on to Plan B before the vote was even taken, although no one yet is entirely clear what exactly Plan B entails.

One very big hint comes from the fact that the Cypriot finance minister, Michael Sarris, is in Moscow today (where he’s denying via text message reports that he has resigned). Russia accounts for the lion’s share of Cyprus’s uninsured deposits, and president Vladimir Putin has said that even a 9.9% tax on those deposits would be “unjust, unprofessional and dangerous”. Given that the only way that Cypriot president Nicos Anastasiades kept the tax to below 10% was by taxing the insured depositors at an unacceptable 6.75%, there is obviously a lot of appetite within Russia to help Cyprus find a way out of this mess.

One way to do that would be for Gazprom, the Russian energy giant, to spend a few billion euros on rights to Cyprus’s natural gas resources; another would be for the Russians to buy a bank or two, leaving Cyprus to raid local pension schemes for extra liquidity until natural-gas revenues come on stream. Or, of course, there’s always the Buchheit-Gulati option. The thing they all have in common is the idea that they’re basically trying to provide a bridge to the point at which Cyprus starts getting lots of money from its natural gas. Of course, the gas might not exist at all, or it might take a decade before it actually starts seeing revenues, so there’s risk here. But the point is that in Cyprus, uniquely, kicking the can down the road actually makes sense: if you get far enough down the road, there’s a real chance that everybody could end up being paid off in full, or making a substantial profit.

It’s not clear that Greece’s parliament will grok the distinction, however, which makes this particular game very dangerous for the Eurogroup. For the time being, the EU and IMF — and, crucially, the ECB — are keeping the lines open to Nicosia: the idea seems to be that so long as they don’t need to cough up any more than the €10 billion they’ve already agreed to, they’ll let Cyprus find the balance of the needed cash any way it wants. But here’s the rub: if Cyprus gets to reject the Troika and largely set its own terms, then everybody else (read: the Greek parliament) will want to be able to do that as well. And no one in Europe’s centers of power really wants the Mediterranean periphery getting too uppity.

The best-case scenario here is that the vote by the Cypriot parliament is a “phoney war”, in Dan Davies’s words: “A vote on which the government abstains is like opening with two hearts at bridge. It’s a bidding convention, not a serious plan.” Cyprus and the EU will go back for another round of negotiations, with Cyprus trying to front that it has a great offer from the Russians, and the two sides will come to a compromise which doesn’t involve taxing insured depositors. The banks will then reopen, the Russians will pull a large chunk of their remaining money out of the country, the ECB will provide all the liquidity that the Cypriot banks need, and Cyprus will muddle through in an austere kind of way.

The worst-case scenario — call it #CypriOut — is that talks just break down entirely, with no plan acceptable to both the Eurogroup and the Cypriot parliament, while the Russians ultimately decide that they don’t want to throw good money after bad. In that event, Cyprus ends up with a chaotic default and devaluation — think Argentina 2002, only on an island which is already fractured along intractable ethnic lines.

The cost of CypriOut to the ECB and to Europe as a whole would be substantial, both in euros and in precedent. If you think that taxing deposits is a bad precedent, just wait until you see what happens when the world learns that a country can leave the eurozone after all. So a lot of people are going to spend a lot of effort trying to avoid it. And judging by recent European history, some last-minute deal will manage to get cobbled together somehow. But this whole situation is horribly messy — it reminds me of the Argentine political chaos in March 2001, a few months before the country finally defaulted.

The big problem here is that there’s no overarching strategy on the part of the EU. An interviewer from Greek TV asked me yesterday whether the agreement with Cyprus represented an important change in the Eurogroup’s attitude towards peripheral countries. I had to say that it didn’t, just because that would imply that the Eurogroup has an attitude towards peripheral countries, which can change. Instead, it’s all tactic and no strategy, and the tactic is a dreadful one: wait until the last possible minute, and then do whatever’s most politically expedient at the time. It’ll probably work, somehow, in Cyprus. But it won’t work forever.

9 comments

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Excellent article. Though I would give more credit to brave Cyprus standing against mighty Frau Merkel & Co. Looks like troika badly miscalculated the move. Better they backtrack from taxes on deposits and pretend that it was meant to be so. The EU will never be the same after this though. VIVA Cyprus!

Posted by Remote | Report as abusive

Concerning Cyprus natgas : isn’t ownership disputed by Turkey? Sounds like a hail mary pass.

Posted by JohnYard | Report as abusive

The tragedy of this whole mess for Cyprus is that they are still going to see a massive outflow from heir banking system in less than 48 hours. Does anyone really think the Russian ganstas or little old Cypriot grandmothers are just going to say “eh… the proposal to take my money got voted down so I’ll just leave it in there.”

Right… when the banks can’t handle requests for withdraws Thursday they will install withdrawal limits… which is the only thing which you could possibly do to make more people want to take their money out.

Little old ladys and rich old men in S

Posted by y2kurtus | Report as abusive

was suppose to end Little old ladys and rich old men in Spain, Ireland, Italy… will all be watching with interest.

Posted by y2kurtus | Report as abusive

Thanks for an informative post!

Posted by EconMav | Report as abusive

Is Davies one of these guys who likes to open 4-card preempts, or what? It is true that you don’t expect to buy the auction with 2 hearts, but the *whole point* is that you are quite happy to play there if the opponents let you.

So how is that like Cyprus again? The terms of the analogy are that Cyprus is hoping that Europe doesn’t bail them out, and that all the pressure is on Europe. OK, you agree with the second part, but Davies does not and neither of you agree with the first.

#dumbmetaphor

Posted by Greycap | Report as abusive

A good article Felix.
I don’t think it would be the end of the world for Cyprus to leave the euro but it might be very bad for the sustainability of that synthetic currency, the ghost of the Bundesmark, based on a sub-optimal currency area.
When one assesses the sovereign risk of a currency one first of all examines at the quality of economic management. Thus, the demonstrated low calibre of the IMF and Eurogroup leaders, mainly qualified as lawyers and accountants with little or no grasp of economic dynamics, does not bode well for the euro.
As long as the so-called Troika takes a punitive stance to towards the countries it is supposed to be helping to get back on track and muddles through a fuzzy version of what is at best an out-dated IMF model one should be concerned that perhaps the loonies have taken over the asylum.
Even the IMF Head has chosen to ignore, or fails to understand, a recent IMF staff study where by intelligently and professionally applying statistical and economic theory they suggest that severe austerity programs are self-defeating because the revealed negative multipliers involved are much more damaging than one might expect. The study explains why IMF country forecasts are so often very wrong a poor guide for decision makers. The Fund Head was no even aware of the summary of her staff’s findings in the September IMF Outlook booklet when asked about the results at a press conference in October.

Posted by Abbotson | Report as abusive

what y2kurtus said. I was there, in person as a depositor and investor, for the run on IndyMac bank in 2008. It wasn’t pretty, and that was with full FDIC insurance guaranteeing deposits 100%.

I feel entirely comfortable predicting a massive bank run on Thursday unless a plan that doesn’t haircut…sorry, “tax” small depositors, is in place before then.

Posted by Strych09 | Report as abusive

By Foster Gamble

I have been asked by various people to comment on this recent article in the mainstream financial magazine, Forbes: 1.6 Billion Rounds of Ammo for Homeland Security? It’s Time for a National Conversation.

I am happy to address the article because it brings up some useful perspectives for us all to inspect. I encourage you to read the Forbes article, if you haven’t already, before reading my analysis below. It will make a lot more sense that way!

As reported, the Department of Homeland Security (DHS) has an open purchase order for 1.6 billion rounds of ammunition, some for hollow-point rounds (forbidden by international law in war), and a large amount for specialized snipers. This would be enough to sustain a war in America for more than 20 years…less than 6 million rounds a month were used at the height of the Iraq war.

So, first there is the critical question:

“Why in the world would the US domestic security force need enough bullets to wage an Iraq-style war for 20 years?”

When the DHS was first caught buying these huge volumes of ammunition, the official excuse was that they were for “training exercises.” That didn’t hold up, because even the military doesn’t use very expensive, hugely destructive “hollow point” bullets for target practice.

So the next reason concocted was that the government was saving us, the taxpayers, money by “buying in bulk.” So as they are cutting back on teachers, roads and air-traffic controllers, they are spending outrageous amounts on bullets that would destroy the entire target for which they were supposedly to be used?

It’s scenarios like this that are awakening people to the dire need for critical thinking. The good news is that Forbes is a very mainstream publication and they are actually covering an event that is inexplicable without some sort of understanding of a much more far-reaching and systemic agenda for consolidating of control.

In the Forbes article, they only follow the money/motivation as far as the notion that “bureaucrats are running amok” with their irresponsible spending. They distance themselves from the only sentence that gets to the heart of the matter by writing that “scaling back” on such expenses would “somewhat defuse, by the government making itself less armed-to-the-teeth, the anxiety of those who mistrust the benevolence of the federales.”

So if the notion of covert planning of an illegal or immoral nature, i.e. – “conspiracy,” has seemed far fetched before, perhaps now would be a good time to reconsider.

It’s worth noting that it took Forbes eleven months — almost a year to catch on to — or be willing to — publish this news. Paul Watson, Alex Jones and the Infowars team have been covering it since last summer — through tracking government procurement bids — what used to be called “investigative reporting.” I was alerting people to these developments on my trips to Australia and Mexico in the fall.

The government rationalizations clearly don’t make any common sense, so in what context can we understand such actions? Is there a lens through which this is explainable? I believe these bullets are in preparation for domestic blowback that those perpetrating the agenda for domination and control anticipate is coming. If you’re living in the United States, that means these deadly bullets are being purchased by your military to use against you here on your home turf if you resist the plan that is being implemented. If that sounds hard to believe, let’s look at the evidence.

The IMF, the World Bank, Goldman Sachs and the so-called Washington consensus (the mega-banks and multi-national corporations operating through the US government and military) have already taken down Ecuador, Chile, Panama, Tanzania, Bolivia, Thailand, Japan, Russia, Iceland, Greece, Spain and other countries around the world with the sort of debt, austerity and assassination strategies described by John Perkins in “Confessions of an Economic Hitman.” In every country taken over this way, there was “blowback” — people resisting in the streets. This resistance is usually mislabeled with such terms as “insurgency” and “terrorism.” The perpetrators know it is always going to happen when they steal people’s resources and ruin their lives. This awakening and resistance is the same dynamic that is beginning to grow in America, as we experience the deterioration of our rights, our privacy, our paychecks, our retirement, the safety of our communities and the value of our currency. The demise of the US economy is a critical part of a documented plan to impose a one-world government that transcends national sovereignty and puts the entire planet under the thumb of the financial elite using the World Bank, the WTO, the UN and NATO as their fronts (see the movie, THRIVE, for more on this). The purchase of nearly two billion deadly bullets by an agency whose only jurisdiction is America is not a mistake; it is not random; it is not benevolent. It is a dangerous threat to us all.

The stock market has been artificially pumped up by the Federal Reserve printing presses (diluting the actual purchasing power of your dollars) in what they candy-coat with the name “Quantitative Easing.” And the precious metals markets, especially gold, appear to be artificially suppressed by covert manipulation. Both of these strategies fool many people into thinking there is a real recovery going on and they should stay in the stock market and out of the street protests.

But let’s look through the lens of an Agenda for Global Domination, as described in the documentary film, THRIVE, that includes the demise of America. If you were planning the collapse of the economy, trying to institute a global authority and preparing to handle historic blowback, you might want to:
•Dismantle constitutional rights
✓ Patriot Act

•Create and authorize total surveillance
✓ Drones, TSA, diluting FISA, Bluffdale, Utah Cyber Spy Center

•Prepare to take control of the Internet
✓ Jay Rockefeller’s Cyber-security Act

•Prepare prison camps for dissenters
✓ FEMA camps

•Legalize indefinite detention, torture and assassination of “dissidents”
✓ NDAA, Natural Defense Resources Preparedness

•Accustom people to military maneuvers in urban areas
✓ Blackhawk helicopter drills in Minneapolis and Oakland

•Move heavy weapons to strategic locations
✓ Tanks being moved around the country

•Authorize the use of the military against US citizens
✓ Cancel Posse Comitatus, Executive orders

•Create plan to centralize authority in the Executive Branch
✓ COG — Continuity of Government authorizations (Cheney, Rumsfeld)

Posted by multipucci1 | Report as abusive