The Eurogroup says that Cyprus is the modelfor future bank rescues. Well, actually we should be grateful for so
much sincerity and it proves that politicians don't always lie. But
we should also be scared: the consequences of a “Cypriot haircut”
are manifold and tragic.
100.000€ might seem a lot of money,
but actually it's not. Somebody who starts working at the age of 25
and saves 250€ a month will have amassed 100.000€ by the time
he's 60. What the European Union is telling those Cypriot savers is
that they're guilty... guilty of what? Of having worked hard and
saved money? After this disastrous “solution” designed by the
European Union nobody can blame the young Europeans if they don't see
any sense in working hard and saving money. And this is a real
problem. All those who have studied some basic macroeconomics know
that saving equals investment. How is Europe going to compete with
the US, China, Brazil or Mexico if no entrepreneur and no business
can borrow money from a bank because there is just no money left?
All those people who have more
than 100.000€ in their bank account may consider transferring an
important part of their savings to another bank account. As the
haircut was applied only to the Cypriot banks' clients who had more
than 100.000€ in their accounts, risk diversification by
appropiately allocating your assets (i.e. your savings) is just a
logical consequence. This could have a really, really negative
impact on banks which do not have any liquidity issues at all
because they could lose many customers and their deposits.
Many people wouldn't even feel
comfortable about putting their money into a bank account. Look at
Argentina: even 12 years after the “corralito” many Argentinians
keep their hard-earned Pesos (or US Dollars) at home. They don't
trust banks anymore. Again: no efficient banking system, no
investment, no growth.
What about the small businesses that
have 100.000€ in their bank account? Would they also be affected?
Wouldn't they go bankrupt as well?
If you knew that the European Union
would take away 40% of your savings, would you still be interested in
buying a car, clothes or shoes? This is what's happening in Cyprus:
the shops and streets in Nicosa are empty.
In the end it may even be better to
leave the Eurozone – at least according to Paul Krugman.
And now you may ask: who's next?
According to der Spiegel it could hit Malta or even Luxembourg...
I have some comments about this blog entry.
ResponderEliminarFirstly the entry is not offering alternatives. The entry is opposing a measurement in Chipre, however, is not offering an alternative. Ok, is not a good thing to use the deposits from the population, so what? we don't do anything?. Is like saying: going to work is tyring and staying in bed is lazy, ok, but what decission do I take this morning?.
(the other alternative is bankrupt and losing the deposits as well)
Second point, deposits are actually not lost (it is implicit in the entry that the money is lost by Chipriot savers) are a transfer back into shares of the banks. Actually the goverment is imposing how the savings of the savers are distributed (so, macroeconomic savings equals investments is actually unaffected) and not taxing the deposit formally (actually the shares of Chipriot banks are not a good assest...).
What I think are the key points missing are:
- What's the value of the shares prior to the bank rescue going to be valued? My view is that shall be 0 euros.
- How can we keep having banks from small countries like Chipre serving internationally... to big to fail for Chipre? My view : I demand shared banks with shares rescues.
- What's the other option? Not saving the bank means leaving euro and inflation (which is actually another way to create taxes...)
"so what? we don't do anything?." --> Quantitive easing. The ECB isn't doing anything because it was created by neoliberal ideologists. This is the real problem of the Eurozone: we don't have a central bank like the FED. Of course this COULD lead to inflation, but it would be still better than a "one-time 40% inflation".
ResponderEliminar"Second point, deposits are actually not lost (it is implicit in the entry that the money is lost by Chipriot savers) are a transfer back into shares of the banks." --> Ok, that's a point. But still: those shares are worth almost nothing. So instead of losing 40%, the banks' clients maybe lost 38%. Don't you think so? It's like the "corralito" in Argentina: we're taking away your dollars, but we're giving you pesos...
Well, there's a central bank in Europe, however, is not the lender of last resort of the banks, those are the facto the european states. I think the current system is over protecting agaisnt the inflation due to the endemic fear of Germany to hyperinflation. So I agree on a controlled quantative easing, BUT, I do also think we need to avoid moral hazard, each contry MUST know that if they don't control their banks and their deficit they will REALLY suffer.
ResponderEliminarHowever... Europe needs to be an unique bank system and not a conglomerate... banks like Deutsche, Santander, Credit Agricole... are multinational ones.
Concerning "how the pain of saving Chipriot banks is shared", my position is the following (different to yours!):
- The wrong control of banks created the issue on the banks. Those politics were selected by Chipriot. Responsability must be on those who selected them => Chipriots one way (deposits) or the other (taxes) but not all europe (inflation or fully BCE).
- And more specifically... those who own the banks (shareholders) should suffer most of the pain. Before deposits are transformed to shares I will do the following:
1 I will value the bank (market value?). Let's say...100
2 I will calculate the need of capital from the bank. Let's say... 80
3 I will give equivalent shares to deposit holders of 80% ownership of the bank.
4 Previous shareholders will only own 20%.
That way, at market value at time 0 after deposit exchange, deposit holders will keep the same value of their deposits but in a different financial instrument and the pain will be mainly faced by previous shareholders.
That's what I meant before with value of the bank is 0. So shares given to them will NOT value 0.
By the way... I do enjoy this conversation :), nice sharing!
ResponderEliminar