Cypriots Stunned by Forced Savings Cuts

[shiny!]

Re: Cypriots Stunned by Forced Savings Cuts

Not so easy to do in the same way, in this case.

There aren't many foreign bondholders to default on. The liabilities of the banks are mostly their depositors. So the closest equivalent to "pulling an Iceland" is exactly what the troika was advocating: hit the foreigners (Russians) with the bill by defaulting on them (tax large-asset accounts) until all shortfalls are recovered.

My guess is that this would get Russia hopping mad, but not too much else. I can't exactly see Russia invading Cyprus over this. The problem is that Russia is probably the nation closest to Cyprus diplomatically at the moment (other than the collapsing Greece, of course). Cyprus has even been cooperating with Russia in smuggling arms to back the Syrian regime, which indicates an extremely close relationship. Cyprus is going to have to choose, ultimately, whether it is in Europe, or the East. But it will try to postpone that day as long as possible, and try to get as much wealth as it can in the meantime.

It is the EU that is trying to force the decision. It's saying "ok, we'll bail you out, but only to the extent you dump your old friend. If you're going stick with him (Putin) then he should be the one to bail you out." There's no sense in bailing out an entity that is aligning itself against you even while you do so, which Cyprus appears to have been doing by acting as a money-laundering center for Russia.

Even with all the maneuvering, I think Europe is seeing this mostly as a question of financial alignment, and giving little regard to the question of halting the expansion of Russia's military power-base. That isn't really the theater that it is expecting the conflict to be resolved in. It remains to be seen whether America will consider the military implications significant enough to intervene. If so, it may well step in to sweeten the EU's deal, to swing Cyprus to the west. So far it's been pretty quiet, at least in public.

Either way, someone is going to be mad, either the neo-cons/neo-liberals in the US, or Putin in Russia. But Cyprus and the EU are probably both going to be just fine. The money itself isn't enough to matter to either the EU or Russia, the political game is pretty dissimilar to anything in Spain or Italy, so fears of contagion are largely only being trotted out by those ignorant of the historic circumstances, and Cyprus will wind up getting bailed out by either the EU on the EU's terms, or Russia on Russia's terms. The fact that there's two bidders means that the final choice won't be too distasteful to Cyprus.

The decision of which path to take will ultimately be made in Cyprus, so if Cyprus does wind up leaving the EU, it won't be a calamity for the EU. It wouldn't be the EU abandoning one of its own, but Cyprus deciding to leave to side with Russia. It's not obvious that this would shatter confidence in the European project. If Cyprus does leave, and subsequently hits hard times, it might even serve as a warning shot to others whose devotion to the ideal is wavering.

This really gives me a clearer picture of what's happening. Thank you!

[ProdigyofZen]

Re: Cypriots Stunned by Forced Savings Cuts

Cyprus is in a position where nothing is going to work out well for them. What's the difference between Cyprus going back to the Cypriot Pound and Iceland having their own currency? Iceland imposed capital controls to keep money from flowing out. Couldn't Cyprus do the same thing?

If Cyprus takes the approach of ripping off the Band-aid fast via bankruptcy, rather than signing up for decades of "austerity" in order to keep the banks whole, wouldn't that be better for them? It wouldn't be better for the German and French banks, though.

Exchange rate devaluations can lead to hyperinflations. Austerity can lead to a depression.

Hyperinflations wipe out entire generations of capital. Depressions do not.

[Chomsky]

Re: Cypriots Stunned by Forced Savings Cuts

As usual, Krugman sounds nice, but in reality he doesn't know squat (or more likely, smooching up to his FIRE overlords).

The very first so called point says it all:



If the majority of deposits are offshore, then why exactly should the Cyprus real estate bubble matter?

What is the size of the Cyprus real estate market? What is the composition of the purchasers of Cyprus real estate? As usual, Krugman fails to provide any useful information.

The Cypriot banks are in trouble because of bad loans - primarily real estate. Are these to Russians? Or are they to Cypriot 'investors'?

Ultimately the problems the Cypriot banks are having aren't due to having offshore money. They're due to bad loans made under the influence of FIRE.

Here's more to your point.

Thursday, March 21, 2013

Krugman’s Bad Math on Cyprus

Paul Krugman, in a post earlier today, Cyprus: The Sum of All FUBAR, acts as if he has figured out what is the real problem with Cyprus. The only problem is his math is all wrong, and a better analysis undermines his major assertions.

You know something is amiss when a discussion of “what ails Cyprus” fails to mention the fact that domestic banks, particularly #2 bank Laiki, the epicenter of the crisis, is heavily exposed to Greece. The crisis in Cyprus is to a large degree a knock-on from the implosion of the Greek economy.

Krugman starts by claiming that domestic deposits are 500% of GDP and merely based on “asking around” has determined the culprit is a real estate bubble:

I’ve done some asking around, and cleared up something that was puzzling me. Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. So we should think of Cypriot deposits as mainly coming from non-Cypriots, attracted by that business model.

It might have helped if Krugman had bothered getting real data on Cyprus, particularly since, as we pointed out, there appears to be an anti-Cyprus PR campaign underway.

This is the data from the Central Bank of Cyprus as of January 2013, see tab T-1 of the spreadsheet (hat tip Ledra Capital):

Domestic Residents: €42.789 billion
Non-Domestic EU Residents: €4.748 billion
Non-Domestic Non-EU Residents €20.882 billion
Total Deposits: €68.420 billion

The Cyprus economy is (was is probably more accurate at this juncture) just under €20 billion, so domestic deposits are well under half the 500% GDP level that Krugman asserts, more on the order of 240% of GDP.

Domestic housing loans are €12.6 billion or about 60% of GDP. By contrast, in the US, residential mortgages (including on multifamily units) are about $10.8 trillion versus a GDP of $15.8 trillion, or 68% of GDP, so Cyprus does not seem all that out of line, particularly when you consider that is has a very large retiree population (as in mortgages are supported by past savings, not current earnings which are included in GDP).

Ledra provides some insight into what those not-as-big-as-Krugman-thought domestic deposits are about:

Sure, some of the deposits are actually foreign depositors in the guise of domestic corps, but note that of all domestic depositors, 26,290M is domestic households so 16,056M makes up all domestic financial and non-financial corporations in Cyprus and given that Cyprus does have a real economy, a good chunk of that is true domestic corporations. The balance is govermental deposits, fwiw.

Also, keep in mind that there are 60,000 British retirees in Cyprus and 40,000 Russians living in Cyprus (the latter, generally wealthy, as it has become a preferred location for rich businessmen to safely raise their families) and their savings will not necessarily correlate with GDP.

So this is an itty bitty country with some rich and moderately rich residents distorting the numbers.

As for the size of the banking sector relative to GDP, Krugman seems scandalized that the banking sector is so large relative to its economy. Yes, this is a risky model, and Cyprus made the mistake of being overly dependent on one huge client, Russia. But Cyprus is hardly alone in being a financial center with banks that are a big multiple of GDP. Luxembourg is the really extreme case here, with a banking sector at over 20x GDP. England’s banking sector is 6x GDP. Swiss banks were 6.8x GDP in 2010 (Switzerland has forced much higher equity requirements on its banks, so its balance sheets have shrunk since then). Singapore also has an outsized banking sector. But let us remember that the EU has also set out to trash the Cyprus banking sector pretty much overnight with the deposit garnishing threat. It is important to recognize that while a restructuring was necessary, the severity of the crisis and the degree of damage that will be inflicted on the economy was not.

This is not to underplay Cyprus’s problems. But it would help to depict them accurately.


http://www.nakedcapitalism.com/2013/...RjtSxAIv1t0.99

[GRG55]

Re: Cypriots Stunned by Forced Savings Cuts

Here's more to your point...

This is the data from the Central Bank of Cyprus as of January 2013, see tab T-1 of the spreadsheet (hat tip Ledra Capital):


Domestic Residents: €42.789 billion
Non-Domestic EU Residents: €4.748 billion
Non-Domestic Non-EU Residents €20.882 billion
Total Deposits: €68.420 billion
The Cyprus economy is (was is probably more accurate at this juncture) just under €20 billion, so domestic deposits are well under half the 500% GDP level that Krugman asserts, more on the order of 240% of GDP.


Domestic housing loans are €12.6 billion or about 60% of GDP. By contrast, in the US, residential mortgages (including on multifamily units) are about $10.8 trillion versus a GDP of $15.8 trillion, or 68% of GDP, so Cyprus does not seem all that out of line, particularly when you consider that is has a very large retiree population (as in mortgages are supported by past savings, not current earnings which are included in GDP)...

I find it quite ironic that there is so much talk that "excessive" deposits are apparently "a bad thing" and a new target for bailing out banks and their bondholders. We seem to have done a complete 180 from the beginnings of this financial crisis. Back in 2007, after the run on Northern Rock, that bank was criticized for not having enough deposits:

"...Northern Rock primarily used wholesale money markets to fund its lending, as opposed to lending out of money deposited by retail savers. More than 75% of Northern Rock's funding came from wholesale markets, a greater proportion than any other UK lender. It relied on securitising its mortgages. This means that the mortgage loans were bundled together and sold collectively in the money markets.

In its report on the problems at Northern Rock, the Treasury Select Committee placed a major part of the blame on the bank's Directors pursuing this "reckless business model which was excessively reliant on wholesale funding"...

So my simple-minded engineering logic is seizing on the idea that, just like the "Goldilocks economy", there must be some "not too hot, not too cold" level of bank deposits that politicians, Central Bankers, the IMF and other assorted pundits and groupies believe is "just right"? Anybody happen to know what that is? Anybody happen to know which nations fit that ideal?

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

Here's the latest from Reuters. Things are pretty much evolving as expected, with some theatrics about Cyprus refusing to participate in conference calls as their latest response to the ECB's threat to cut off ELA lending should a deal not be put in place soon. Cyprus was apparently hoping for more carrot, and less stick.

Some carrot is, however, on offer at the moment from Russia:

In Moscow, Cypriot Finance Minister Michael Sarris said he was discussing possible Russian investments in banks and energy resources to reduce its debt burden, as well as an extension of an existing 2.5-billion-euro Russian loan.

"The banks are the ultimate objective in any support we get, so it'll either be a direct support to the banks or the support that we get through other sectors will be channelled to the banks," Sarris told Reuters during a second day of talks with his Russian counterpart, Anton Siluanov.

He said Cyprus had no plans to borrow more money from Russia and add to its debt mountain. The Russian Finance Ministry had said on Monday that Nicosia sought an extra 5-billion-euro loan.

Russia is making it clear that they don't care much about Cyprus per se, just about the banks holding Russian money. It looks as if, whether the Cypriot government is willing to admit it or not, their status as an offshore banking safe-haven is pretty much toast. Not surprising, since the only real utility they provided compared to other offshore locations was that they served as a back door into the EU. If that's no longer on offer (with or without a rescue) they're not really worth the risk. A buyout by a Russian bank makes more sense for the mobsters-in-charge, so that's my personal leaning at the moment. And Russia's other oligarchs will of course try to grab what mineral resources they can.

[GRG55]

Re: Cypriots Stunned by Forced Savings Cuts

Here's the latest from Reuters. Things are pretty much evolving as expected, with some theatrics about Cyprus refusing to participate in conference calls as their latest response to the ECB's threat to cut off ELA lending should a deal not be put in place soon. Cyprus was apparently hoping for more carrot, and less stick.

Some carrot is, however, on offer at the moment from Russia:



Russia is making it clear that they don't care much about Cyprus per se, just about the banks holding Russian money. It looks as if, whether the Cypriot government is willing to admit it or not, their status as an offshore banking safe-haven is pretty much toast. Not surprising, since the only real utility they provided compared to other offshore locations was that they served as a back door into the EU. If that's no longer on offer (with or without a rescue) they're not really worth the risk. A buyout by a Russian bank makes more sense for the mobsters-in-charge, so that's my personal leaning at the moment. And Russia's other oligarchs will of course try to grab what mineral resources they can.

You seem to be rather harsh on the Cypriots. If they are to be criticized as an "offshore banking back door into the EU" then why have you singled them out and excluded Luxembourg, Gibralter, the Channel Islands, Monaco, and the grand-daddy of them all, Switzerland? With the revelations of the French Socialist Party Budget Minister having to resign this week after lying about his secret Swiss bank account, it would seem the real hypocrites are still largely to be found among the elite (including, apparently the "People's Government" elite in France) in Continental Europe...

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

You seem to be rather harsh on the Cypriots. If they are to be criticized as an "offshore banking back door into the EU" then why have you singled them out and excluded Luxembourg, Gibralter, the Channel Islands, Monaco, and the grand-daddy of them all, Switzerland? With the revelations of the French Socialist Party Budget Minister having to resign this week after lying about his secret Swiss bank account, it would seem the real hypocrites are still largely to be found among the elite (including, apparently the "People's Government" elite in France) in Continental Europe...

I don't intend to be harsh on anyone. Just stating facts. The others you list are likely to be just as bad (or good, if one prefers to think of it that way). It's just that Cyprus got caught in a position of needing a bailout, and so it's the one we get to learn about right now, since its dirty laundry is being aired publicly. Moral judgement (mine or anyone else's) is irrelevant to predicting the next step, so I'm not really trying to dig into that.

When an entity gets caught without enough deposits on hand to cover their outflows, someone will lose. That's not moralizing, that's math. The EU has as much "right" to make sure it's not them as Russia does. Which is to simultaneously say no right at all, and whatever right their momentary positional strength gives them.

I fully expect that this is not the last offshore haven that this mess will roll through, or even the worst. But if we can learn something from this one, maybe we can keep ourselves from getting caught in some future mess. If we can predict how this one unfolds as it happens, maybe we can at the end of the day say something about how such crises in general unfold.

After all, the big crunch is yet to come.

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

I don't intend to be harsh on anyone. Just stating facts. The others you list are likely to be just as bad (or good, if one prefers to think of it that way). It's just that Cyprus got caught in a position of needing a bailout, and so it's the one we get to learn about right now, since its dirty laundry is being aired publicly. Moral judgement (mine or anyone else's) is irrelevant to predicting the next step, so I'm not really trying to dig into that.

When an entity gets caught without enough deposits on hand to cover their outflows, someone will lose. That's not moralizing, that's math. The EU has as much "right" to make sure it's not them as Russia does. Which is to simultaneously say no right at all, and whatever right their momentary positional strength gives them.

I fully expect that this is not the last offshore haven that this mess will roll through, or even the worst. But if we can learn something from this one, maybe we can keep ourselves from getting caught in some future mess. If we can predict how this one unfolds as it happens, maybe we can at the end of the day say something about how such crises in general unfold.

After all, the big crunch is yet to come.

I should add that if you prefer to have the conversation regarding the ethics in play rather than the one centered around predictive modeling, I'm game for that as well. Just let me know, so I can take off my "prognosticating windbag" hat and put on my "philosophizing windbag" one.

[GRG55]

Re: Cypriots Stunned by Forced Savings Cuts

I should add that if you prefer to have the conversation regarding the ethics in play rather than the one centered around predictive modeling, I'm game for that as well. Just let me know, so I can take off my "prognosticating windbag" hat and put on my "philosophizing windbag" one.

There aren't any ethics in that game, among any of the players. Period. It is the undertone of moralizing in the choice of words in your posts that I was observing. Not quite the dry, Joe Friday "just the facts ma'am" treatment you seem to think you are giving it...

[don]

Re: Cypriots Stunned by Forced Savings Cuts

self-interest being confused with morality leads nowhere . . .

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

There aren't any ethics in that game, among any of the players. Period. It is the undertone of moralizing in the choice of words in your posts that I was observing. Not quite the dry, Joe Friday "just the facts ma'am" treatment you seem to think you are giving it...

Fair enough. It never hurts to be more self-aware. I'll try to do better going forward. Thanks! :-)

In that same spirit, let's take another look at the quote that was highlighted as objectionable, and apologize for it in detail:

since the only real utility they provided compared to other offshore locations was that they served as a back door into the EU.

I can see how that might be seen as harsh. (Sorry about that.) There might well be other legitimate, useful, services that these banks provide, over and above other offshore centers, that I am not aware of. I am genuinely curious as to what these might be, but will certainly concede that they could exist, and that I would be wrong if these were the reason Cyprus had so much Russian wealth on deposit.

But since we're on the subject, perhaps you might be able to help me understand something else, as well. I was under the impression that offshore banking locations (in general) don't have any legitimate purpose, instead existing mostly to dodge one law or another. My understanding was that was essentially the definition of the group. To my mind, I was just highlighting which group of laws this one had been (quite heavily) alleged to be skirting, based on my reading so far. For example, the Cayman Islands are favorite among Americans for proximity to the US, but opacity to US tax authorities. Switzerland is favorite because its banking secrecy laws prevent disclosure of activities that are not illegal in Swiss law, regardless of the law of the foreign national's home country. Cyprus is a favorite because it asks less questions of depositors than other EU nations do, and so secrecy is less of a big deal (you don't have to hide what you never officially knew). So from this perspective, I didn't really see it as moralizing to point out exactly which subset of law-avoidance made Cyprus favorable to one group. Any judgement (moral or otherwise) was already arrived at through its inclusion in the class "offshore locations" in any event; the specificity merely identifies the sub-type.

This too, might have been wrong (if so, again, sorry) as follows:

I am entirely open to the possibility that I am misunderstanding something about the offshore banking business! I'll be the first to admit this isn't a part of banking I know anything about first-hand. Are there legitimate reasons (and not merely tax- or regulatory-evasion ones) for such offshore entities to exist, beyond the scope of local, domestic banking needs? What legitimate reason would a company or individual have to route large quantities of wealth through third-, fourth-, or fifth-parties, when not conducting business in that party's country, that doesn't involve trying to evade taxes, or regulations? It adds overhead, complicates transactions, adds more parties to the chain of risk, etc. What are the legitimate benefits that offset those downsides? If they are compelling, I'm sure it's something more people here would love to learn about, so they could participate as well. I know I would like to learn more about such benefits!

It can't just be about the obvious answer: currency diversification. That could have been better and more cheaply achieved through simpler transactions, in a large number of states (as you say, Switzerland, and others, permit accounts in a multiplicity of currencies). But my reading indicates Russian oligarchic wealth was instead heavily concentrated in Cyprus. What legitimate activities might bring this circumstance about? If it was diversification of counter-party risk, I can only say that it looks like these depositors were about as incredibly bad at judging risk as it is possible to be, and not just individually, but en masse! It is indeed curious. Circumstantial, of course, but curious.

I'm here to learn. And I'm also more than willing to receive correction, and apologize when wrong. Heck, I've even given some specific examples of information that would prove my thought process wrong. ;) I am genuinely not being either ironic or sarcastic when I say I'd love to learn more about any insights you, or anyone else, can share about this. There is a vast world I don't know nearly enough about.

But if objective facts point to a conclusion, then it is not bias to state that conclusion, but bias to withhold it. Not only I, but numerous media outlets in different countries and languages, have referred to Cyprus as a center for Russian offshore banking. I can only say that I understood the repetition of this description as a statement of numerical fact. No doubt a fact that has moral implications to some, but a fact nonetheless. My intent in stating it was specifically to bypass any such implications, and address the facts, to arrive at a predictive picture. If, however, repeating that already widespread statement is moralizing, I am sincerely sorry.

I will try to do better. Thanks again.

[GRG55]

Re: Cypriots Stunned by Forced Savings Cuts

Your understanding of who and why offshore jurisdictions are used seems limited. I make direct investments in a partnership with two or three other people that I have worked with for years. We all resident in different countries on different continents (it's an eclectic group). Our investments are high risk resource sector, invariably in difficult jurisdictions. For example we built a gas derivatives manufacturing business in Egypt in cooperation with one of the state-owned companies. We always use an offshore jurisdiction with a well developed legal system for the entity that holds our share of each project (Cyprus doesn't fit the bill btw). Registering in the country of operations is out of the question...get into a legal dispute with your in country partner and who do you think these largely corrupt and immature legal systems are going to favour? Register in the resident country of one of the partners and we can get into some bizarre double-taxation issues with our own home juridiction. If we get lucky and make some money we each pay tax on the distributions in the country of our own residency...in my case Canada. Straight up and simple, and the tax code is unambiguous as to how to file that situation. Offshore jurisdictions are also used heavily by non-resident expatriates...there's absolutely nothing nefarious or illegal about it. It is just a matter of sound personal tax planning for most salaried professionals living and working abroad...other than citizens of the USA. I could give some other legitimate examples, but I imagine you get the point...

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

Thanks, that helped quite a bit!

As an American citizen, I get taxed by the US no matter where I live, work, or earn investment income. It seems I may have been extrapolating too heavily from that, apparently fairly unusual, circumstance. Since taxes here are based on self-reported income (audit-able through bank reports), the frequent use of offshore banks to hide income for the purpose of (illegally) evading taxes provides a more negative connotation.

You are of course right in pointing out that for other nationalities, which may tax based only on domestic income, this connotation should not apply. Thanks for the reminder!

[Chris Coles]

Re: Cypriots Stunned by Forced Savings Cuts

I find it quite ironic that there is so much talk that "excessive" deposits are apparently "a bad thing" and a new target for bailing out banks and their bondholders. We seem to have done a complete 180 from the beginnings of this financial crisis. Back in 2007, after the run on Northern Rock, that bank was criticized for not having enough deposits:

"...Northern Rock primarily used wholesale money markets to fund its lending, as opposed to lending out of money deposited by retail savers. More than 75% of Northern Rock's funding came from wholesale markets, a greater proportion than any other UK lender. It relied on securitising its mortgages. This means that the mortgage loans were bundled together and sold collectively in the money markets.

In its report on the problems at Northern Rock, the Treasury Select Committee placed a major part of the blame on the bank's Directors pursuing this "reckless business model which was excessively reliant on wholesale funding"...

So my simple-minded engineering logic is seizing on the idea that, just like the "Goldilocks economy", there must be some "not too hot, not too cold" level of bank deposits that politicians, Central Bankers, the IMF and other assorted pundits and groupies believe is "just right"? Anybody happen to know what that is? Anybody happen to know which nations fit that ideal?

There is a huge underlying debate regarding the balance between those that see the future is all about banking; and in which case the entire debate is all to do with how you engage with the banking system to renew it; and on the other hand, those of us, myself included, that believe we have a lop sided economy that lacks the parallel institutions and methodologies to enable a much more balanced savings culture to enable the equity capitalisation of the base economy.

Over the last few decades we have all changed from an economy that, through the delivery of wages via cash in an envelope, had an automatic balance, competition if you like, between those within the banking system and those outside; to where we are today, with every single penny entirely encompassed within the banking system and as such no competition for savings.

As I see it, it is the role of savings that needs to be returned to a wider remit by the re-creation of a completely renewed mindset around the concept of savings institutions. To that end I was much encouraged to see that The Group of Thirty http://www.group30.org/members.shtml have also now come to the conclusion that we need new institutions with a long term viewpoint. http://www.group30.org/rpt_65.shtml

[unlucky]

Re: Cypriots Stunned by Forced Savings Cuts

The FT had an in-depth analysis of how the negotiations evolved leading to the original decision to levy insured deposits. You can find it here but it may be pay-walled: http://blogs.ft.com/brusselsblog/201...e-game-begins/

Nobody comes up smelling of roses. If this analysis is correct, then Germany and the IMF were initially looking for the axe to fall entirely on uninsured (>100K) deposits, with losses of between 20-40% to be imposed. The European Comission was the first to propose a levy on insured deposits, possibly in an effort to soften the blow for the Cypriot government. (The Commission traditionally plays a role of supporting the smaller governments versus the larger countries). The Cypriots eventually agreed to a version of the EC proposal after the ECB told them the game was up if there was no agreement.

We're presumably heading back now to some version of the original German/IMF proposal, perhaps with the Cypriot government also raiding the pensions of its citizens in order to give a helping hand to the Russians. It's a very ugly game, but since the Eurozone has failed to put in place proper institutions for handling these crises, they end up having to make their sausages in public.