Around the Globe Weekend Edition October 19-20

Saturday:

Euro Zone May Not Have Emerged from Recession, CEPR Says – WSJ.com.

Eurozone Total Employed Persons US Labor Force Participation

The mainstream media is beholden to the standard definition of a recession, which is two consecutive quarters of GDP contraction.  If it chose to feature another data series as its bellwether of economic health, then it would be forced to alter the recovery narrative that it has been touting for the last few years.

As it happens to be,  the labor market reveals more about the experiences of the vast majority of taxpayers.  Both the Eurozone and the United States remain in labor market recessions, even though GDP is growing modestly.  Total jobs have decreased in the Eurozone, and there is no end in sight to the contraction.  In the U.S., job creation is positive but is not maintaining pace with the number of new labor market entrants; hence, the employment participation rate continues to decline.

If you own stocks, bonds or real estate, then this is the economy for you.  If you derive most of your wealth from the fruits of your labors, then the recession never ended.

From Friday’s Edition:

Heard on the Street: China Rebound Fails to Reassure – WSJ.com.

Infrastructure drive powers China’s growth prospects – FT.com.

China GDP

What goes up, must come down.  Recessions are normal.  These down periods give the economy time to reallocate resources so that productivity increases ultimately lead to rising GDP and employment levels.

Once politicians figured out that they will be blamed for the twists and turns of the business cycle, they began trying to prevent contractions.  The two methods for accomplishing this objective are government spending and money printing.  This has been occurring for years, but credit growth is reaching an important juncture.  The diminishing marginal returns of stimulus are fast approaching zero.  The U.S. has printed almost $3tr extra dollars and has added over $6tr to the government debt since Lehman, and this has only added $1.4tr to GDP.  That’s over a six to one ratio.

China is nowhere near that poor ratio, yet, but it is well on its way.  Chinese officials wish to maintain power, and they will create as much yuan as is necessary to accomplish their goal.

China Credit Growth

 

From Wednesday’s Edition:

Shutdown is having ‘notable impact’ on mortgages.

Home Builders Cite Waning Confidence – WSJ.com.

New Purchase Mortgage Apps
Source: MBA/Zerohedge

New mortgage apps are plummeting, which does not bode well for home sales.  Even though the budget “impasse” will end with a deal before too much long-term damage to the nation’s standing is done, the consequences of this political theater will drag on for months.  Home sales will drop through October, but a November rebound will be touted by the mainstream media as a resurgence in the housing “recovery,” not the pent up demand from prior weeks.

 

From Tuesday’s Edition:

Fed’s Dudley: Large Balance Sheet Increases Inflation-Fighting Discipline – Real Time Economics – WSJ.

Exclusive: Fed’s Fisher, outspoken hawk, sees no QE reduction this month | Reuters.

Fed Balance Sheet vs. SP500 10.2013

The printfest will continue because it cannot stop.  Once the Fed stops creating dollars by monetizing federal and mortgage debt, the market will cease its rise shortly thereafter.  Eventually, the policy of printing money to increase asset prices will lose its efficacy.  First, additional QE will stop inflating market prices, but it will still be able to maintain some sort of stability.  Next, well, no one knows what happens next.

 

From Monday’s Edition:

Asmussen rules out ECB rollover of Greek bonds | Reuters.

Greek Government Budget Deficit Ratio

Asmussen must say things like this for two reasons.  First, Germany needs to keep up the austerity pressure, or else the Greeks will stop “reforming” the economy.  Second, Germany has not yet formed a government.  With sensitive coalition negotiations, it is an inconvenient time to admit that Greece needs a 4th bailout even though this is inevitable.  In order to preserve its export currency, the German government and the voters will continue denying that Greece needs more money until it does.  Then, it will gladly do whatever is necessary to bail Greece out.

Advertisements

Around the Globe 08.02.2013

China money rates slide after strong c.bank injection | Reuters.

China 7 Day Repo Rate 08.02.2013

The Chinese financial system remains under stress.  The PBOC has injected cash into the markets the last few days to alleviate tight financing conditions.  Once a central bank begins supporting the financial system with cheap money, it is difficult to stop.  Over the next few weeks, the PBOC will either become more deeply involved with supporting weak institutions or it will allow the system to collapse and clear.  It’s a 50-50 proposition at this point, but keep in mind that the latter option will wreak havoc on world  markets.

U.S. Adds 162,000 Jobs, Continuing a Tepid Run – WSJ.com.

Payrolls Rise Less Than Forecast, U.S. Jobless Rate Falls – Bloomberg.

U.S. hiring slows in July but jobless rate falls to four-year low | Reuters.

2103 Full vs. Part Time Jobs

Not only is the country not creating enough jobs, the ones that are being generated are low-quality McJobs.  The economy is creating part-time positions in favor of full time work at over a 3 to 1 clip.  Economic growth will not become self-sustaining anytime soon with these poor results because workers require quality jobs in order to begin spending again.

German Politician Open to Greek Debt Waiver – WSJ.com.

Greece - with policy change

It is a foregone conclusion that Greece will require a generous debt-forgiveness package from its Eurozone partners as the chart illustrates nicely.  Wildly optimistic assumptions regarding GDP expansion, tax revenue growth and privatization receipts were crafted with an eye towards kicking the Greek can past German elections.  Everyone except German voters knows that Greece will require a fourth bailout, but it is not being stated openly except by the potential future finance minister of a Social Democrat-Green coalition.  This is exactly why that coalition will lose.  The proper method here is to pretend that everything is fine until after elections.  Once you are safely in office, then you tell the voters about all of the extra tax money that the government will be spending on Greece.

Asian Stocks Rise on China PMI Expansion, Fed Bond Buying – Bloomberg.

SK and AU PMI 08.2013

The official Chinese PMI continues to point to a slight expansion while the HSBC Markit number has been in contractionary territory for two months now.  Which one is correct? South Korea and Australia have one thing in common: both count China as their best customer.  As the charts illustrate, business has not been very good lately.  The only place China’s slowdown is not evident is in the official Chinese data.

Europe Sees Bottom of Downturn as Daimler Leads Rebound – Bloomberg.

ECB holds rates, confirms no move for ‘extended period’ | Reuters.

Draghi Says ECB Won’t Raise Rates for Foreseeable Future – WSJ.com.

Draghi Signals Worst Is Over as ECB Reiterates Low Rates – Bloomberg.

Eurozone PMI 07.2013

The worst is not over for Europe.  The continent may finally break the streak of contracting quarters, but the sustained boom required to lift the PIIGS out of depression is far away.  In context of the PMI chart, Eurozone PMIs would have to improve more than 20% to lift the region to the 3-4% growth desperately needed to reduce its debt pile.  A contracting China and an anemic US will crimp growth in the second half though a stagnant rather than contracting 3rd quarter may surprise some.

Greece Requires 4th Bailout

IMF to suspend aid payments to Greece unless bailout hole plugged – FT.com.

Greece Now, Too? Dow Down 300 on Reports of IMF Threat – MoneyBeat – WSJ.

GGB 06.20.2013

Greece will require even more money by July, and you read it here first.  Astute readers of Dareconomics knew in December that the troika’s numbers simply did not add up, and Greece would have a funding gap opening prior to German elections:

Risks Remain in Greek Bailout | DARECONOMICS.

The 3rd Greek bailout was not designed to place Greek finances on a sustainable path; rather, the troika was primarily concerned with kicking the can down the road past German elections.  Once Angie was safely seated in the Chancellor’s throne, she could return to the Bundestag with a request for more German money to throw down the Hellenic Hole.

The troika is placing the blame at the feet of the countries of the Eurozone who are refusing to rollover Greek debt after initially promising to do as part of the 3rd Bailout.  This refusal to fund combined with the usual lack of privatization receipts and “surprise” shortfalls in government revenue means that the Greeks will require more money by the end of July.  The question is how will they get it.
Merkel will not be able to request more money in the Bundestag, because a vote on more PIIGS giveaways will not be scheduled prior to elections in September.  This leaves the ELA.  As we predicted months ago in the link above, the Greeks will have to rely on ELA cash for a few months until after German elections.  Will the IMF accept this fudge again?

Around the Globe 06.06.2013

Economist: Housing Will Thrive After Fed Exit.

US Housing Sales through 04.2013

The mainstream media loves promoting its housing recovery narrative.  In this article, the reporter writes, “Housing has experienced an incredible recovery.” Apparently, an incredible recovery means 2010 sales levels, which are less than one-third the pace at the market’s peak.

The chief economist for a sell-side firm bases her thriving housing market prediction on rising mortgage activity going forward.  We have a chart for that:

Mortgage Applications 06.2013

As you can see, mortgage activity is actually falling.  The truth is that the housing market will not revive until employment and income rise.  In other words, people who actually wish to live in houses must reenter a market overrun by exuberant flippers with their pockets stuffed full of Uncle Ben’s money.

The Aussie Dollar Just Can’t Catch a Break.

AUDUSD 06.06.2013

From CNBC

All you need to know about the Aussie can be summed up in this handy chart:

China HSBC PMI 06.02.2013

Chinese manufacturing is contracting, and in lockstep, China’s demand for raw materials.  China is purchasing less Aussies, and this shortfall in demand is driving the currency lower.  This trend will continue for the immediate future broken up by occasional rallies.

$1 Trillion Debt Crushes Business Dreams of U.S. Students – Bloomberg.

Credit Growth to 2013

Government intervention creates a vicious circle.  The purpose of offering cheap loans is to make higher education accessible to all, but this is not the end result of student loan programs.  The hot money created by government subsidies actually increases the cost of college, so in the long run the program runs counter to its purpose:

Tuition Inflation

The chart also details what hot money from government subsidies is doing to another popular economic sector that is subject to Beltway reforms (the orange line).

Draghi Sees Economy Recovering as ECB Rates Left on Hold – Bloomberg.

ECB holds rates, sees gradual recovery this year | Reuters.

ECB Sees Longer Wait for Recovery – WSJ.com.

Eurozone Unemployment 05.31.2013

The ECB lowered its GDP performance estimate for the Eurozone from -0.5% to -0.6%, and Draghi forecasts a return to growth by the end of the year.  Of course, the return to growth keeps getting pushed back by ECB forecasters from their initial prediction of the 1st quarter in the fall, to the summer in their 1st quarter forecast and to year end today.  Notice a pattern? The ECB will continue to predict growth commencing six months from the date of the prediction until the day the euro breaks.  In the meantime, GDP will contract, unemployment will rise and prosperity will remain just around the corner.

EU Hits Back at IMF Report – WSJ.com.

For hard-hit Greeks, IMF mea culpa comes too late | Reuters.

Bad IMF Predictions

Hanlon’s razor is, “Never attribute to malice that which is adequately explained by stupidity.” On the plus side, the IMF was not cooking the books and actually believed that it was issuing usable economic forecasts for the Greek bailouts.  On the minus side, IMF economists are dangerously incompetent.  Despite missing to the downside time after time, they continued to rely on the same defective models.  This mea culpa and change in philosophy is a day late and a drachma short for the people of Greece.

Merkel urged to come clean on Greek debt relief | Reuters.

Angela Merkel, courtesy of Armin Kübelbeck http://commons.wikimedia.org/wiki/File:Angela_Merkel_15.jpg

Angela Merkel, courtesy of Armin Kübelbeck http://commons.wikimedia.org/wiki/File:Angela_Merkel_15.jpg

The German opposition, the SPD, is attempting to make hay out of the fact that the Greeks will require debt forgiveness after German elections.  While this is true and German voters will be outraged when this goes down in the winter, the SPD supports this policy, too. In fact, the Socialists will be more than happy to expend even more money to keep the euro together.  This is the type of stupid move that the challenger makes on his way to losing an election to an incumbent.

Around the Globe 05.08.2013

Fed’s credibility tested as inflation drifts below target | Reuters.

US CPI 05.01.2013

The Fed wishes to continue its money printing experiment to maintain the asset price bubbles that the world central banks have inflated since the onset of the GFC.  The problem that they are experiencing in implementing this policy is the decreasing marginal returns of each new round.  $85bn a month may no longer be enough, so  the organization leaks stories about the labor market and low inflation to justify moar.

Not only will the current program be continued, but I bet that the amount will be raised to $100bn per month.

BofA Traders Have Perfect Quarter as Morgan Stanley Lags – Bloomberg.

Fed QE versus SP500

Res ipsa loquitor.  The thing speaks for itself.   Lest one have any doubts that the market is rigged, note this piece.  A firm should not have quarter long winning streaks in efficient markets.  The TBTF firms are the beneficiaries of the Fed’s $3tr+ in purchases since 2009.  They sell bonds to the Fed and buy stock realizing profits and inflating the value of their inventories.

When this madness ends, it will not be the Fed that lost billions of dollars but the taxpayer.  Will the banks give the profits back to help recapitalize the Fed when the time comes?

Poland Cuts Interest Rates to Record Amid Lack of Recovery – Bloomberg.

Polish Benchmark Interest Rate

A few days ago, the Polish government began selling euro membership to its wary citizens.  If the government gets it way, Poland will surrender its independence and monetary policy for nothing, and the country will no longer be able to cut interest rates to offset an economic slowdown.

China Trade Surplus Draws Doubts – WSJ.com.

China opens new front in war as yuan speculation distorts export data | Reuters.

China Export Gains Spur Renewed Skepticism of Figures – Bloomberg.

Chinese Export Growth

How do exports continue rising dramatically when China’s key trading partners reported small or flat increases in Chinese imports? Exporters are adding to invoices, particularly in Hong Kong, so that they have more clean capital that they can use to speculate in Chinese markets.

These massaged export numbers are significant.  Chinese GDP is probably not growing at the official rate of 7.7%, and this slower growth will continue to sap world demand particularly in the commodities space.

Asian Governments Take Measures to Battle Strong Currencies – WSJ.com.

JPM Asia Dollar Index

When the major central banks print money, the effect ripples throughout the world.  The initial rounds in 2009 led to food price inflation that in part caused the Arab Spring.  Currently, cheap central bank money is finding its way to every corner of the globe in its quest for yield.  This dynamic raises the demand for emerging market currencies, which appreciate slowing economic growth.  In response, EM central banks are forced to cut interest rates and sell their own currency in the markets to hold down exchange rates.  And the bubble continues to inflate.

Call to End Troika in Europe Crises – WSJ.com.

Unsustainable Bailouts

Now we all know that everyone has two reasons for adopting a course of action: the reason that they say and the real reason.  You can read all about the reasons for ejecting the IMF from the European bailout regime that the Eurocrats say in this article.

The real reason is that the IMF has begun insisting that debt restructurings are sustainable after remaining silent throughout the Portuguese, Irish and first Greek bailouts.  While the IMF supported sustainability in the third Greek bailout and the first Cyprus one, it quickly caved.

Nevertheless, the IMF seems less willing to pretend that 170% debt to GDP ratios are okay, and the rich countries refuse to any form of debt forgiveness.  If you think this policy will change after German elections, then ask yourself why the IMF is being retired.

EU Commission or ESM could wind down ailing banks: report | Reuters.

Italy, Spain NPLs as of 03.2013

This article reports more talk from the eurocrats.  In order for there to be a banking union, the rich countries must decide to become joint and severally liable for the banking systems of countries like Spain and Italy.  When the rich countries put up about €1trn to start a resolution and deposit guarantee system, then you have a banking union.  Until then, you just have talk.

McDonald’s Sales Slip 0.6% on China, Europe Weakness – WSJ.com.

McDonald’s Sales Slip 0.6% in April.

McD 05.08.2013

McDonald’s sales worldwide sales performance confirms slackening international demand led by Europe and anemic growth in the U.S.  A barely positive 0.7% rise in American sales was more than offset by a 2.4% drop in Europe, McD’s second largest market, and smaller decreases in Asia and Africa.  This has been the McD story for the last year or so, but that has not stopped the stock price from appreciating over 20% since November.  I wonder what could cause a stock with falling revenues and profits to rise so much.

Portugal Marks Return to Bond Market – WSJ.com.

Portugal 10yr Bond 05.08.2013

Portugal managed to sell bonds today in what the mainstream media has decided is an important step for the country to regain independence. Unfortunately, there is no regaining independence in the Eurozone.  A country with a tremendous debt pile and no growth is only able to sell bonds because the ECB has made vague promises about supporting the price and cheap money allows TBTF European banks to speculate in this debt free of charge.

 

 

Cyprus Bailout Needs to Be Reworked

Cyprus Debt to GDP

Cyprus Facing Rough Ride After Bailout: Finance Minister.

Cyprus Rescue: From Bad to Worse: El-Erian.

Cyprus Central Bank In Shambles Following Third Board Member Resignation | Zero Hedge.

Cyprus is  changing from a disaster to a catastrophe before our very eyes.  The primary purpose of any of these EU bailouts is to maintain stability until after German elections on September 22, 2013 without any regard for the what will happen in the crisis country.

The troika is granting Cyprus a €10bn loan.  Initially, Cyprus needed to procure another €7.5bn on its own to fund the necessary bank recapitalization among other necessities.  The deposit flight of insiders in the days leading up to the collapse caused a larger capital crunch than anticipated pushing the final sum needed to €23bn.  Rather than adjusting the program, the troika has ordered the Cypriots to come up with another €5.5bn on their own.  This figure is about one-third of Cyprus’ GDP and twice its annual budget.  Cyprus will not be able to raise this money on its own now that the banking sector, the largest contributor to its GDP, has been destroyed.

Even if the €23bn bailout was doable in the short-term, Cyprus would slowly suffocate to death under a crippling pile of debt for the next decade or two.  Before the bailout, Cypriot government debt had risen to €15bn.  Add the €10bn loan, and it rises to €25bn, which is close to 140% of GDP.  If the troika increases its loan to €15.5bn to cover the shortfall, the ratio rises to 170%, which are Greek levels.  In case you hadn’t noticed, Greece isn’t doing to well right now.

Amidst this financial distress, the finance minister and three central bankers have resigned in the last two weeks.  Parliament ceased an investigation of money fleeing the country, possibly due to the fact that its members used inside information to get their own money out of the country while their constituents were left to bear the brunt of the bank failures.

The current bailout will not keep the lid on the Cyprus crisis until German elections are finished in September, so there has to be a Plan B from the troika.  Cyprus should insist on debt forgiveness as part of a new bailout so that it does not turn into Greece.  If it does not receive this concession, it should exit the eurozone.  A year of severe economic distress beats a decade of misery.

Of course, this is unlikely to happen.  The recently elected President is deep within Merkel’s pocket and is committed to seeing her reelection go smoothly rather than doing what is right for his people.

Cyprus Deal

cyprus-gdp-growth-annual

Cyprus agrees deal on €10bn bailout – FT.com.

Cyprus reaches last-minute deal on 10 billion euro bailout | Reuters.

Cyprus Salvaged After EU Deal Shuts Bank to Get $13B – Bloomberg.

As you have figured out by now, eurocrisis deals must occur in the wee hours of the morning before European markets open.  This gives the parties the maximum amount of time to play Machiavellian brinkmanship games in addition to making the eventual movie about the eurocrisis more dramatic.

This is the deal.  In exchange for €10bn in loans from the troika, Cyprus will restructure its two largest and weakest banks.  Deposits under €100k will be placed into the Bank of Cyprus with the amount over the threshold moved into Laiki bank.  Bank of Cyprus will serve as the starter for a new, good bank, while Laiki will serve as the core of the bad bank.

All bad loans will be moved to Laiki with good loans moved to Bank of Cyprus.  Excess deposits will fund the resolution of the new bad bank with depositors receiving equity.  These depositors will receive some money in the future as the bad bank is wound down.  Bondholders also will be impaired and receive equity in exchange.

Cyprus will be subject to capital controls for the time being to limit the run on its banks.  Depositors will face restrictions in withdrawing and transferring funds.  The exact type and the duration of these restrictions has not yet been disseminated to the public.

The Eurozone survives another day, but at what cost? These are the consequences of this bailout.

Unsustainable Debt Load. Not only will Cyprus’ debt balloon to nearly 120% of GDP, it will be unable to service this debt in the immediate future as its largest industry is pared down over the next few years.  Cyprus is a small country with limited domestic industry.  Like Greece, it will be hard-pressed to increase its exports, and a strong euro does not help.  The facts and figures are here:

https://dareconomics.wordpress.com/2013/03/16/cypriot-debt-will-not-be-sustainable-in-2020/

Crisis Fighting Precedent.  Cyprus’ treatment by the Germans shows stakeholders in the periphery the treatment to expect if a bailout is required.  Even though small depositors get to keep their money, it will be subject to capital controls indefinitely.  With banks paying practically zero interest, people are better off keeping their money in a mattress.

Democracy.  People throughout the periphery cannot help noticing that the Cypriot Parliament was bypassed in making this deal.  Doing “whatever it takes” includes subverting the democratic process.  This may actually soothe investors in periphery debt, but at what price?

dareconomics.com

Cyprus Roundup for March 20, 2013

Cyprus Petra tou romiou beach

Cyprus, EU Work on Contingency Plans – WSJ.com.

There is no alternative to the deposit tax to raise money for the bailout.  The contingency plans focus on what to do after the bailout occurs.  A large amount of account withdrawals is expected in the wake of this bailout, and Cyprus and the troika are considering steps to staunch the outflow of deposits.
Cyprus is likely to impose capital controls including limiting daily withdrawals and the amount of money that may be electronically transferred out of the country both physically and electronically.

Of note, Euro officials do not believe that a contagion will spread from Cyprus to the rest of the Eurozone banking sector.  This may be the reason why Germany is playing hardball with the Cypriots.

ECB Said Likely to Delay Vote on Emergency Cyprus Bank Lending – Bloomberg.

The ECB is stalling to create extra time for Cyprus and the troika to work out a deal.  Cyprus will extend its bank holiday until the end of the week.  Couple with a national holiday on March 25, this action creates another five days for the troika and Cyprus to reach a deal.

In the meantime, since the banks are remaining shut, the ECB’s vote on continuing ELA is moot and won’t be held at its mid-month meeting.  The ECB does not want to precipitate a collapse by voting to end Cyprus’ ELA and will wait until the troika makes a political decision before acting.

Analysis: In Cyprus standoff, Germany refuses to blink | Reuters.

The Germans have blinked every time during the eurocrisis in order to maintain the stability of the eurozone.  This time, they are given every indication that they will not allowing Cyprus to sink if it does not adopt an appropriate bailout plan.

German politicians have taken the position that a Cypriot default and exit will not  precipitate a general euro crisis.  Moreover, the MPs believe that they will not be able to justify a bailout of whom their constituents believe to be Russian organized crime.

I agree with the Germans in one sense.  A Cypriot default will not create a Eurozone panic immediately; it will merely sow the seeds for the endgame.  The next time a country comes under market pressure, investors will recall the treatment of Cyprus and attempt to get all of their money out before it is too late.  Once the markets move, it is already too late.  Invest wisely.

What next for Cyprus after bailout vote? – Mar. 20, 2013.

This article doesn’t answer the question posed by its headline.  There are references to what will not happen, i.e. a broad deposit-based tax, but there is no alternative presented save for the usual hope of a white knight arriving to fix everything.  The white knight in this case is Russia, so don’t expect much.

In Cyprus, Europe Sets a New Standard for Stupidity – Bloomberg.

Europe made two mistakes here. First, the structure of the bailout will destroy Cyprus’ largest economic engine.  Imagine if the U.S. bailed out Michigan, but as a consequence of the assistance the state could no longer manufacture cars.  While it would be saved temporarily, over the long term it would have no way to pay back any loans without the contribution of its largest industry.  That’s exactly what the troika has done by destroying Cyprus’ status as a banking have with a deposit confiscation and proposed capital controls.

Second, Europe has destroyed the concept of deposit insurance and resolution authority with this heavy-handed bailout.  The fact that it is so cavalier about these facets of a proposed banking union shows that the rich countries will never become joint and severally liable with the poor countries for the entire Eurozone banking system.

Without a closer European Union of which a banking union is a mandatory component, the euro crisis will continue to fester until the eurozone disintegrates.

 

Cyprus Roundup, March 19

GGB Price YTD

Cyprus Contagion Spreading: Greek Bonds Plunge Most Since Bailout | Zero Hedge.

The markets’ reaction to the Cyprus crisis was a big yawn.  Moves were adverse but slight.  Today, Greek bonds dropped the most since everything was fixed back in July, and this is a taste of the future.  Each crisis country has a potential confiscation waiting to happen, and this factor will cause a run in this sector.

For example, n Greece, there is always the potential for yet another voluntary buyback or some other euphemism masking a default causing the Greek bond yields to rise.  As investors wake up to which instrument is likely to bear the brunt of the confiscation, more runs will happen.

Cyprus Bank-Levy Passage in Doubt as EU Shows Flexibility – Bloomberg.

Cyprus aims to let small savers out of deposit tax; veto still likely | Reuters.

Cyprus is delaying the confiscation vote yet again.  The deposit confiscation does not have enough support in the Cypriot Parliament even when exempting small savers.  This has set up yet another round of eurocrisis brinkmanship.  The troika can cut off ELA and allow the Cypriot banks to fail, but that action will probably force Cyprus to exit the euro and default on its debts.  The fear is that a Cyprexit would lead to other countries leaving the Eurozone, a.k.a the dreaded domino effect.

Will Cyprus or the troika blink first, or will another solution materialize?

Former Cyprus Central Bank Head Slams ‘Blackmailing’ European Leaders | Zero Hedge.

Cyprus is rallying its surrogates to argue against the troika deposit heist.  Ex-CCB head Anthanasios Orphanides characterizes the troika’s actions as blackmail.  The troika issued an ultimatum to Cyprus early Saturday morning demanding the government to implement the deposit tax or suffer the consequences of the ECB removing ELA from Cyprus’ two largest banks.  This action would have pushed Cyprus into immediate insolvency.

While the troika is blackmailing Cyprus, it would be improper for its top government officials to state this publicly; hence, the former central bank head is trotted out to make the point.

A Cypriot Nobelist Is ‘Appalled’ by the Proposed Bailout Bank Tax – Businessweek.

Another distinguised Cypriot, Nobel prize winning economist Christopher Pissarides opposes the deposit confiscation.  He claims that Germany is bullying the smaller members of the Eurozone and that Germany wants all of the Eurozone members to behave like Germany.  These claims are true to an extent.  The problem with the euro is that smaller members unwittingly accept a monetary policy fit for the eurozone’s largest member.

Pissarides also points out that Cyprus is in crisis in part due to the ill-conceived bailouts forced on Greece.  The bulk of Cypriot bank losses are from Greek debt, both public and private.  Greek sovereign bonds have been written down by the troika, while the Greeks are defaulting on the private loans due to the ongoing depression.  In essence, the Greek bailouts forced Cyprus to request its own.

Cyprus braces for defeat on deposit levy – FT.com.

This article is a little stale as the vote has been pushed back yet again.  All financial services are on holiday in Cyprus for at least another day with another extension likely.

The Russians are protesting the troika’s deposit confiscation.  Will they use a natural gas embargo, implicit or explicit, as leverage? Will they wind up bailing out Cyprus? No one knows what the riddle, wrapped in a mystery, inside an enigma will do.  The key is Russia’s national interest.  Moving Cyprus away from NATO’s influence may be worth a few billion dollars or so.

Schaeuble says Cyprus, depositors must take responsibility | Reuters.

There is an upcoming election in Germany, and Schaeuble does not want his party to take the political fall-out for yet another bailout.  While Cyprus will receive assistance, it also must be punished and humiliated to assuage the resentment of German voters.

Cyprus is the victim of circumstances beyond its control, but Schaeuble spins the story into a morality tale:

Whoever deposits their money in a country because it will be taxed less and controlled less runs a risks when the banks in these countries are no longer solvent. That is what happened in Iceland and in Ireland some years ago. European taxpayers should not be made responsible for this risk.

This characterization ignores the role the troika has played in causing Cyprus’ woes.  Schaeuble is talking tough, but the question remains, will Germany or Cyprus blink first?

 

 

 

 

Troika Greek Bailout Drama

Greek Budget Deficits

Lenders say Greece makes reform progress | Reuters.

When you were in college, there was always that one couple who fought constantly, breaking up and getting back together  on a regular basis.  The troika and Greece have a similar relationship.

The troika says a lot of things in this article.  Officials state that Greece is making progress, and that they will return to reassess the program in April.  However, what they don’t say is more significant.  Troika representatives never say that Greece is definitely receiving the tranche of aid.

There are two sticking points.  Because this is Greece, the bank recapitalization that should have occurred in December is still being negotiated.  The reason is that the banks took huge losses by being forced to participate in the voluntary bond exchange.   The resultant write-downs have inflated the banks’ capital needs significantly, and no one knows where this extra money is coming from.

The other point of contention is the sacking of 27,000 state workers.  In fact, Greece doesn’t even need to actually lay off the workers but merely present a detailed plan to the troika showing which ministry is losing which workers.  Why they just don’t present the plan and then refuse to implement it like they usually do concerns me.  Are the Greeks losing their elan?

The troika packing its bags and moving out of Greece has happened several times before and will happen again just like with that couple you knew in college.  Within a day or two, they’ll both realize that they need each other, get drunk and makeup.

Greece needs money, and the troika needs to preserve their currency union.  The troika will move back into Athens in a few weeks, Greece will make promises to never cheat on it again and they’ll continue their dysfunctional relationship.