Cyprus bailout deal #2

Phoebas

InchicoreDude wrote: »

Everyone is talking about the levy on the bank accounts.

But are there other terms to this bailout? Like, will there be increased taxes for people in Cyprus too?

No doubt. There is an addition e10bn being loaned to Cyprus. There will be plenty of strings attached.

hmmm

A senior European Union official said international lenders were pushing the Cypriot government to exempt all deposit holders below €100,000. Instead, the IMF, the European Union and the European Central Bank wanted a levy of 15.6 per cent on all deposits above that level, many of which are held by Russians.

This is from the FT tonight. I guess the EU have begun to understand the ramifications of the original proposal.

A Dub in Glasgo

If this continues, people will just hoard money in the mattress especially now with sustained low interest rates

Scofflaw

hmmm wrote: »

This is from the FT tonight. I guess the EU have begun to understand the ramifications of the original proposal.

The Commission were opposed to any depositor levy:

The International Monetary Fund, which had been urging depositor haircuts for months, had won the argument over the skittish European Commission, which had long worried that seizing depositor assets could spark a bank run in Cyprus and, potentially, elsewhere in the eurozone.

José Manuel Barroso, the commission president, and Marco Buti, the top civil servant in the commission’s economics directorate, had even contemplated a programme that excluded the IMF, one senior official involved in the talks said. But by then, multiple officials said, the commission had lost credibility in Berlin.

The original reason for the levy on smaller depositors was Cypriot unwillingness to raise the levy on large depositors:

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/f890566a-8f24-11e2-a39b-00144feabdc0.html#ixzz2NwD5QAMJ

“The Cypriot president did not want to agree to a levy higher than 10 per cent,” said one top negotiator. “People were joking that he has only rich friends.”

Once that limit was placed on the top rate, it became simple maths. Negotiators agreed to count €1.4bn in privatisation receipts and new income from an increased corporate tax – which would go from 10 to 12.5 per cent – towards the Cypriot contribution, bringing the total needed from the deposits to €5.8bn. With a top rate of 9.9 per cent, the lower rate fell in at 6.75 per cent.

http://www.ft.com/intl/cms/s/0/f890566a-8f24-11e2-a39b-00144feabdc0.html#axzz2NpJHU2Me

cordially,
Scofflaw

Lou.m

The EU decision in Cyprus is unfathomable.

It could potentially threaten similar 'deals' across southern Europe. It has caused bank runs in Cyprus and there is there is the real threat of bank runs across southern Europe.

Financial institutions preach capitalism but want the rewards with none of the risks.It is placing a bet losing and taking everyone else's money.

It is stealing from the less well of the save the wealth of the well off when a truly free market they would both incur some losses.

And if Ireland ever needed another bailout??hmm?

ednwireland

Lou.m wrote: »

The EU decision in Cyprus is unfathomable.

It could potentially threaten similar 'deals' across southern Europe. It has caused bank runs in Cyprus and there is there is the real threat of bank runs across southern Europe.

Financial institutions preach capitalism but want the rewards with none of the risks.It is placing a bet losing and taking everyone else's money.

It is stealing from the less well of the save the wealth of the well off when a truly free market they would both incur some losses.

And if Ireland ever needed another bailout??hmm?

certainly no point saving in these times

djpbarry

Lou.m wrote: »

Financial institutions preach capitalism but want the rewards with none of the risks.It is placing a bet losing and taking everyone else's money.

It is stealing from the less well of the save the wealth of the well off when a truly free market they would both incur some losses.

But the banks obviously have incurred losses?

hatrickpatrick

djpbarry wrote: »

But the banks obviously have incurred losses?

So when was the last time you saw one of their incompetent managers queuing up for the dole having lost everything?

Dan133269

This is a question on which I started another thread in the EU sub-forum, but didn’t receive any responses. Hopefully someone here can provide some insight.

From what I've read about the Cypriot bail-in, a lot of sources are saying that a large amount of deposits are the proceeds of illegal crime from Russian mafia. The German Finance Minister, Wolfgang Schauble also effectively saying it. They're somewhat justifying their actions by implying that a large proportion of those hit with the haircuts will be criminals outside the EU, and bailing out the Cypriot banks will also be a bail-out for the criminals, by extension.

So my question in this, if there is a huge amount of money in Cyprus which is being laundered there from ill-gotten gains outside the EU, why hasn’t Cyprus been implementing the anti-money laundering legislation like it should have been under EU law? As far as I’m aware there have been 2 different Directives on this, and a third Proposed Directive has recently been announced. Apparently, Cyprus wasn't playing by the rules in order to get the advantages of all the hot money in their banks, but now they’re happy to cry that they’re the victim.

Scofflaw

Dan133269 wrote: »

This is a question on which I started another thread in the EU sub-forum, but didn’t receive any responses. Hopefully someone here can provide some insight.

From what I've read about the Cypriot bail-in, a lot of sources are saying that a large amount of deposits are the proceeds of illegal crime from Russian mafia. The German Finance Minister, Wolfgang Schauble also effectively saying it. They're somewhat justifying their actions by implying that a large proportion of those hit with the haircuts will be criminals outside the EU, and bailing out the Cypriot banks will also be a bail-out for the criminals, by extension.

So my question in this, if there is a huge amount of money in Cyprus which is being laundered there from ill-gotten gains outside the EU, why hasn’t Cyprus been implementing the anti-money laundering legislation like it should have been under EU law? As far as I’m aware there have been 2 different Directives on this, and a third Proposed Directive has recently been announced. Apparently, Cyprus wasn't playing by the rules in order to get the advantages of all the hot money in their banks, but now they’re happy to cry that they’re the victim.

Unfortunately, the Cypriot claim that there's no naughty money in their banks is very hard to challenge, because the Cypriot banks are regulated by Cyprus. Obviously, the necessary legislation to prevent money laundering will exist, and can be pointed to with an air of injured innocence. And clearly if it was going to be simply provable that the money in Cypriot banks was criminal money, it wouldn't be there.

So one is thrown back on whether it is generally regarded as being the case that the Cypriot banks contain dodgy money within the sector most likely to know, which is the financial industry - and there the impression that Cypriot banks are havens for questionable money is universal. For example:

But in his latest note, Dennis Gartman discusses the presence of Russian money:

"There is no question but upon whom the decision by the Cypriot government noted at length above is going to fall most heavily: Russian oligarchs; Russian government officials and Russian criminals.

"Cyprus has been their own private Switzerland for many years. Legal and non-legal Russian cash has swamped the banking system in Cyprus since the early 90’s. The beauty of the island; the ease of admission too and exit from the island via boat or plane; the secrecy of the banking laws; the warm Mediterranean climate and the ease of which Cypriot authorities could be bribed and bought all worked to make Cyprus the center of Russian capital flight.

...

"The Russians... legal and illegal... loved Cyprus for the reasons noted above, not the least of which was the tiny 4% corporate tax rate there. Who would not like that rate? It attracted money relentlessly, with the Russians leading the way. Criminal money especially was attracted to the secrecy laws, sending money to the island to have it “washed” and then either left there on deposit, or returned to other banking centers for “investment” abroad, but “washed” thoroughly and made nearly impossible to be followed and tracked. It was an enterprise that worked to the benefit of the Cypriot government and to the Russians, despite the comment by the new President, Mr. Anastasiades, that Cyprus was and is “not complacent about money laundering."

http://www.businessinsider.com/gartman-cyprus-stealing-russian-money-2013-3#ixzz2Nz9uv8dL

That's from someone who nevertheless regards the levy as theft - and thereby hangs a point which makes the question of money laundering sort of irrelevant. If the Cypriot government and banks pretend there is no laundered money in the banks, they are not then able to distinguish between criminal and honest money in their levy, and the levy falls on the honest and dishonest alike, making the criminal money as a justification for the levy false.

cordially,
Scofflaw

djpbarry

hatrickpatrick wrote: »

So when was the last time you saw one of their incompetent managers queuing up for the dole having lost everything?

I've never seen such a thing.

Does that mean that banks have not incurred losses?

hatrickpatrick

djpbarry wrote: »

I've never seen such a thing.

Does that mean that banks have not incurred losses?

Of course not, it means that the people responsible for f*cking them up have been protected when they shouldn't have been.
Drumm has been declared bankrupt. In the entire 2007 and onwards banking collapse, he's possibly the only high-up in any failed bank I can think of who has actually been screwed over by the mess he helped to create.
EDIT: What a coincidence. This just popped up on my Google News homepage:
http://www.independent.ie/irish-news/843k-euro-for-bailedout-bank-chief-29141273.html

A week after the Government warned banks to slash pay bills by up to 10%, Bank of Ireland revealed chief executive Richie Boucher earned a salary of 690,000 euro in 2012. He was paid an additional 34,000 euro in other remuneration costs, which includes car costs and benefits in kind, and a further 186,000 euro in pension contributions.

That's close to a million quid. A million quid from the taxpayer to someone working in a private business which if any of the alleged "capitalist" ideals touted by the defenders of the establishment's behavior had been followed, would not exist today.

Happyman42

How is this one gonna play out? How long can the banks stay closed?

A Dub in Glasgo

As long as democracy gets the right answer!

hatrickpatrick

A Dub in Glasgo wrote: »

As long as democracy gets the right answer!

Technocratic government in 5, 4, 3........

jimmycrackcorm

Can someone explain the difference between the IMF insisting on Cypriots paying a tax on their deposits to get a bailout, and them insisting on us having to pay a property tax to have our bailout?

nesf

jimmycrackcorm wrote: »

Can someone explain the difference between the IMF insisting on Cypriots paying a tax on their deposits to get a bailout, and them insisting on us having to pay a property tax to have our bailout?

The former is proportional to your liquid wealth, the latter is not.

InchicoreDude

jimmycrackcorm wrote: »

Can someone explain the difference between the IMF insisting on Cypriots paying a tax on their deposits to get a bailout, and them insisting on us having to pay a property tax to have our bailout?

But how do you know Cyprus will not have to pay a property tax?

Have we actually seen full terms of their bailout?

nesf

InchicoreDude wrote: »

But how do you know Cyprus will not have to pay a property tax?

Have we actually seen full terms of their bailout?

You miss his point. If we have to raise X billion, is it different if we do it through a property tax or a deposit levy and if it is, which is preferable from a fairness point of view?

djpbarry

hatrickpatrick wrote: »

That's close to a million quid. A million quid from the taxpayer to someone working in a private business which if any of the alleged "capitalist" ideals touted by the defenders of the establishment's behavior had been followed, would not exist today.

How much would the CEO of BOI be earning if the banking collapse did not occur?

nesf

djpbarry wrote: »

How much would the CEO of BOI be earning if the banking collapse did not occur?

Brian Goggin, the old CEO pre-bust was on around €4 million I think.

mike65

Is Cyprus about to become a de-facto client state of Russia?

hatrickpatrick

djpbarry wrote: »

How much would the CEO of BOI be earning if the banking collapse did not occur?

How is that relevant?
800 grand from the taxpayer to pay wages in a failed private company is too much no matter what the circumstances are.

djpbarry

hatrickpatrick wrote: »

How is that relevant?

I had a hunch that was a pretty low salary for the CEO of a large bank.

hatrickpatrick

djpbarry wrote: »

I had a hunch that was a pretty low salary for the CEO of a large bank.

It's 800 grand more than the salary of the CEO in an insolvent, bankrupt private company. The taxpayer should not be paying this amount of money to failed private companies (and I don't just apply this to banks, I would argue the same if the government had bailed out any other company).

Once the taxpayer has bailed out the company, it should be the taxpayer who makes the rules. The idea that the government has pulled these banks back from the abyss at a massive loss to everyone else and then can't do something like setting pay caps in them is just ridiculous.

Scofflaw

Cough...Cyprus bailout deal...or does this thread need to be closed/merged?

moderately,
Scofflaw

KyussBishop

Another good Golem XIV post, on how this is likely to affect Europe in the future, and noting other countries already considering deposit levies:
http://www.golemxiv.co.uk/2013/03/plunderball-the-new-euro-banking-game/

jmayo

hatrickpatrick wrote: »

Of course not, it means that the people responsible for f*cking them up have been protected when they shouldn't have been.
Drumm has been declared bankrupt. In the entire 2007 and onwards banking collapse, he's possibly the only high-up in any failed bank I can think of who has actually been screwed over by the mess he helped to create.
EDIT: What a coincidence. This just popped up on my Google News homepage:
http://www.independent.ie/irish-news/843k-euro-for-bailedout-bank-chief-29141273.html

That's close to a million quid. A million quid from the taxpayer to someone working in a private business which if any of the alleged "capitalist" ideals touted by the defenders of the establishment's behavior had been followed, would not exist today.

And something that should also be mentioned re mr boucher was that he was employed within the retail lending function of the bank, an area that helped drive the bank to destruction.
So he was rewarded for helping shove the bank into insolvency by being promoted to CEO.
Typical Irish insider deals.

Also remember this was the idiot that thought sean dunne's Ballsbridge plans were a good idea and lodged a letter of recommendation with Dublin City Planning dept stating such.
Oh and he addressed said letter as CEO of Retail Finances BOI.

It is idiots like him that have indeed cost us dear and yet he is promoted and rewarded.

djpbarry wrote: »

I had a hunch that was a pretty low salary for the CEO of a large bank.

You mean a large formerly insolvent bank that only exists thanks to the good graces of the Irish taxpayer ?

I cannot for the life of me see how people around here and indeed some so called experts in the media see the merit in putting a tax or levy on peoples' actual savings.

The idea has affectively undermined Europe's banking system.
What message is this sending out to the rest of Europe, especially the members of the PIIGS club.
Watch a run on banks the next time one of these looks like it needs a new bailout or a renegotiation.
The troika/IMF/EU/ECB have crossed a line and told both ordinary and high end depositors you may be fair game for a sizable precentage of your savings to be hit if they so chose.

Oh and if anyone thinks it is just Russian money in Cyprus then they are deluded.

podgeandrodge

My worry is that, regardless of promises from politicians, is that I can no longer confidentally believe that they will never attempt to steal them.

Can I ask therefore, and maybe someone legally minded might comment, if it would be reasonable to ask for an amendment to the constitution - to protect the deposits of depositors from removal by the State -

If this were possible, it would be clear enough that the amendment would be passed by a majority, and also clear enough that a removal of this protection would never be!

Phoebas

podgeandrodge wrote: »

My worry is that, regardless of promises from politicians, is that I can no longer confidentally believe that they will never attempt to steal them.

Can I ask therefore, and maybe someone legally minded might comment, if it would be reasonable to ask for an amendment to the constitution - to protect the deposits of depositors from removal by the State -

If this were possible, it would be clear enough that the amendment would be passed by a majority, and also clear enough that a removal of this protection would never be!

I don't think an amendment like that would make any difference. If the money is gone, its gone. Whether they call it a tax, or a bail on or a write down, the end result would be the same - less money in your deposit account.

I suppose we could pass laws that prevented banks from lending out what they received in deposits, but I guess they would just stop accepting deposits.

KyussBishop

An amendment like that would only be possible, if we had control over our own currency (i.e. if we had monetary sovereignty), which we don't; if we need help from Europe again, they can force whatever terms they like on us, just like they did with Cyprus; it will be "do what we say or jump off the cliff", the cliff being a banking system collapse and probable exit.

Arguably, as this crisis shows, there isn't much real sovereignty for a country without monetary sovereignty, and the disregard/incompetence the EU is showing with its dealings towards many of its member states, is increasingly scary; I doubt there is any hope now of Germany coming around, to agreeing towards implementing any kind of recovery policies (not even after their elections in September), so I think the EU is fúcked now and it's probably only a matter of time before the single currency breaks up.

Scofflaw

Phoebas wrote: »

I don't think an amendment like that would make any difference. If the money is gone, its gone. Whether they call it a tax, or a bail on or a write down, the end result would be the same - less money in your deposit account.

I suppose we could pass laws that prevented banks from lending out what they received in deposits, but I guess they would just stop accepting deposits.

It would more or less prevent banking entirely, yes. Interestingly, it would prevent the useful bits of banking, without preventing any of the bits they get themselves into trouble with.

Our banks had problems partly as a result a result of using wholesale short term debt to fund long term loans, while the Cypriot banks used only deposits. Different paths, but the same result, which is that of the government decides to save the banks, someone has to pay, and the government only really has one source of funds, which is the public. And since the government is rescuing the banks for the greater good, the rights of individuals do take a back seat.

cordially,
Scofflaw

djpbarry

KyussBishop wrote: »

...I think the EU is fúcked now and it's probably only a matter of time before the single currency breaks up.

We've been hearing these predictions for about five years now - the wait goes on.

Scofflaw

KyussBishop wrote: »

An amendment like that would only be possible, if we had control over our own currency (i.e. if we had monetary sovereignty), which we don't; if we need help from Europe again, they can force whatever terms they like on us, just like they did with Cyprus; it will be "do what we say or jump off the cliff", the cliff being a banking system collapse and probable exit.

Arguably, as this crisis shows, there isn't much real sovereignty for a country without monetary sovereignty, and the disregard/incompetence the EU is showing with its dealings towards many of its member states, is increasingly scary; I doubt there is any hope now of Germany coming around, to agreeing towards implementing any kind of recovery policies (not even after their elections in September), so I think the EU is fúcked now and it's probably only a matter of time before the single currency breaks up.

I would have said it shows there's not much sovereignty for countries who get themselves into more bank trouble than they can afford to get themselves out of. It's surprisingly similar to what happens if you get into the same position as a company or individual - you need to borrow money, lenders set conditions.

Funny old world, eh?

cordially,
Scofflaw

KyussBishop

Scofflaw wrote: »

I would have said it shows there's not much sovereignty for countries who get themselves into more bank trouble than they can afford to get themselves out of. It's surprisingly similar to what happens if you get into the same position as a company or individual - you need to borrow money, lenders set conditions.

Funny old world, eh?

cordially,
Scofflaw

Ya but that's what monetary sovereignty changes; you don't need to borrow anything when you have that, and you can fulfill depositor insurance guarantees, and you don't need to go to the markets to achieve funding.
Think about it: Why borrow money and pay interest, when you can just create it and spend it, with the limit being the inflation target? (remember, the current systems restrictions against this are only political, not economic)

As I mentioned to someone in a different thread yesterday, macroeconomic accounting is not the same as household accounting, because of the ability to utilize money creation (among many other things which differ).


One of the most influential economic writers around, Martin Wolf (a leading editor and writer in the Financial Times) recognizes this too, albeit he is coming around to it only slowly:

Martin Wolf wrote:

Above all, it is not clear what a rating for a sovereign that borrows in its own fiat (government-made) money actually means. Unless it chooses to do so, such a sovereign cannot default on the debt denominated in its own currency.

http://www.ft.com/intl/cms/s/0/efcab958-7dd1-11e2-aff5-00144feabdc0.html#axzz2Ll2m2AFP

Martin Wolf wrote:

Mr Cameron argues that those who think the government can borrow more “think there’s some magic money tree. Well, let me tell you a plain truth: there isn’t.” This is quite wrong. First, there is a money tree, called the Bank of England, which has created £375bn to finance its asset purchases.

http://www.ft.com/intl/cms/s/0/1670a3d2-880f-11e2-8e3c-00144feabdc0.html#axzz2NQc3UkhI

This is not recognizing the full potential applicability of public money creation on his part, but it is a significant portion of the way there; these are views that are (achingly slowly) gaining wider mainstream attention, and warrant a very close look (current mainstream/neoclassical theory, actually ignores the role of debt, banks and money in its models/foundations, which is one of many reasons economic teaching is so messed up at the moment).

I know the initial response to this stuff is skepticism (and it doesn't help that there's a crowd that likes to pour scorn on it, rather than engage in argument), but if you give this stuff a good look, it's very intuitive and makes a lot of sense, once it 'clicks'.

jmayo

KyussBishop wrote: »

...
Arguably, as this crisis shows, there isn't much real sovereignty for a country without monetary sovereignty, and the disregard/incompetence the EU is showing with its dealings towards many of its member states, is increasingly scary; I doubt there is any hope now of Germany coming around, to agreeing towards implementing any kind of recovery policies (not even after their elections in September), so I think the EU is fúcked now and it's probably only a matter of time before the single currency breaks up.

djpbarry wrote: »

We've been hearing these predictions for about five years now - the wait goes on.

Just think of it being like the Irish housing bubble burst.
Some may try and convice you that a corner has been turned and everything will be hunky dory, but then more slippage continues.

Just be patient.

clairefontaine

KyussBishop wrote: »

An amendment like that would only be possible, if we had control over our own currency (i.e. if we had monetary sovereignty), which we don't; if we need help from Europe again, they can force whatever terms they like on us, just like they did with Cyprus; it will be "do what we say or jump off the cliff", the cliff being a banking system collapse and probable exit.

Arguably, as this crisis shows, there isn't much real sovereignty for a country without monetary sovereignty, and the disregard/incompetence the EU is showing with its dealings towards many of its member states, is increasingly scary; I doubt there is any hope now of Germany coming around, to agreeing towards implementing any kind of recovery policies (not even after their elections in September), so I think the EU is fúcked now and it's probably only a matter of time before the single currency breaks up.

How much time to you think it will take?

Right now it looks like Germany is the only country to have a decent economy but if there is no one in the Eurozone with money to buy their stuff and they are sustaining all these loans, how long can that last?

Scofflaw

Hmm. Russian banks don't want to buy Cypriot banks:

Russia's two largest state-owned banks have now both said they are uninterested in buying Cypriot banks, reports Howard Amos.

The island-state's banking assets were one of the bargaining chips Cypriot Finance Minister Michalis Sarris was hoping to be able to use to tempt the Kremlin into offering a rescue package.

“We don't, of course, have any plans of that sort,” said Andrei Kostin, the head of Russia's second biggest bank, VTB. “Our interests are that we are given the opportunity to carry out payments and access the accounts of our clients.” VTB has a subsidiary on Cyprus called Russian Commercial Bank which is at risk of losing “millions of euros” in a compulsory levy.

German Gref, the head of Russia's biggest bank, Sberbank, said last night that he had been approached about buying Cypriot banks, but had turned the offer down.

Cypriots don't even turn up for a eurogroup phone conference to discuss options:

In detailed notes of the call seen by Reuters, one official described emotions as running "very high", making it difficult to come up with rational solutions, and referred to "open talk in regards of (Cyprus) leaving the euro zone".

The call was among members of the Eurogroup Working Group, which consists of deputy finance ministers or senior treasury officials from the 17 euro zone countries as well as representatives from the European Central Bank and the European Commission. The group is chaired by Austria's Thomas Wieser.

Cyprus decided not to take part in the call, a decision that several participants described as troubling and reflecting the wider confusion surrounding the island's predicament.

"The (Cypriot) parliament is obviously too emotional and will not decide on anything, if Cyprus does not even feel that they can attend the call it is a big problem for us," the French representative said, according to the notes seen by Reuters. "We have never seen this."

They've known their banks were in trouble since late 2011, the previous government refused all bailout deals, and neither Russia nor the EU seems to be able to offer them what they want. Where do they go from here?

cordially,
Scofflaw

djpbarry

KyussBishop wrote: »

Think about it: Why borrow money and pay interest, when you can just create it and spend it, with the limit being the inflation target?

For one thing, the interest on your existing debts effectively increases.

KyussBishop wrote: »

As I mentioned to someone in a different thread yesterday, macroeconomic accounting is not the same as household accounting....

Well of course it's not exactly the same - every analogy breaks down at some point. But that doesn't make it an invalid comparison - the basic point still stands.

Oracle

Cyprus bailout deal exposes the real agenda; the EU wants to privatise the utilities, introduce universal stealth taxes for property and water, and levy after-tax savings and income.
The EU want citizens to pay income tax, pay for State and household services and pay tax again on their personal after-tax spending (VAT), savings and income.

Scofflaw

Oracle wrote: »

Cyprus bailout deal exposes the real agenda; the EU wants to privatise the utilities, introduce universal stealth taxes for property and water, and levy after-tax savings and income.
The EU want citizens to pay income tax, pay for State and household services and pay tax again on their personal after-tax spending (VAT), savings and income.

Actually they just want the Cypriots to come up with some of their bailout programme fund, because otherwise the Cypriot debt:GDP ratio is unsustainable, and the bailout votes won't get past the parliaments of the lending countries, or the IMF, without such a contribution. But there's no telling the paranoid that, I guess.

regards,
Scofflaw

KyussBishop

clairefontaine wrote: »

How much time to you think it will take?

Right now it looks like Germany is the only country to have a decent economy but if there is no one in the Eurozone with money to buy their stuff and they are sustaining all these loans, how long can that last?

Ya exactly that I've been reading in places lately, that Germany is harming the economic performance of the very countries it depends on exporting to, so it's eventually going to drag them down too.

I've only relatively recently been giving greater attention to Europe, and there's not really a way to tell how much longer it will last, but you can see across Europe the rise of parties like Beppo Grille's (who is also, from what I can tell, a monetary reformist) 5 star movement, and the rise of other anti-austerity parties, and they are only going to get more popular over time as countries get fed-up of these failed policies.

So, the policies in place in Europe now are only going to aggravate the social suffering in most countries, driving the popularity of the anti-austerity parties, and eventually one of them will get in power and will push for more reform policies (unlikely to succeed due to Germany), or will get favourable terms on economic assistance from the EU/ECB (and stay put), or will exit.

It could still take many years though, as there's not really any accurate way to tell what is going to happen politically in countries, so we'll still be stuck in this limbo for quite a while, until some country sets the precedent, by leaving.


I'd still prefer to see recovery while staying in the EU though, as that is the best of all worlds, just can't see Germany ever acquiescing to the necessary policies; exiting from the single currency will be extremely painful in the short/medium-term for countries doing that (but is arguably less painful in the long-term, than sticking with things as they are).

KyussBishop

djpbarry wrote: »

For one thing, the interest on your existing debts effectively increases.

Typically bonds are sold at a fixed rate, so their interest rate doesn't increase; and you don't need to go to market for more bonds, once you start utilizing money creation.

You're even able to pay the interest on current bonds (and the principle, but only when the debt falls due; you don't pay it off early) using money creation (always limited by the inflation target), and eventually the country will extinguish all of its debts.

djpbarry wrote: »

Well of course it's not exactly the same - every analogy breaks down at some point. But that doesn't make it an invalid comparison - the basic point still stands.

Money creation breaks that comparison completely though, because it unlinks government spending from taxation; the limit to government spending becomes hitting the inflation target, not government income (i.e. taxes).

clairefontaine

KyussBishop wrote: »

Ya exactly that I've been reading in places lately, that Germany is harming the economic performance of the very countries it depends on exporting to, so it's eventually going to drag them down too.

I've only relatively recently been giving greater attention to Europe, and there's not really a way to tell how much longer it will last, but you can see across Europe the rise of parties like Beppo Grille's (who is also, from what I can tell, a monetary reformist) 5 star movement, and the rise of other anti-austerity parties, and they are only going to get more popular over time as countries get fed-up of these failed policies.

So, the policies in place in Europe now are only going to aggravate the social suffering in most countries, driving the popularity of the anti-austerity parties, and eventually one of them will get in power and will push for more reform policies (unlikely to succeed due to Germany), or will get favourable terms on economic assistance from the EU/ECB (and stay put), or will exit.

It could still take many years though, as there's not really any accurate way to tell what is going to happen politically in countries, so we'll still be stuck in this limbo for quite a while, until some country sets the precedent, by leaving.


I'd still prefer to see recovery while staying in the EU though, as that is the best of all worlds, just can't see Germany ever acquiescing to the necessary policies; exiting from the single currency will be extremely painful in the short/medium-term for countries doing that (but is arguably less painful in the long-term, than sticking with things as they are).

So my next question is, if Germany is doing most of the lending here, than what is to say they wont need a bailout eventually? Who will bail them out?

Their economy shrank last quarter.

So my feeling is, we are in the very early stages of this problem, and we have a lot more time before we see this russian doll unfold, but it will not be pretty when it does.

djpbarry

KyussBishop wrote: »

Typically bonds are sold at a fixed rate, so their interest rate doesn't increase...

I said effectively increases - devaluing your own currency makes those interest payments more expensive.

KyussBishop wrote: »

Money creation breaks that comparison completely though, because it unlinks government spending from taxation; the limit to government spending becomes hitting the inflation target, not government income (i.e. taxes).

You're talking about these things like they're completely independent variables - money creation influences all of the above!

KyussBishop

clairefontaine wrote: »

So my next question is, if Germany is doing most of the lending here, than what is to say they wont need a bailout eventually? Who will bail them out?

Their economy shrank last quarter.

So my feeling is, we are in the very early stages of this problem, and we have a lot more time before we see this russian doll unfold, but it will not be pretty when it does.

I think the German banking system is largely healthy (but not really that sure to be honest), though they do have significant exposure in other countries; still, I doubt they would need a bailout (if they did, the ECB is always able to create money directly, instead of sourcing it from other countries).

As their economic output decreases though, austerity will begin to bite harder in Germany as well, which may eventually bring about some political changes (which may not matter by then, because they have an election in September, and there isn't enough of an anti-austerity movement there now, so it will be a pro-austerity part for a number of years still).

Blogs like www.nakedcapitalism.com and also Yanis Varoufakis' blog often discuss the EU, but I don't know where would be a place to get similarly good information on individual countries in the EU, and their possible future (they tend to come up on those two sites though, when something of note happens, like in Italy with Grillo).

KyussBishop

djpbarry wrote: »

I said effectively increases - devaluing your own currency makes those interest payments more expensive.

Not when your debts are denominated in your own currency; it is crazy for any country to hold significant debts in a foreign currency.

djpbarry wrote: »

KyussBishop wrote:

Money creation breaks that comparison completely though, because it unlinks government spending from taxation; the limit to government spending becomes hitting the inflation target, not government income (i.e. taxes).

You're talking about these things like they're completely independent variables - money creation influences all of the above!

Public use of money creation would be used for government spending, sure, but taxes would not have to be linked to government spending.

For macroeconomic accounting to match household/business accounting, spending has to match income (taxes), which (when you introduce money creation) it doesn't; you can deficit spend without debt.

Boulevardier

Am I the only person here who would not consider it completely mad for the EU (not just the Eurogroup, the whole EU) to come up with a 6.5 bn grant-in-aid for Cyprus, with no repayment strings attached?

They would still get the 10bn Troika loan and this extra handout would cut through the remaining difficulties without adding to Cyprus's debt. It is a small economy and the EU could afford this in these special circumstances.

Scofflaw

Boulevardier wrote: »

Am I the only person here who would not consider it completely mad for the EU (not just the Eurogroup, the whole EU) to come up with a 6.5 bn grant-in-aid for Cyprus, with no repayment strings attached?

They would still get the 10bn Troika loan and this extra handout would cut through the remaining difficulties without adding to Cyprus's debt. It is a small economy and the EU could afford this in these special circumstances.

It would also be illegal, and a heck of a precedent, particularly as a way of saving rich Russians.

cordially,
Scofflaw

Scofflaw

KyussBishop wrote:

I think the German banking system is largely healthy (but not really that sure to be honest), though they do have significant exposure in other countries; still, I doubt they would need a bailout (if they did, the ECB is always able to create money directly, instead of sourcing it from other countries).

The German banks have had a bailout to the tune of €295bn.

cordially,
Scofflaw