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Posts Tagged ‘ECB

Cyprus: new fault lines in the Eurozone

What to make of the Cyprus rescue deal announced this morning? Is it necessary? Absolutely: the Cypriot banking system is insolvent, and has been ever since the Greek rescue deal last year, if not before. Is it fair? Probably not. Knowing how weak the Cypriots’ bargaining position was, the troika (EU, ECB and IMF) has played hardball with one of the EU’s smallest member countries, which makes it certain that for every irate mobster or money launderer who loses a chunk of their capital, there will also be many hard luck cases.

The deal administers rough and ready treatment to bank depositors in the country’s two largest banks, while preserving – belatedly, and at the second attempt – the general principle that depositors with less than $100,000 euros are still protected from loss by state guarantee. (Important to note that while the EU has enshrined this principle as a political objective, the guarantees are only as good as the individual state that provides them. Cross-border deposit insurance, under which the EU would collectively guarantee bank deposits in all member states, is necessary if the banking union which the EU is trying to edge towards is ever to become a reality, but it remains so electorally toxic that it won’t be introduced any time soon). Read the rest of this entry »

Written by Jonathan Davis

March 25, 2013 at 4:12 PM

The cost of Europe’s deal

The latest Greek deal appears to have a fair chance of working in the short term, but it has not been without significant costs, especially for investors in European sovereign debt, as Jim Leaviss of M&G explains in this latest comment on the firm’s always excellent Bond Vigilantes blog. Of the five lessons he draws from the latest deal, his last is probably the most important from a long term perspective.

This was a bad deal, not because bond investors took losses, but because the losses they took were too small.  Even under heroic growth assumptions Greek debt to GDP will barely get down to 120 percent. The population will live with austerity for years and Greece will probably default again anyway.  And as others implement extreme austerity too, we’ll see the rise of extreme politics across the Eurozone. One lesson that policy makers across the world keep missing is that imposing punishment on moral hazard “sinners” is a luxury we don’t have in the middle of this series of crises. There have rightly been comparisons made between the terms of the Greek restructuring and the reparation terms that Germany was forced to accept after the First World War.  The biggest wave of defaults has yet to happen – not in the bond markets, but with the breaking of promises (retirement ages, pension entitlements, healthcare) made to complacent western populations.

Whether the Greeks default sooner rather than later, we will all be living with the consequences for a long time. The security of European sovereign debt has been downgraded, without yet solving the problem the deal is designed to address. It may have.prevented a short-term crisis, in other words, for which investors could be grateful, but at what longer term cost we don’t yet know. More government promises will inevitably be reneged on in the years ahead.

Written by Jonathan Davis

March 2, 2012 at 1:25 PM