Cyprus, Greece and the Eurozone Endgame

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The letter which forms the main body of this post was first written on 28th July 2011 – two weeks after the Mari disaster – in the form of a private letter to a key person in the unfolding Cypriot banking and economic catastrophe.

The letter called for the urgent separation of the Greek banking activities of the Cypriot banks with a view to shutting down the contagion channel which eventually engulfed Cyprus. Despite the ceaseless efforts of the recipient of this letter to do exactly that, our political and economic elite never took this warning seriously: even as late as this week, Cypriot bankers and officials are procrastinating with respect to the Troika’s request to spin off the Greek-based banking activities of Cypriot banks.

Today, and as predicted in this letter almost two years ago, Cyprus is staring at the destruction of its banking system as we have known it. As for the Eurozone, by now it has probably passed within the “event horizon” which leads to it being split asunder, most likely with an eventual German departure but not excluding departures from the periphery as Eurosceptic political parties rise in the polls everywhere.

28 July 2011

Attn: Mr …………

Dear …………..,

On current trends, and given our structural weaknesses in public finances, I am concerned that if we also add the recapitalization liabilities for our banks onto the public debt we will be looking at a lost decade for the economy, as by necessity the public sector must proceed to strangle the private sector on an ongoing basis in order to service the debt.

What is worse, this huge sacrifice of the recapitalization burden might fail to save our banks if the participation of Cyprus in the Eurozone is questioned even slightly leading to deposit flight.

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A Cypriot Solution to a Systemic Problem

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UPDATE: This proposal has been cross-posted to the comments section of FT Alphaville under the excellent post “A Cypriot Game of Chicken

If confiscation of deposits is a systemic danger, as the action in global markets has shown today, and

If €5.8 billion needs to be raised from internal Cypriot sources for the purposes of the Cypriot adjustment programme, as the Troika demands,

Then why confiscate this sum if a voluntary option is available? A truly voluntary option surely is not systemic.

The trick is to pull back from forcible confiscations and look for ways whereby depositors would want to contribute this sum.

What could possibly induce deposit holders to want to contribute €5.8 billion?

Is there an offer that no true Cypriot and no true European could refuse.

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IMF: We Screwed Up

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FT Alphaville reporting:

Christine Lagarde has urged countries to put a brake on austerity measures amid signs that the IMF is becoming increasingly concerned about the impact of government cutbacks on growth. Ms Lagarde, IMF managing director, cautioned against countries front-loading spending cuts and tax increases. “It’s sometimes better to have a bit more time,” she said at the annual meetings of the IMF and the World Bank on Thursday.

The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity.

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Europe’s Triple Cocktail: Lethal Medicine?

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The inspiration for this post is Wolfgang Münchau’s latest piece in the FT which scores 10/10 for logical clarity, as always:

Why is Greek GDP falling so fast contrary to what official forecasts have claimed? … If the economy misses the targets, more austerity is applied, which causes a continued fall in GDP, followed by another failure to meet the target. In other words, the troika is demanding policy action whose effect will be a further deterioration in the Greek economy, and thus a further deterioration in the debt ratio, which in turn requires further policy action of the same self-defeating kind.

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Wisdom of the Crowds – Eurozone edition

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Imagine a rosebush laden with fresh red roses glistening in the morning dew. What feelings and sensations come to mind?

Now imagine the Eurozone. What feelings and concerns come to the minds of tens of millions of people? As always, Google has our answer:

Nowadays, when the average person thinks of the Eurozone, they think of crisis, debt crisis, collapse and recession. The not-so-average persons, like the treasury officers of multinationals such as WPP, Reckitt Benckiser and Diageo, sweep Euros from accounts on a daily basis in anticipation of a breakup. Depositors in Greece and Spain are voting with their feet.

The ECB will not cut off the southern central banks from the TARGET2 system which enables all deposit withdrawals to be met, any more than a parent would knowingly send a child to its death, meaning that the ongoing deposit flight from south to north will be accommodated all the way up to the bitter end.

It is time for the Eurozone leadership elite to take a deep breath and admit that efforts of the past 3 years have been an abject failure. Only then it will be possible to pursue new efforts which at least have a chance of working.

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Where Did All The Money Go?

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Friends and colleagues often ask me “Where did all the money go? someone somewhere must have it!”. I too used to wonder – until I read this dinner speech by Benoît Cœuré, Member of the Executive Board of the ECB, which was delivered to the BIS-ECB Workshop on global liquidity a few days ago. This is well worth reading, as it is written clearly, it is a short piece (recall, it’s a dinner speech!) and it explains to a large part what happened to the global economy over the last 15 years.

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One Euro Is Not Enough

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One excuse reason why my posting frequency is down is that for all of the major issues that I have been following, the policy makers and mainstream commentators seem to be going round in endless circles, desperately trying to avoid doing the right thing. The corollary of that is that the independent bloggers have been stuck repeating themselves in pointing out the right thing! Case in point, the various modest and indecent proposals to save the Eurozone from implosion:

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