6 ms·

"After five years of bailouts financed largely by austerity-weary European taxpayers, wealthy nations like Germany and the Netherlands have decreed that from no

by mixmax 14y ago

"After five years of bailouts financed largely by austerity-weary European taxpayers, wealthy nations like Germany and the Netherlands have decreed that from now on when a bank or country fails, it will be bond investors and perhaps even bank depositors who will be forced to pick up a big share of the bill." This is so incredibly stupid that it would be funny if it wasn't so tragic. They're basically telling everyone in the Eurozone that their money isn't safe in the bank, and that if you want to make sure it keeps being yours you should wthdraw it and move it to a safer place. Either under your mattress or outside of the Eurozone. They're basically asking for a bankrun across the southern European countries. Didn't any of these geniuses take econ 101?

InclinedPlane 14y ago
It's just another example of what's fundamentally wrong with the Euro. If you compare to the US, which is a continent sized country with a lot of diversity, you'll see some big differences. For one, the economic differences between regions in the US aren't nearly as large as in the eurozone. For another, the authority which regulates currency is also in control of taxation and government spending at a federal level, unlike the EU. Also, everyone in the US is subject to the same federal banking regulations and enjoys FDIC insured deposits. In the eurozone you have a hodgepodge with a currency system overlaid, and then when some financial crisis happens the whole system breaks down.
- niggler 14y ago
  " the economic differences between regions in the US aren't nearly as large as in the eurozone" I think the origin of this and other problems is the lack of a significant EU-wide tax system. The US federal tax system serves as a wealth distribution mechanism (some states like NY and CA pay much more than they receive, and other states like OK receive much more than they pay). A similar system in europe would help the net import nations like Cyprus and greece.
  - InclinedPlane 14y ago
    This works in the US because there isn't actually that great a disparity between the wealthiest and poorest states in the US, whereas the disparity is much, much greater in the eurozone. More so, the "poor" states in the US are still pretty wealthy even compared to some of the wealthiest European countries, whereas the poor countries in the eurozone are quite poor on an absolute scale (Estonia and Slovakia have a per capita GDP of around 15k USD, much less than half the poorest US states). Also, the poorest eurozone countries are quite populous, there are tens of millions of people who are living at less than 3/4 of the mean per capita GDP of the eurozone, whereas in the US the same figure is around 2 million. It's a much, much harder situation to deal with and the eurozone has fewer options and tools to do so.
    - skinnynerd 14y ago
      Take a look at this table http://www.economist.com/blogs/dailychart/2011/08/americas-fiscal-union?fsrc=scn/fb/wl/mp/redandblack http://www.economist.com/blogs/dailychart/2011/08/americas-f... to see how income is distributed in the US between the states. New Mexico has received over two-and-a-half times its 2009 GDP more in federal spending than it has sent in taxes over a twenty year period. The equivalent for Europe would be akin to Greece getting over $760 billion. Yeah, Europe has to work on its "union" aspect a bit.
      - uvdiv 14y ago
        That's not comparable: one is subsidy, one is spending. US spends money in New Mexico by maintaining military bases and hiring New Mexico residents to work for them [1]. They serve the entire country, not just New Mexico. In contrast, the EU sending checks to Greece or forgiving its debt is pure subsidy. Only Greece directly benefits from it. It's one thing to spend money in exchange for goods and services, and another thing to give it away in exchange for nothing. [1] https://en.wikipedia.org/wiki/New_Mexico#Federal_government https://en.wikipedia.org/wiki/New_Mexico#Federal_government
- Nux 14y ago
  Well, Europe has different dynamics, rooted in ancient times... and a lot of inertia. It's hard to steer all people in a certain direction, especially from quite different cultures. We're not Europeans; we're Romanians, Greeks, French, Cypriots and so on. We have a sense of belonging, not to each other, but to our individual nations. It is a "hodgepodge", but we must keep it together somehow. What happened last century must never happen again. I'm really keeping my fingers crossed for the EU; not necessarily for my generation, but for my kids and grankids. USA on the other hand is an "engineered" country, people got there relatively recently and said "Ok, that's it, let's do things this way". Of course you will see more homogeneity and agreement. And nationalism actually helps keep stuff together instead of dividing people.
  - Swizec 14y ago
    Remember, most of our countries formed in the 19th and early 20th century. Before that Germans for instance were Prussians, Bohemians, Moravians, Bavarians and so on. (39 states) The French for instance only commonly adopted the same language in 1914. (When literacy rates were high enough for everyone to know French instead of regional languages). Most countries in Europe were the same less than 200 years ago. I can easily see us being Europeans 100 years from now. I know Slovenians (where I'm from) still considered it a novelty to think of themselves as Slovenians as late as the 1840's.
    - Nux 14y ago
      Well, if this goes on for long enough, with open borders and such there's going to be a lot of mixing.. I'm not sure what we're going to call ourselves, but if nothing "explosive" happens in the next 2-3 centuries, I predict we'll be mostly brown-skinned and speak some sort of English.
  - InclinedPlane 14y ago
    The EU is one thing, the eurozone another. Overall I don't think either has advanced the cause of European brotherhood very much and I think now the eurozone may actually be setting that goal back quite a bit (ask the Greeks or the Cypriots how they feel about their French and German European brothers).
- martinced 14y ago
  Indeed. Excepted that this is not a financial crisis. The financial crisis is just a catalyzer. The fundamental issue is state who continuously spend more than what they made because states are run by politicians who can't count (because 99% of them are lawyers and lawyers can't count and they'll only accept advices from economists going their way: that is "more state"). We're now witnessing what happens when states spending more than what they make are running out of money. Of course socialists are trying to pretend it's a financial crisis and that without the financial crisis in the U.S. nothing would ever have gone wrong with all these highly socialists states in Europe spending more than they're making and creating an ever bigger state debt. Seriously who's buying that? When you're borrowing more money than what you make at one point payback time comes. And payback time is coming for socialists. And they don't like it.
  - scarmig 14y ago
    For all the ranting about socialism, deeply social democratic countries--namely, countries like Germany, Denmark, Norway, Sweden--are doing mostly fine. If not for the Eurozone crisis, I'd say they'd be much better places economically than the USA, let alone a country like Cyprus or Greece. This is despite having more generous public sectors than the Mediterranean. Nor is it simply corruption, though there's PLENTY of that to go around. Lots of corrupt countries aren't about to spontaneously collapse. But it's not totally crazy to imagine Italy, Spain, and Greece collapsing into chaos by the end of April. Or, if you're a pessimist, by the end of March... It's sectoral imbalances and a deeply broken EU.
    - ams6110 14y ago
      Norway is kind of a special case since they have oil. Denmark, Sweden... they have another decade or so before it hits there. Germany is such an industrial giant that again they are not your typical Eurozone country.
      - scarmig 14y ago
        Well, once you've explicitly excluded the quarter of Europe that counts as "rich" and "social democracy" as special cases, of course you won't have examples available that suggest that being an economically successful social democracy is possible. That doesn't even touch on the UK or France. Which, although certainly having their problems, also aren't the same kind of basket cases PIGS are. I excluded them initially because although they seem to have more severe problems than, say, Germany, they're still pretty economically successful and stable. By the time any of them get to a hypothetical debt crisis, the PIGS will have long-since imploded, and it'll be a totally different ballgame anyway that resists prediction.
Atropos 14y ago
Smug US/UK commentators have now been shouting for 3+ years about how incredibly stupid the EU is, how the Euro will break up in two weeks... But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years? Why are German bond yields lower than the US bond yields, and why do some stable eurozone countries still possess a triple AAA rating by all credit agencies, in opposition to the US? Considering the population, Cyprus is more like a middle-size city than a country. It joined the EU in 2004 and the Eurozone in 2008 - their problems are much older than that. Other than for humanitary reasons, the EU shouldn't and doesn't really care if they go under. If panicked investos withdraw their money they shall - smarter investors will pick up their holdings and realize gains; the doomsayers will end up as losers, like the US hedge funds ala Paulson betting against the EU the last years.
- jpdoctor 14y ago
  > But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years? You think it is something other than supply and demand? The Fed and BoE can print; The ECB cannot. The result (which is related to printing) you failed to quote: Greek deflation. It's not complicated.
  - Atropos 14y ago
    What exactly is your point? If we see market prices as reasonably efficient, the current Euro price shows that the typical "Stupid Eurocrats idiotic mismanagement of the flawed Euro project will lead to European collapse in 2 weeks" simply doesn't have a base in reality. Individual (small) countries may fail, the system will be fine, and misinformed doomsayers will - as always - end up making fools of themselves.
    - jpdoctor 14y ago
      > What exactly is your point? The euro is up 16% because there are more dollars in circulation chasing the same number of euros. Same for the pound. A deflationary environment in Europe (what are prices doing in Greece? What is the Spanish unemployment rate?) is exactly what you would expect, and the Euro up 16% against the USD and 23.3% against the UK pound is evidence of that. Or to put it another way: You quote evidence that supports the point you are trying to refute. (Perhaps you are being confused by the term "up" in currency exchanges? It makes exports more expensive, which makes the deflation worse since fewer employees will be needed.)
Lazare 14y ago
You know what's even better? In the Cyprus example, bond investors in the banks (who don't have government insurance) are being completely protected from losses). Small depositors (who do have government insurance) are having 6.75% of their savings calculated. That's entirely contrary to the policy you quoted. It's hard to really get your head around how wrong headed this decision is.
- JumpCrisscross 14y ago
  Cypriot banks finance themselves through deposits, not bonds. Less than 0.3% of Laiki's and 2.5% of Cypriot banks' €70 billion in assets are funded by bonds. Further, those bonds were issued under English law. The depositors are governed by local law. Government insurance means nothing when the government is broke (relative to the size of its banks). Nicosia does not have the €30 billion to reimburse accounts covered by the country’s deposit guarantee scheme. No bail-out means depositors being wiped out.
  - No1 14y ago
    "Cypriot banks finance themselves through deposits, not bonds." The Cypriot banks are going to find all of their deposits withdrawn as soon as they reopen, so they better figure out a new way to finance themselves.
    - deleted 14y ago
      [deleted]
- pcrh 14y ago
  The real problem here is not that depositors are getting a "haircut", which they should if they invest in non-profitable bank, but that the insurance on deposits under Euro 100,000 is no longer good. In a theoretical free market, depositors would lose all their money if a bank goes bust, just as stock holders lose their money if a company goes bust. Banks, however, hold a particular role in a modern economy that regular companies don't. As such, deposit insurance is a necessity for overall financial stability. In the case at hand, the decision by the Cypriot gov't to effectively cancel deposit insurance for smaller depositors is their biggest mistake, since it decreases confidence in both the banks and the gov't.
cft 14y ago
I believe the decision was based on German unwillingliness to bail out Russian "hot money" , which they believe is the majority of Cypriot bank cash deposits. They grossly miscalculated the public reaction however.
- eurleif 14y ago
  Is anyone of any importance seriously clueless enough that they can't predict the consequences of taking money out of everyones' bank accounts? And if so, what is wrong with the system that allows morons of that magnitude to gain power?
  - etherael 14y ago
    It sounds unbelievable enough that I really can't help but wonder if they're doing it on purpose. But assuming that were true, what have they to gain from doing so?
    - deleted 14y ago
      [deleted]
  - tptacek 14y ago
    I don't understand this question. What was the alternative? As people keep pointing out, Cypriot banks are overwhelmingly funded by their depositors. You can't just go after the bondholders in this case. And "do nothing" would have been worse, possibly by an order of magnitude, for depositors.
    - loumf 14y ago
      There are alternatives that amount to basically the same thing and are also disruptive, but perhaps differently. For example, they could leave the Euro, print money to bailout, let inflation rise, let their new currency devaluate, etc. It's also very risky and results in savers losing money. It's also less progressive than what they are proposing as it's strictly just a flat percentage of assets.
- 14y ago
riggins 14y ago
They're basically asking for a bankrun you've nailed the key outcome. I mentioned this on another thread, but this has to raise the risk of a European bankrun.
Turing_Machine 14y ago
Agreed, but I wouldn't necessarily restrict it to the southern countries. Everyone across the entire Eurozone now knows that their bank deposits can be confiscated without warning. If I were a bank teller, I think I'd call in sick tomorrow. It's not going to be pretty.

by mixmax 14y ago

InclinedPlane 14y ago

It's just another example of what's fundamentally wrong with the Euro. If you compare to the US, which is a continent sized country with a lot of diversity, you'll see some big differences. For one, the economic differences between regions in the US aren't nearly as large as in the eurozone. For another, the authority which regulates currency is also in control of taxation and government spending at a federal level, unlike the EU. Also, everyone in the US is subject to the same federal banking regulations and enjoys FDIC insured deposits. In the eurozone you have a hodgepodge with a currency system overlaid, and then when some financial crisis happens the whole system breaks down.

niggler 14y ago
" the economic differences between regions in the US aren't nearly as large as in the eurozone" I think the origin of this and other problems is the lack of a significant EU-wide tax system. The US federal tax system serves as a wealth distribution mechanism (some states like NY and CA pay much more than they receive, and other states like OK receive much more than they pay). A similar system in europe would help the net import nations like Cyprus and greece.
- InclinedPlane 14y ago
  This works in the US because there isn't actually that great a disparity between the wealthiest and poorest states in the US, whereas the disparity is much, much greater in the eurozone. More so, the "poor" states in the US are still pretty wealthy even compared to some of the wealthiest European countries, whereas the poor countries in the eurozone are quite poor on an absolute scale (Estonia and Slovakia have a per capita GDP of around 15k USD, much less than half the poorest US states). Also, the poorest eurozone countries are quite populous, there are tens of millions of people who are living at less than 3/4 of the mean per capita GDP of the eurozone, whereas in the US the same figure is around 2 million. It's a much, much harder situation to deal with and the eurozone has fewer options and tools to do so.
  - skinnynerd 14y ago
    Take a look at this table http://www.economist.com/blogs/dailychart/2011/08/americas-fiscal-union?fsrc=scn/fb/wl/mp/redandblack http://www.economist.com/blogs/dailychart/2011/08/americas-f... to see how income is distributed in the US between the states. New Mexico has received over two-and-a-half times its 2009 GDP more in federal spending than it has sent in taxes over a twenty year period. The equivalent for Europe would be akin to Greece getting over $760 billion. Yeah, Europe has to work on its "union" aspect a bit.
    - uvdiv 14y ago
      That's not comparable: one is subsidy, one is spending. US spends money in New Mexico by maintaining military bases and hiring New Mexico residents to work for them [1]. They serve the entire country, not just New Mexico. In contrast, the EU sending checks to Greece or forgiving its debt is pure subsidy. Only Greece directly benefits from it. It's one thing to spend money in exchange for goods and services, and another thing to give it away in exchange for nothing. [1] https://en.wikipedia.org/wiki/New_Mexico#Federal_government https://en.wikipedia.org/wiki/New_Mexico#Federal_government
Nux 14y ago
Well, Europe has different dynamics, rooted in ancient times... and a lot of inertia. It's hard to steer all people in a certain direction, especially from quite different cultures. We're not Europeans; we're Romanians, Greeks, French, Cypriots and so on. We have a sense of belonging, not to each other, but to our individual nations. It is a "hodgepodge", but we must keep it together somehow. What happened last century must never happen again. I'm really keeping my fingers crossed for the EU; not necessarily for my generation, but for my kids and grankids. USA on the other hand is an "engineered" country, people got there relatively recently and said "Ok, that's it, let's do things this way". Of course you will see more homogeneity and agreement. And nationalism actually helps keep stuff together instead of dividing people.
- Swizec 14y ago
  Remember, most of our countries formed in the 19th and early 20th century. Before that Germans for instance were Prussians, Bohemians, Moravians, Bavarians and so on. (39 states) The French for instance only commonly adopted the same language in 1914. (When literacy rates were high enough for everyone to know French instead of regional languages). Most countries in Europe were the same less than 200 years ago. I can easily see us being Europeans 100 years from now. I know Slovenians (where I'm from) still considered it a novelty to think of themselves as Slovenians as late as the 1840's.
  - Nux 14y ago
    Well, if this goes on for long enough, with open borders and such there's going to be a lot of mixing.. I'm not sure what we're going to call ourselves, but if nothing "explosive" happens in the next 2-3 centuries, I predict we'll be mostly brown-skinned and speak some sort of English.
- InclinedPlane 14y ago
  The EU is one thing, the eurozone another. Overall I don't think either has advanced the cause of European brotherhood very much and I think now the eurozone may actually be setting that goal back quite a bit (ask the Greeks or the Cypriots how they feel about their French and German European brothers).
martinced 14y ago
Indeed. Excepted that this is not a financial crisis. The financial crisis is just a catalyzer. The fundamental issue is state who continuously spend more than what they made because states are run by politicians who can't count (because 99% of them are lawyers and lawyers can't count and they'll only accept advices from economists going their way: that is "more state"). We're now witnessing what happens when states spending more than what they make are running out of money. Of course socialists are trying to pretend it's a financial crisis and that without the financial crisis in the U.S. nothing would ever have gone wrong with all these highly socialists states in Europe spending more than they're making and creating an ever bigger state debt. Seriously who's buying that? When you're borrowing more money than what you make at one point payback time comes. And payback time is coming for socialists. And they don't like it.
- scarmig 14y ago
  For all the ranting about socialism, deeply social democratic countries--namely, countries like Germany, Denmark, Norway, Sweden--are doing mostly fine. If not for the Eurozone crisis, I'd say they'd be much better places economically than the USA, let alone a country like Cyprus or Greece. This is despite having more generous public sectors than the Mediterranean. Nor is it simply corruption, though there's PLENTY of that to go around. Lots of corrupt countries aren't about to spontaneously collapse. But it's not totally crazy to imagine Italy, Spain, and Greece collapsing into chaos by the end of April. Or, if you're a pessimist, by the end of March... It's sectoral imbalances and a deeply broken EU.
  - ams6110 14y ago
    Norway is kind of a special case since they have oil. Denmark, Sweden... they have another decade or so before it hits there. Germany is such an industrial giant that again they are not your typical Eurozone country.
    - scarmig 14y ago
      Well, once you've explicitly excluded the quarter of Europe that counts as "rich" and "social democracy" as special cases, of course you won't have examples available that suggest that being an economically successful social democracy is possible. That doesn't even touch on the UK or France. Which, although certainly having their problems, also aren't the same kind of basket cases PIGS are. I excluded them initially because although they seem to have more severe problems than, say, Germany, they're still pretty economically successful and stable. By the time any of them get to a hypothetical debt crisis, the PIGS will have long-since imploded, and it'll be a totally different ballgame anyway that resists prediction.

Atropos 14y ago

Smug US/UK commentators have now been shouting for 3+ years about how incredibly stupid the EU is, how the Euro will break up in two weeks... But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years? Why are German bond yields lower than the US bond yields, and why do some stable eurozone countries still possess a triple AAA rating by all credit agencies, in opposition to the US? Considering the population, Cyprus is more like a middle-size city than a country. It joined the EU in 2004 and the Eurozone in 2008 - their problems are much older than that. Other than for humanitary reasons, the EU shouldn't and doesn't really care if they go under. If panicked investos withdraw their money they shall - smarter investors will pick up their holdings and realize gains; the doomsayers will end up as losers, like the US hedge funds ala Paulson betting against the EU the last years.

jpdoctor 14y ago
> But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years? You think it is something other than supply and demand? The Fed and BoE can print; The ECB cannot. The result (which is related to printing) you failed to quote: Greek deflation. It's not complicated.
- Atropos 14y ago
  What exactly is your point? If we see market prices as reasonably efficient, the current Euro price shows that the typical "Stupid Eurocrats idiotic mismanagement of the flawed Euro project will lead to European collapse in 2 weeks" simply doesn't have a base in reality. Individual (small) countries may fail, the system will be fine, and misinformed doomsayers will - as always - end up making fools of themselves.
  - jpdoctor 14y ago
    > What exactly is your point? The euro is up 16% because there are more dollars in circulation chasing the same number of euros. Same for the pound. A deflationary environment in Europe (what are prices doing in Greece? What is the Spanish unemployment rate?) is exactly what you would expect, and the Euro up 16% against the USD and 23.3% against the UK pound is evidence of that. Or to put it another way: You quote evidence that supports the point you are trying to refute. (Perhaps you are being confused by the term "up" in currency exchanges? It makes exports more expensive, which makes the deflation worse since fewer employees will be needed.)

Lazare 14y ago

You know what's even better? In the Cyprus example, bond investors in the banks (who don't have government insurance) are being completely protected from losses). Small depositors (who do have government insurance) are having 6.75% of their savings calculated. That's entirely contrary to the policy you quoted. It's hard to really get your head around how wrong headed this decision is.

JumpCrisscross 14y ago
Cypriot banks finance themselves through deposits, not bonds. Less than 0.3% of Laiki's and 2.5% of Cypriot banks' €70 billion in assets are funded by bonds. Further, those bonds were issued under English law. The depositors are governed by local law. Government insurance means nothing when the government is broke (relative to the size of its banks). Nicosia does not have the €30 billion to reimburse accounts covered by the country’s deposit guarantee scheme. No bail-out means depositors being wiped out.
- No1 14y ago
  "Cypriot banks finance themselves through deposits, not bonds." The Cypriot banks are going to find all of their deposits withdrawn as soon as they reopen, so they better figure out a new way to finance themselves.
  - deleted 14y ago
    [deleted]
pcrh 14y ago
The real problem here is not that depositors are getting a "haircut", which they should if they invest in non-profitable bank, but that the insurance on deposits under Euro 100,000 is no longer good. In a theoretical free market, depositors would lose all their money if a bank goes bust, just as stock holders lose their money if a company goes bust. Banks, however, hold a particular role in a modern economy that regular companies don't. As such, deposit insurance is a necessity for overall financial stability. In the case at hand, the decision by the Cypriot gov't to effectively cancel deposit insurance for smaller depositors is their biggest mistake, since it decreases confidence in both the banks and the gov't.

cft 14y ago

I believe the decision was based on German unwillingliness to bail out Russian "hot money" , which they believe is the majority of Cypriot bank cash deposits. They grossly miscalculated the public reaction however.

eurleif 14y ago
Is anyone of any importance seriously clueless enough that they can't predict the consequences of taking money out of everyones' bank accounts? And if so, what is wrong with the system that allows morons of that magnitude to gain power?
- etherael 14y ago
  It sounds unbelievable enough that I really can't help but wonder if they're doing it on purpose. But assuming that were true, what have they to gain from doing so?
  - deleted 14y ago
    [deleted]
- tptacek 14y ago
  I don't understand this question. What was the alternative? As people keep pointing out, Cypriot banks are overwhelmingly funded by their depositors. You can't just go after the bondholders in this case. And "do nothing" would have been worse, possibly by an order of magnitude, for depositors.
  - loumf 14y ago
    There are alternatives that amount to basically the same thing and are also disruptive, but perhaps differently. For example, they could leave the Euro, print money to bailout, let inflation rise, let their new currency devaluate, etc. It's also very risky and results in savers losing money. It's also less progressive than what they are proposing as it's strictly just a flat percentage of assets.
14y ago

riggins 14y ago

They're basically asking for a bankrun you've nailed the key outcome. I mentioned this on another thread, but this has to raise the risk of a European bankrun.

Turing_Machine 14y ago

Agreed, but I wouldn't necessarily restrict it to the southern countries. Everyone across the entire Eurozone now knows that their bank deposits can be confiscated without warning. If I were a bank teller, I think I'd call in sick tomorrow. It's not going to be pretty.