Wednesday, March 27, 2013

With Cyprus Europe Continues Its March Towards Non-Lethal Suicide

Resolving a Crisis in the Worst Possible Way – Thanks to Germany

The crisis in Cyprus looks like it will be resolved with the equity holders, bond holders and holders of large deposits (greater than $140k) in one bank being wiped out, and equity and bond holders in another bank being forced to buy equity.  The large depositers in the Bank of Cyprus will exchange their bank accounts for stock, in effect being forced to invest in the stock of the bank.

Reality set in with respect to insured deposits, who will be kept whole.  The legacy though is a bitter and fractured Europe and a distrust in the banking system that will take decades to restore.  And when a banking system cannot function, an economy cannot function as Europe will learn in the coming months.

One of the really good economic columnists of the Financial Times, Wolfgang Munchau has it pretty much correct.

Few in Cyprus may agree, but the island state has got the best deal it was entitled to expect. This was not the morality play rolling across media bulletins that paint the country as an innocent victim of European highhandedness. It chose a high-risk strategy of living off a banking system far bigger than the state could support. Two years after Nicosia lost market access, the banks still have books seven times Cyprus’s annual economic output. Even proportionately small losses are unaffordable for the state to make good.

Yes, Cyprus got the best deal it could and

The relative victors are small depositors, who faced an unconscionable haircut, and non-financial business which was spared much worse chaos in a euro exit.

Had Europe arrived at this solution the first time, much of the damage could have been avoided.  But German insistence on punishing the people of Cyprus, an insistence motivated by domestic German politics made a problem into a crisis.  And the problem created by the inept crisis management is just beginning.  What a bunch of idiots.

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