March 19th, 2013

Cyprus Says “NO!” to Taxes on Bank Deposits

I guess we are in uncharted waters, then. Now Russia has become the lender of last resort, which I am sure will come with some kind of cost, given that the Cypriots are now going to get comfy and cozy with Vladimir Putin—not my idea of the warm and fuzzy character one wants around to serve as a source of comfort during times of crisis. Meanwhile, other eurozone countries are swearing up and down that they would never levy taxes on bank deposits; one wonders how many members of their respective populations actually believe that.

I am going to hope that Dan Drezner is right, and that what happens in Cyprus stays in Cyprus—and possibly in the surrounding near regions. Because if that is not the case, Europe is in for a wild ride, and I have a hard time imagining a scenario in which the United States will not be adversely affected.

March 19th, 2013

Eurozone: Doomed

If there were any doubt that the eurozone is eventually going to go the way of the dinosaur, said doubt ought to be dispelled by what is going on in Cyprus:

Global stock markets fell on Monday as concerns over European sovereign debt returned to the forefront after the euro zone’s decision on partially funding a bailout of Cyprus by taxing bank deposits.

The declines gave U.S. equities investors the opportunity to lock in profits after last week’s extended rally, and trading was volatile throughout the day. Equities cut their losses midway through the session, but returned to solidly lower territory in the final hours of U.S. trading, led by banks.

The Cyprus move hit confidence in the European banking sector, sparking concerns that authorities might go after depositors in other euro zone nations. The euro and bonds of troubled European sovereign debtors also fell.

"Will authorities be able to convince markets that this proposal is only for this unique situation, for such a small country where the banking system is more of a tax shelter? If they can’t, that might cause new concerns about Europe’s banking system," said Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati.

The bloc struck a deal on Saturday to give Cyprus rescue loans worth 10 billion euros ($13 billion), but defied warnings - including from the European Central Bank - and imposed a levy that would cost those with cash in the island’s banks between 6.75 and 9.9 percent of their money.

Cyprus’ parliament put off a vote on the measure, which has shaken depositors’ confidence in banks across the continent, until Tuesday. With public anger at the deal widespread, the government said it was looking to reduce the losses for small savers.

Well, it is certainly going to be a shock to the system when bank deposits are being taxed. In a late move, the government of Cyprus announced that the tax would be a progressive one; small depositors wouldn’t sustain as much of a hit as larger ones will. But small depositors will still sustain a hit, so I am not sure how much a reduction in tax for small depositors will stop the bank runs. Everyone is looking at the situation with a wary eye, and the slightest hint of trouble will send people to the ATMs in a panic.

And of course, there is the danger that people in other countries will start bank runs as well:

Mohamed El-Erian, the chief executive of Pimco, the world’s largest bond investor, said: “In Europe, [the Cyprus bailout] could well undermine the recent tranquil behaviour of depositors and creditors in other vulnerable European economies – in particular Greece, Italy, Portugal and Spain.”


Some bankers now say the euro itself is now under threat. Lars Seier Christensen, chief executive of the Danish investment bank Saxo, said: “I believe it could be the beginning of the end for the eurozone as this is an unbelievable blow to the already challenged trust that might be left among investors.”

Wolfgang Münchau is worried:

Sir Mervyn King once said it was not rational to start a bank run but rational to participate in one once it has started. The governor of the Bank of England was right, of course. On Saturday morning, the finance ministers of the eurozone may well have started a bank run.

With the agreement on a depositor haircut for Cyprus – in all but name – the eurozone has effectively defaulted on a deposit insurance guarantee for bank deposits. That guarantee was given in 2008 after the collapse of Lehman Brothers. It consisted of a series of nationally co-ordinated guarantees. They wanted to make the political point that all savings are safe.

Münchau wrote his article before progressive rates were announced, but again, does anyone believe that the announcement of progressive rates did a whole lot in calming things down? For all we know, a further haircut might be announced. I hope that I am wrong, but if I am not, then the integrity of eurozone commitments regarding bank deposits is irrevocably compromised. And it is hard to see how the eurozone will survive in that kind of environment.

January 13th, 2013

Hank Greenberg, AIG and Misplaced Outrage

I know that there are a lot of people who are ever-so-mightily upset that Hank Greenberg of AIG had the temerity to sue the federal government regarding a Takings Clause issue that arose from the government’s bailout of AIG, but as Stephen Bainbridge points out, there most certainly does exist an important legal principle at stake in this case, and that principle deserves to be settled by allowing Greenberg to have his day in court.

It is worth noting that Professor Bainbridge is all over this issue. He explains here why AIG’s board had to join Greenberg’s suit; note that former Harvard law professor—and current Massachusetts senator—Elizabeth Warren either does not understand, or pretends not to understand the reasons why AIG’s board had to join the suit, and here, he offers a further explanation as to why the suit against the government may have merit. Whether one agrees or not, there should be a consensus around the fact that political grandstanding regarding the issue should not replace sober legal analysis.

Unfortunately, however, there are a great many people more interested in fomenting outrage regarding the Greenberg/AIG suit than there are in spelling out the legal issues in dispassionate fashion. Interestingly enough, those waving the bloody shirt regarding this story like to call themselves part of the “reality-based community.”


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