Cyprus bailout next?

[Umfriend]

Yeah, same difference though as a number of countries would then join Germany in a new currency. There actually is a different option and one that should have been chosen from the start: default and reorganise much as the Paris Club has done in the past.

[UtwigMU]

I also think this is the case.

Merkel said today that as long as she lives there won't be Eurobonds. (Why should German be forced to borrow money at higher rate because of others and lax rules on borrowing).

Once further countries fold, banks and governments who lent them money will fold in a domino effect. The two solutions left are printing money and dissolution of monetary union.

Just recently our financial minister said that Slovenia will not have to ask for EU financial help. I'm afraid this translates into "We will need help soon" as was the case with Greece, Ireland and Spain.

A rather prophetic speech by Margaret Thatcher from 1990 on what will happen with Euro:

http://www.youtube.com/watch?v=vZZf7cLhPG8

[dZeus]

I do not think eurobonds are a good idea. I would favor countries with failing fiscal policies to, at least temporarily, relinquisishing fiscal and economic policy and introduce reforms that make it easier to exit the Euro.

Don't you think it's more likely that with sufficient countries under fiscal pressure, a pact will be formed pushing the ECB for more monetary easing? In the end, Germany might quit before anyone else does...

[Umfriend]

I do not think eurobonds are a good idea. I would favor countries with failing fiscal policies to, at least temporarily, relinquisishing fiscal and economic policy and introduce reforms that make it easier to exit the Euro.

[Brian Ellis]

The conditions of the loan to Cyprus are still being negotiated. I know which public-funded fat cats who are draining the economy I would target! I speculate the loan at €5bn or thereabouts.

Something has got to change in the eurozone. The current situation is untenable and die Führerin will have to put some water in her wine. She is going further out on a limb (sorry for mixing my metaphors). The only long-term solution is a higher degree of federalism and controls, to make it a real money controlled by the ECB. This will involve pooling each country's monetary assets, reserves and debts and converting the latter into eurobonds. At the same time, it will be necessary to establish a federal fiscal police to stamp out fraud, money laundering and corruption within the eurozone. Not every country will welcome this (and not just the southern ones!). My hope is that the eurozone will not force all EU members to join. The zone could do better without the monetary mic-mac of the UK and some other current non-members.

[UtwigMU]

They are not donors yet and it's not so clear-cut.

Bailout means that each Euro nation (based on % of GDP) lends money at low interest to nation asking for help. For example in Slovenia we lent 400 millions (200EUR/250USD per capita) of EUR to Greece in first installment in 2010.

We are also not bailing out nations per se but banks which lent money to nations or banks in nations. While some nations such as Spain are not as much in debt and didn't have as much deficit, there was a huge real-estate crash and there is high unemployment. This meant that Spanish banks were under capitalized and state had to take on their debt.

Also once state asks for help, there are conditions attached (cutting public jobs, reducing social spending, balancing budget, liberalizing some sectors...)

Or as it happened in Greece:
When EU started, French and German banks could borrow money at low (3% interest) and lend it to Greece at 8% interest. Since Greece is net importer, this money then flew out of Greece to German exporters. While Germany is lending money to others and doesn't have as much control as they did with DEM, they are also benefiting from huge EU market. For example some German industrialists (BMW) are in favour of bailouts and against austerity.

When Greece was bailed out this money immediately went to German and French banks. and debt to banks was exchanged for debt to EU members, ECB, IMF. Then once Greece bankrupted the bonds were exchanged for less and some debt was written off.

Basically entire EU* tax payers bailed out German and French banks. Except for Slovakia, they have liberal (what in USA can be compared to libertarian) government and they said that Slovakian pensioners who receive 360 EUR on average will not bail out Greeks whose pensioners receive 1300 EUR.

If Euro survives and Europe is strenghtened, Euro will strenghten it's status of reserve currencies and having a reserve currency is huge benefit. For example alredy can Germans borrow money at negative interest since they are a safety haven now.

Question is how all this will unfold. While Euro was formed there were generally boom times and while there were Maastricht rules (3% of GDP, 60% debt, within 2% inflation/interest rate of EUR area). No one was enforcing those rules and everyone including Germany broke them even before the crysis.

Now there is a fiscal pact planned which will require constitutional changes by member states which dictates 0 deficit. Also talked about are Euro bonds (national bonds would be exchanged for EU bonds) but in this case there will be more political union.

While some (such as UK - in EU but not in Euro) are sceptic, there are quite a few countries who like EU (Poland - not in Euro, had practically no recession) or Estonia and Slovakia (both in Euro, their economy is doing well).

In 2013 there are elections in Germany and Merkel could be voted out or will have to form coalition with socialists. Since EU institutions (commission = quasi government, president) are impotent (for now), Merkel has stepped in to fill the void and she has been doing moderately OK job at this (concerning the mess we're in). What happens if she goes is anyone's guess.

Here is video of Angela Merkel's reaction to German team scoring a a goal against Greece on Euro football cup.

http://www.youtube.com/watch?v=VKJey41fDOw

[Dr Mordrid]

One wonders how long the German people are going to tolerate their status as perpetual donor.

[UtwigMU]

Cyprus asks for bailout help.

Cyprus has told the European authorities that it intends to apply for financial assistance, the fifth eurozone member to do so.

http://www.bbc.co.uk/news/business-18586532

And Spain also

http://money.cnn.com/2012/06/25/investing/spain-banks/

[UtwigMU]

Found this historic piece: The Latin Montary Union

http://en.wikipedia.org/wiki/Latin_Monetary_Union

The Latin Monetary Union (LMU) was a 19th century attempt to unify several European currencies into a single currency that could be used in all the member states, at a time when most national currencies were still made out of gold and silver. It was established in 1865 and disbanded in 1927.
Contents

By a convention dated 23 December 1865,[1] France, Belgium, Italy, and Switzerland formed the Latin Monetary Union and agreed to change their national currencies to a standard of 4.5 grams of silver or 0.290322 gram of gold (a ratio of 15.5 to 1) and make them freely interchangeable. The agreement came into force on 1 August 1866.[2] The four nations were joined by Spain and Greece in 1868, and Romania, Bulgaria, Venezuela, Serbia and San Marino in 1889.

The LMU eventually failed for a number of reasons. Some members, notably the Papal State's treasurer, Giacomo Cardinal Antonelli, began to debase their currency. This meant he minted coins with an inadequate amount of silver and then exchanged them for coins from other countries that had been minted correctly.

According to Financial Times, another major problem of the LMU was that it failed to outlaw the printing of paper money based on the bimetallic currency. A weakness which was exploited by France and Italy that printed banknotes to fund their own endeavours, effectively "forcing other members of the union to bear some of the cost of its fiscal extravagance by issuing notes backed by their currency"[9]. Greece also caused problems. According to the BBC, "its chronically weak economy meant successive Greek governments responded by decreasing the amount of gold in their coins[10], thereby debasing their currency in relation to those of other nations in the union and in violation of the original agreement". Greece was formally expelled from the Latin Monetary Union in 1908. It was readmitted in 1910, however.[11]


Emphasis mine. Nothing new going on here.

[UtwigMU]

I'm wondering how this will unfold. Break-up of Euro or some countries leaving it is possible.

I saw one currency breakup in my life (Yugoslavia) and I read up on how Austro-Hungary broke up.

What consequences might this have for certain countries in Europe - you can see 1920s and 1930s for historic reference. Unrests, soviet republics, hyperinflation, civil wars, clashes that resulted in full scale war. I don't think major war is to transpire in Europe, since key players are now China and USA but for example if Greece cannot form a government for a while or if one group in power goes to radical and other groups feel they need to use force to make/stop changes.

[Brian Ellis]

and right on queue we get the announcement of the next €100 billion wealth transfer from tax payers to banks' equity and bond holders, this time in Spain (I guess Cyrpus has to wait a bit longer).

But, if it happens, it won't be as much!

[dZeus]

and right on queue we get the announcement of the next €100 billion wealth transfer from tax payers to banks' equity and bond holders, this time in Spain (I guess Cyrpus has to wait a bit longer).

[dZeus]

UK's oil and gas reserves are (were) not really of the same scale as Norway's.

And I'd hardly call Norway's management of their oil reserves neither proper no prudent. They pump up way more oil that they need in income, while at the same time it is quite clear that future oil price will have a much bigger chance to go up than to go down. We'll see how well their investment fund will retain its wealth when more nations are driven towards bankruptcy and currencies are further debased in the near future.

As for the militant trade unions in France: to a certain degree it protects the rights of labor. In more 'docile' societies (North/North-West Europe, US), this just has led to a decrease in welfare as corporates can increase their profit margins by reducing labour costs.

I think that the nationalisation of banks while repaying bond and equity holders in full, financed by imposition of austerity on the populace is a very similar issue. My take is that we'll see a different reaction to this by the people in different parts of Europe (and US).

Docile societies work better when everybody works for the common good. As soon as you get a class of people who use the system to profit at the expense of others, then the situation can get far further out of control than in societies where people are more concerned about their own well-being and are vocal about it.

P.S. I think the two party system is a disaster. It's fake democracy, as neither side represents your interests any more. Further more, it encourages people to think in black and white, and 'cheer for their team' rather than to look critically at what is going on. The presence of plenty of threads with comments on democrats/republicans between Dr. M and cjolley are very representational of this behaviour.

[Brian Ellis]

The Bridgewater paper seems interesting but, as far as I could see at a skim through, it may be missing out on one or two things.

The most important is work ethic, aka as pulling oneself up by the bootstraps. Countries that have shown this, in my lifetime, are Germany, Austria and Switzerland in Europe and Japan and Singapore in Asia. All these countries were desperately poor after WWII but have succeeded in becoming wealthy by dint of hard work as much as having resources. In other words, the human mindset is a most valuable resource.

OTOH, the countries that have not done as well, such as the UK and France, have had top-heavy administrations, militant trade unions and have a mindset that God or the State will provide. Interestingly, in the UK, when Thatcher toppled the unions, the reliance on the State increased and all will towards hard work by manufacturing flew out the window, to be replaced by an increasing service economy which became too big for the demand. North Sea oil and gas was perceived as the saviour but no one saw that it was being bled dry and it became a bubble, currently bursting (cf. Norway, in a similar position but with proper management of its fuel resources).

The current rise of China and, to a slower extent, India is not, IMO, primarily because of cheap labour as many think or the presence of resources, but because of a new will to pull themselves up by their bootlaces. In other words, their mindset is changing; hard work is the new God, in order to become rich as individuals and as a nation.

The USA is starting to decline as their mindset is changing from manufacturing to services. IMO, the two-party system is, by far, too polarising and alternating administrations means that there is no common mindset because it needs a happy medium, an adjudicating middle-of-the road. People don't know whether they are coming or going, even though the words for both sides may sound the same, but mean different things. It would not surprise me if the USA goes into economic free fall in the next decade or so and it is going to hurt hard.

To get back to the subject from the wild generalities:
Cyprus had an economy largely based on one thing: tourism. A minority of service providers over-exploited it by ripping tourists off, creating an atmosphere of mistrust and dropping numbers. Successive governments have been weak and short-sighted, the present one worst of all, not helped by the 1974 US-backed invasion by Turkey of 1/3 of the island, which has been and still is a big bone of contention without a real will for a settlement (by either side). In other words, we struck gold, but the lode was small and mismanaged. We have just struck another valuable lode in the form of natural gas and this will probably be equally mismanaged because the mentality is always "we know best" while knowing nothing. The mindset in the Republic is "because we speak a dialect of Greek and our Church is an independent form of Greek Orthodoxy, we are Greek and everything that is Greek, including a 3000 year old culture, is perfect!". This is a big mistake, as the notion of being Cypriot, has become very secondary, plus the fact that the people have much more Phoenician blood in their veins than Greek. You see more Greek flags flying than Cypriot ones. Without a national identity, the country will never pull itself up by its bootlaces and will rely on bubbles, such as tourism and natural gas, for any prosperity they may acquire, much more than the will to be a vibrant nation.

I have often reflected that if, in 1960 (year of independence), it had thought ahead and acted, Cyprus could have been a second Singapore. At that time, the two small island states had much in common, with two major differences: we had developed an unworkable constitution and we had a weak president who was also Archbishop and couldn't reconcile his extreme Hellenism with the real needs of the country. We still suffer from this, a top-heavy administration, over-powerful trade unions and an unashamed will to get all it can from the EU and give nothing in exchange. The world owes Cyprus its living.

I know these words are inflammatory, but I see no upcoming leader who could bring some common sense to the island and that has become clear to me by the ineptitude of the present administration and megalomaniac President.

In the words of Frazer in "Dad's Army", we're doomed, aye, doomed!

[UtwigMU]

I think it goes much deeper than just introducing 2-party system.

I think USA is equally ****ed. You're in debt for about 120% of GDP and there is no way of ever repaying this. FED will print money to buy bonds and repay creditor nations which will in turn stop buying bonds and holding USD as reserve (this is already dropping).

One Dollar gradually looses this point your GDP falls for about 10-15% as you need to export to buy reserve currency to buy raw materials and goods and inflation goes up. I think everything will be fine till election but afterwards it will get more interesting (no end of world, ... I was a kid and we had inflation and I knew exchange rate of DEM/YUD).

http://www.bwater.com/Uploads/FileManager/research/deleveraging/why-countries-succeed-and-fail-economically--ray-dalio-bridgewater.pdf

This paper is really interesting as it compares USA to British Empire in 19th century.

Also really interesting book is why nations fail:

http://whynationsfail.com/summary/

http://www.nybooks.com/articles/archives/2012/jun/07/what-makes-countries-rich-or-poor/?pagination=false

http://www.amazon.com/Why-Nations-Fail-Origins-Prosperity/dp/0307719219/ref=sr_1_1?ie=UTF8&qid=1339091294&sr=8-1#reader_0307719219

The basic premise is that some countries for various reasons develop extractive institutions. For example in Peru even after revolution the inequality and poverty stayed.

Even if you change system nominally it still doesn't change instutitons, etc...

So I think stuff like if you guys in Cyprus go 2-parties or if you guys in Europe go China style strong 1-party or if you guys in USA no longer own guns and are more socialist will not solve problems.