Tag Archives: ECB

Portugal

Gaspar defends Portuguese economic program at Brookings

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Portuguese finance minister Vítor Gaspar (pictured above) spoke to a small audience at the Brookings Institution Tuesday, notably less than 36 hours after Cyprus and the ‘troika’ of the European Commission, the European Central Bank and the International Monetary Fund agreed on the terms for a Cypriot bailout — the fifth such eurozone bailout during the currency zone’s sovereign debt crisis.portugal flag

Of course, Portugal is one of those of other five countries, and Gaspar, for the past 21 months, has been responsible for implementing the terms of Portugal’s own bailout program.

Gaspar presented as optimistic a case as possible for Portugal’s current economic state on Tuesday. But he admitted that despite gains in lowering the country’s budget deficit, restoring Portuguese banks to greater health, and boosting the growth of Portuguese exports (the latter as much a sign of painful ‘internal devaluation’ of wages and incomes within Portugal as any sign of newfound productivity or competitiveness), Portugal’s GDP growth and employment rate remain problematic.  The Portuguese economy contracted by 1.6% in 2011 and 3.2% in 2012, and is expected to contract by a further 2.3% in 2013, while its unemployment rate, as of the last quarter of 2012, is 16.9%, its highest level yet.

As Gaspar noted, Portugal’s economy — second only to Italy’s — was already on the ropes when it entered the eurozone.  In particular, from 1990 to 2012, he claimed that the Portuguese economy marked a poorer performance than either Japan during its ‘lost decade’ or the United States during the Great Depression.  Regardless of whether that’s exactly right, there’s no denying that Portugal has faced long-term structural problems — since 2000, it’s notched GDP growth in excess of 2% just once (in 2007, when it grew by 2.37%, and that was at the height of the eurozone and global credit boom).

Gaspar placed much of the blame on Portugal’s failure to pursue macroeconomic stability in accordance with ‘best practices’ — i.e., Portugal simply failed to adjust properly upon accession to the eurozone 14 years ago.

Gaspar serves under prime minister Pedro Passos Coelho, whose liberal, center-right Partido Social Democrata (PSD, Social Democratic Party) came to power in the last election in coalition with the more socially conservative Centro Democrático e Social – Partido Popular (CDS-PP, Democratic and Social Center — People’s Party).

Among his solutions are greater EU-level banking union as a means of reducing the risk premium associated with peripheral economies such as Portugal’s — Gaspar added that the higher borrowing costs that constitute financial headwinds, especially in the context of budgetary adjustment.

But it was surprising not to hear any mention of the emigration of up to 1 million Portuguese from the country over the past 14 years — and nearly 250,000 since 2011 alone.  Passos Coelho in late 2011 was criticized when he suggested that young, enterprising Portuguese citizens should emigrate to Portuguese-speaking countries, such as Brazil in South America, or to Angola in southeastern Africa, still in the throes of an oil boom.  Angolan visas issued to Portuguese nationals jumped from just 156 in the year 2006 to nearly 150,000 by mid-2012.

Mozambique, another former Portuguese colony, apparently issues 200 visas a day to Portuguese nationals.

Invariably, that escape valve has kept Portuguese unemployment lower than the rates over 25% recorded in Spain and Greece.

Edward Hugh at A Fistful of Euros has made a very compelling case that the emigration of younger, working age Portuguese, combined with a decreasing birth rate and greater longevity has resulted in relatively fewer workers contributing to pensions and health care for relatively greater numbers of retirees, placing extraordinary long-term fiscal pressure on Portugal, given the lackluster expectations for future growth: Continue reading Gaspar defends Portuguese economic program at Brookings →

Cyprus, European Union

Cypriot-‘troika’ deal means that Cyprus is leaving eurozone in all but name

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Another late Sunday night in Brussels, another eurozone bailout plan for Cyprus — and it seems likely that the new deal between Cyprus president Nicos Anastasiades, and the ‘troika’ of the European Commission, the European Central Bank and the International Monetary Fund will endure much longer than last week’s disastrous plan, though capital controls to be implemented by the Republic of Cyprus’s government seem likely to lead to a backdoor eurozone exit for the nation of 1.15 million people.
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The Cypriot-troika deal in brief

The deal will shield depositors with under €100,000 in savings from a ‘haircut’ levy, but depositors with funds over €100,000 now face an even more painful result –what amounts to a haircut for depositors and creditors alike at the troubled Bank of Cyprus (the largest Cypriot bank), and an even deeper haircut for Laiki’s depositors and creditors, who will take huge losses as Laiki is wound down.  Laiki (also known as the Cyprus Popular Bank, the country’s second-largest bank) will be split into a ‘bad bank’ and a ‘good bank,’ the latter to be folded into the Bank of Cyprus.

All creditors at the Bank of Cyprus will see their interests restructured into a long-term equity interest and uninsured depositors will take an expected haircut of around 35% or 40%, with their deposits also held up for some time to come.

All the same, as Joseph Cotterill at FT Alphaville writes, the deal is better on two counts:

But there were two major injustices in the first Cyprus-Troika deal which made a mockery of the bail-in principle. Without debate, and upfront, it “taxed” depositors below the insured €100k limit alongside the uninsured. Then the tax was applied to either irrespective of bank. Why should small depositors in Barclays Nicosia or VTB Limassol take pain off large ones in Laiki or BoC, for instance. Well, finally, now we know. They shouldn’t have. The two unjust parts are gone.

Bonus points, I guess (if you’re a eurocrat), for structuring the deal in such a way that it can be implemented directly under Cyprus’s banking authority, so no need for another vote from the Cypriot parliament, which overwhelmingly rejected last week’s plan.  That plan featured a 6.75% levy on all depositors with savings under €100,000 in any Cypriot bank.  The parliamentary run-around, however, will only fuel the ‘democratic deficit’ hand-wringers throughout the European Union and breed resentment inside Cyprus and beyond.

The worst of the Irish and Icelandic precedents

Though the deal is ostensibly narrowed to focus on Cyprus’s two largest banks, and it’s better than last week’s plan, the deal essentially features the worst elements of the Irish and Icelandic examples.

Like Iceland, some of the Cypriot banking sector will be allowed to fail — Laiki’s uninsured depositors are out of luck, no matter whether they are Russian or Cypriot or whatever.  That’s exactly how Iceland approached its banking sector failure.

But unlike Iceland, Cyprus does not control its own monetary policy, so it won’t be able to devalue its currency and take the kind of independent monetary policy steps to rebalance its economy in the way that Iceland has.  Though Iceland is no longer the financial center it was before 2008, it has returned to GDP growth (around 3% in 2011 and 2.5% in 2012) and features relatively low unemployment — just 5.3% as of November 2012.  In contrast, Cyprus remains trapped in the ECB monetary policy straitjacket.

But like Ireland, the rest of the Cypriot banking sector will be essentially nationalized by the Cypriot government, with a European bailout that is likely to require additional bailout assistance and will come with increasingly stringent austerity measures that Cyprus’s government will be forced to take that will invariably depress its own GDP growth.  No one’s optimistic about Cyprus — it seems fated to suffer a fierce GDP contraction and a massive uptick in unemployment, joining Greece and Spain as one of the eurozone’s most troubled economies, no thanks to the Eurogroup’s clumsy policymaking.

Self-inflicted wounds to the European project

It’s worth repeating that the damage from the first Cyprus plan remains and cannot easily be reversed — Cyprus’s banking sector has now been decimated, probably permanently.  As one unsentimental Moscow economist put it, Cyprus’s beaches-and-banks economy is now just beaches.  The best hope for Cyprus’s economy is the rapid development of natural gas deposits that could bost its economy back after what will likely be a double-digit recession. But the ultimate scope and richness of those deposits are still unknown, and there’s no assurance that natural gas will be the country’s economic savior.

Brussels has so thoroughly undermined Anastasiades that he allegedly threatened to resign Sunday at one point, so it’s not clear how much legitimacy he’ll have in the next four years and 49 weeks of his five-year term, especially given that his own center-right party Democratic Rally (DISY, Δημοκρατικός Συναγερμός or Dimokratikós Sinayermós) controls just 20 of the 56 seats in the Cypriot House of Representatives (Βουλή των Αντιπροσώπων).

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In addition to the obvious ammunition that eurozone leaders have handed to euroskeptics, no one in Spain or Italy or Slovakia or Latvia should be feeling very good these days about keeping their money in national banks, deposit insurance or not.  Already today, Jeroen Dijsselbloem, the newly elected president of the Eurogroup of eurozone finance ministers (pictured above with IMF managing director Christine Lagarde), has released a statement walking back earlier comments that appeared to hail the Cypriot bailout as a precedent for future deals.

It’s been a horrible start for Dijsselbloem, who succeeded Luxembourg prime minister Jean-Claude Juncker — Juncker has already (very gingerly) criticized the Eurogroup’s post-Juncker approach to Cyprus, and it’s hard to believe that Juncker would have made some of the more glaring errors that  Dijsselbloem has made — unlike Juncker, who was Luxembourg’s finance minister from 1989 to 2009 and has been prime minister since 1995, Dijsselbloem has served as the Dutch finance minister for barely over four months. It’s starting to look like the decision to appoint Dijsselbloem as a sort of compromise Eurogroup president (he’s a pro-growth member of the Dutch Labor Party who’s implementing an austerity regime in an otherwise budget-cutting government led by center-right prime minister Mark Rutte) may have been a poor one.

Capital controls are a backdoor Cypriot eurozone exit 

While it’s far from an original observation — more sophisticated financial commentators and economists have made the same point — the biggest takeaway from the weekend is that Cyprus has essentially been booted out of the eurozone, in large part due to the capitol controls that Cyprus looks set to enact tomorrow when banks in the country reopen — here’s a short summary of the menu of options from Yiannis Mouzakis, based on the capital control bill that Cyprus’s parliament passed over the weekend.  There’s optimism that the controls will be ‘very temporary,’ and will be somewhat lighter than originally feared, but it’s worth noting that Iceland’s controls are still in place even today, over four years after their imposition in late 2008.

The inescapable conclusion is that a ‘Cypriot euro’ is no longer the same thing as a euro throughout the rest of the eurozone.

As former banker Frances Coppola wrote over the weekend, the imposition of capital controls transforms Cyprus into something far short of an equal member of the eurozone:

Once full capital controls are imposed, a Euro in Cyprus will no longer be the same as a Euro anywhere else in the Euro area. It cannot leave the island. The Cyprus Euro will in effect be a new domestic currency. The imposition of capital controls in Cyprus is therefore the end of the single currency in its present form.  Continue reading Cypriot-‘troika’ deal means that Cyprus is leaving eurozone in all but name →

Cyprus, European Union

Cypriot parliament overwhelmingly rejects EU bailout terms, turns to Plan B

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Protesters take part in an anti-bailout rally outside the parliament in Nicosia

This was not surprising.

After a couple of delays, Cyprus’s 56-member House of Representatives (Βουλή των Αντιπροσώπων) has rejected the European Union-led bailout of Cyprus’s banks by a vote of 0 to 36, with 19 abstaining and one not present.European_Unioncyprus_world_flag

As I wrote yesterday, the parliamentary rejection became increasingly likely as the vote became delayed.

So where do things stand now?

The crisis continues to unfold in real time — although the bailout terms ( €10 billion loan to Cyprus, with an additional €5.8 billion to be raised by means of a haircut on all Cypriot depositors) were announced Friday night, Cypriot banks are now closed through at least Thursday while everyone scrambles for a Plan B.

The European Central Bank has, for now, agreed to continue ‘its commitment to provide liquidity as needed within the existing rules,’ but who know what that means?  The current crisis started over the weekend when the ECB threatened to pull that support.

Obviously, EU leaders and the International Monetary Fund will probably go back to the negotiating table with newly inaugurated Cypriot president Nicos Anastasiades to determine a new approach — the EU position now seems to be that they don’t care how Cyprus raises the €5.8 billion, so long as they raise it.  Essentially, that means some kind of rebalancing of the burden to be shared by depositors in Cyprus — that means perhaps raising the 9.9% levy on deposits over €100,000 and lowering the 6.75% levy on deposits under €100,000.

Meanwhile, there’s word that Cyprus and Russia are now in talks over, potentially, either a solution that involves Russia or Gazprom — Cypriot finance minister Michael Sarris actually flew to Moscow Tuesday, which indicates that the Cypriots and the Russians are extremely serious.

In this regard, today’s vote probably bought some crucial time to come up with a credible counter-offer from Moscow.  Russian president Vladimir Putin is, in particular, upset about the approach because around 22% of deposits in Cypriot banks are held by Russian citizens.  That, in fact, is one of the reasons why the EU was so wary of providing a full bailout to Cyprus over the weekend.  Russia has designs on future exploration of natural gas deposits in Cyprus, and it could also well have designs on a greater military presence in Cyprus as well.  All of this has profound geopolitical security implications — for the EU and Greek Cypriots, but also for Turkish Cypriots, the United States, and its NATO allies, including Turkey.

Whether Anastasiades is serious or not about the Russian alternative, it certainly gives him more negotiation leverage with the EU and the IMF, which could conceivably revert back to a full  €17 billion bailout, via the ‘troika’ or through the European Stability Mechanism, as Open Europe notes in a great post.

We’re also in such uncharted territory that if ‘EU Plan B’ or ‘Russia Plan B’ don’t work, then Plan C is pretty much a disorderly default that finds Cyprus tumbling out of the eurozone, with even greater pain for Cypriot savers, Russians depositors, and all of the holders of private and public Cypriot debt, to say nothing of the costs to the eurozone — now that EU minds from Brussels to Berlin to Helsinki have escalated the bailout into an international crisis, it could catalyze an entirely self-inflicted domino effect that would pretty rapidly bring the eurozone to 2008-crisis levels.

So let’s hope we don’t get to that, though with the United Kingdom airlifting €1 million in cash to Cyprus to cover military personnel unable to access their own funds and with Russian ultranationalist Vladimir Zhirinovsky mock-eulogizing private property in the EU, the Cypriot situation has already reached a pretty high crisis mode.

One question that I haven’t heard asked in the past 72 hours, and one I wish I had an answer: why hasn’t Moscow been involved in the Cypriot bailout talks from last June onward? It’s clear that there’s a Russian interest in an orderly bailout (or even selective default) for Cyprus and its debt-bloated banks.

Russia has already extended a €2.5 billion loan to Cyprus, and Cyprus and the EU are dependent on Russia’s rolling over than loan soon if the current EU-led bailout to have any chance of working.

Are the channels of communication between Brussels and Moscow really so poor?

All of this was predictable nine months ago.

Even if the EU ultimately blinks, it’s already done a lot of damage that it can’t well undo — it’s still the case that the EU has undermined Anastasiades just days into his administration, pretty much destroyed the short-term future of the Cypriot finance sector, undermined the concept of deposit insurance throughout the eurozone, given every euroskeptic on the continent a prime example of the anti-democratic nature of the EU project.

Above all, the Cypriot crisis has undermined global confidence in EU leaders at a time when most everyone was certain that the worst of the eurozone crisis was behind us.

The good news? No word of significant bank runs in Italy or Spain, though I’d love to see how much capital quietly leaves those two countries electronically in the two weeks following March 15.

Photo credit to Yorgos Karahalis of Reuters.

Cyprus, European Union, Greece

Europe concedes Cyprus default less than a month before presidential election

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Felix Salmon has a tantalizing tidbit about Olli Rehn, European commissioner for economic and monetary affairs, apparently conceding that a Cypriot default is now virtually inevitable, less than a month before the Cypriot presidential election:European_UnionGreece Flag Iconcyprus_world_flag

EU economics commissioner Olli Rehn went on the record telling him that Cyprus is going to have to restructure its debt — just two weeks after ruling such a thing out.

That might come as little surprise, given that Cypriot banks were loaded up to the gills with Greek debt, and Greek debt suffered a 70% haircut. Cyprus is tiny, and could never afford the €17 billion needed to bail out the banks and the government — especially since that would bring the country’s debt load up to more than 140% of GDP.

Salmon cites a report from The Wall Street Journal‘s Stephen Fidler reporting from Davos.

The Republic of Cyprus, with just over 800,000 people, is the third-smallest member of the eurozone (after Malta and Luxembourg), and it’s a relative newcomer to the single currency, having replaced the Cypriot pound for the euro only in January 2008, although the Turkish-controlled northern part of the island still uses the Turkish lira.

The country accounts for just 0.2% of the eurozone economy, though its GDP per capita is a relatively wealthy $29,000, and it’s been in negotiations for a bailout for some time now.  That hasn’t yet been successful, in part because of the unique legal, political and financial complexity of the negotiations.

Rehn’s statement, if true, is essentially a declaration that time has run out — Moody’s downgraded Cypriot debt in July 2011 to junk status.

Nonetheless, a €17 billion bailout would be dwarfed by the Greek bailout (€245.6 billion), the Spanish bailout in July 2012 to provide liquidity to Bankia (€41 billion), and even the bailout provided by the ‘troika’ of the European Commission, the European Central Bank and the International Monetary Fund of Romania that began in 2009 (around €20 billion).

In many ways, a Cypriot default will be a key test for the European Union, given that it would be the first default since the treaty establishing the European Stability Mechanism formally came into effect at the end of September 2012.

Unlike in Greece, where much of its debt is governed by Greek law, much of Cypriot debt is governed under various international law, which will make it a messier restructuring.

Keep in mind, also, that the island of Cyprus remains split between the Republic of Cyprus (largely populated by Greek Cypriots) and the Turkish-occupied northern half of the island, the Turkish Republic of Northern Cyprus (largely populated by Turkish Cypriots).  The island has been divided since a 1974 coup, Greece’s attempt to annex the entire island, and Turkey’s subsequent invasion, and the formal declaration of Northern Cyprus’s independence in 1983.

Add to that the fact that Cyprus is seen as a hub for worldwide money laundering, especially with respect to illicit funds from Russia, despite the protestations of Panicos Demetriades, president of the Central Bank of Cyprus, earlier this week.

That means bailout proceeds could go directly into the pockets of some of Russia’s wealthiest oligarchs, a position that’s unlikely to go down well politically throughout the rest of the eurozone, especially as Germany gears up for federal elections later this year — German officials have even demanded that Russia contribute to any Cypriot bailout.

Meanwhile, Cyprus will go to the polls in less than a month to replace Demetris Christofias, the country’s left-wing president since 2008.  Unlike in many European countries with parliamentary systems, Cyprus’s president is both head of state and head of government.

With a default (orderly or otherwise) on the horizon, Cyprus now faces a presidential election on February 17 — with a runoff, if necessary, a week later on February 24 — in the midst of a financial crisis and perhaps in the midst of bank runs.

Christofias, who has presided over economic turmoil and an unemployment rate that’s now at 14%, has so far refused to engage in massive privatizations of state-run industries as a condition for a potential bailout.

Add all of those factors together — the size of the Cypriot banking sector’s debt, the legal complexity of the debt, the Russian laundering issue, the complexity of the Turkish political reality with Northern Cyprus, and the leftism of the Christofias administration — and you start to understand why Cyprus is now allegedly headed to a default.

Continue reading Europe concedes Cyprus default less than a month before presidential election →

Greece

How many days (weeks) away are we from another Greek solvency crisis?

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When the world last left Greece, it was breathing a sigh of relief upon the news that Antonis Samaras would be able to cobble together a coalition following a narrow win in the June elections — the second such election in as many months.

Samaras (pictured above), now a little over six weeks into his government, is finding it increasingly difficult to get his coalition to agree on €11.5 billion in cuts, required by Greece’s bailout from the European Central Bank, the European Commission and the International Monetary Fund.  Those entities, known as the ‘troika,’ have pushed off a long-delayed review of Greece’s bailout program from September to October, but that means only that Greece’s government will have until mid-September to make the cuts. The ‘troika’ will then make a decision about disbursing the next €31 billion tranche of bailout funds to Greece, and Greece will then try to push for a renegotiation of the bailout terms to lighten the austerity that has added pressure to Greece’s downward economic spiral.

It’s clear that the ‘troika’ is getting impatient: the IMF has started to balk at throwing more money at Greece, has called on the European Union to take the lead on any further bailouts and the ECB in late July stopped accepting Greek bonds as collateral altogether.

But the Greek economy is in shambles, and is expected to contract by a full 7% this year — much more than an original forecast of 4.7%.  Greece’s recession is only getting worse, not better, and that’s after the economy contracted almost 14% in the past four years.  As tax receipts correspondingly shrink, Greece’s debt sinkhole becomes ever larger.  Greater debt requires more austerity, which cripples the economy, which leads to greater debt, and so on.

The only solutions seem to be:

  1. a miraculous economic turnaround. Not likely anytime soon.
  2. a full bailout from the European Union. Whether that means a direct cash bailout or “eurobonds” or a more inflationary ECB monetary policy, it all boils down to a transfer of wealth from Germany to Greece  — it’s an option that German chancellor Angela Merkel has resisted and which has become increasingly unpopular in domestic German politics.
  3. the “Grexit”. Greece leaves the eurozone, adopts a new drachma, and devalues it until its debts are manageable and its exports are cheap.  But that could lead to snowballing worries about Spain, Portugal, Italy and the rest of the eurozone and precipitate Europe’s own “Lehman” moment of financial panic.

The next deadline is August 20, when Greece must pay a €3 billion maturing to the ECB — and the ECB (despite its edict that it will no longer accept Greek bonds as collateral) is weighing the option of lending money directly to the Greek central bank (which can accept Greek bonds as collateral), so that Greece in turn can pay back the debt it owes to the ECB.

It’s a tidy Alice-in-Wonderland arrangement in which only a central banker could delight.

ECB president Mario Draghi deserves credit for getting Greece past yet another hurdle, but it doesn’t inspire any long-term confidence in either Europe or Greece to get the country out of its nosedive.  It takes little imagination to see how Greece could bumble out of the eurozone in short order without further intervention if and when it runs out of cash (which could now still happen in September): Greece would then be forced to pay its employees and pensioners in IOUs (think of the kind of IOUs that California issued — registered warrants — when it fell short of cash reserves in 2009), Greece would take longer and longer to pay back the IOUs, individual Greeks would start trading the IOUs for euros, and a market would develop that sets a price for the IOUs in euros.

In time, the IOUs will have become de-facto drachmas.

Meanwhile, the coalition that everyone thought would easily come to an agreement on those additional budget cuts has stalled. Continue reading How many days (weeks) away are we from another Greek solvency crisis? →