How Serious Is This Cyprus Thing?

[koganbot]

Damned if I know.

Been online at a few U.S. and Brit papers to see if they think it merits a link on the visible Webpage. Yes: NYTimes, LATimes, Boston Globe, Washington Post, Denver Post, Telegraph, Guardian, Financial Times, The Independent, The Times. No: Chicago Tribune, Philadelphia Inquirer, Miami Herald.

I'd say that's pretty good except most of the U.S. links are just passing along the Associated Press story of Cyprus and the EU trying to figure out a way to renegotiate so the terms won't clomp down quite so hard on every depositor. And many of the Brit sheets are merely stuck on the idea that some British nationals might lose money in the next day or two. But the NYTimes, the Telegraph, the Financial Times, and the Independent got the issue that immediately jumps to mind if you're on the lookout for international financial calamities. As Paul Krugman put it in his blog:

The big problem, however, is that it's not just large foreign deposits that are taking a haircut; the haircut on small domestic deposits is a bit smaller, but still substantial. It's as if the Europeans are holding up a neon sign, written in Greek and Italian, saying "time to stage a run on your banks!"

Tomorrow and the days immediately following should be very interesting.

The Financial Times leads with, "Europe botches another rescue," and editorializes, "Like other European island states before them, the people of Cyprus are discovering who pays to keep a metastised banking sector alive."

I have no idea what this leads to, of course. Presumably European leaders (whoever they are) assure everyone, "This is just Cyprus, with its specially weird banking situation."

Comments

Yglesias links

[skyecaptain.livejournal.com]

I know basically nil about this, but Yglesias has been blogging about it a lot -- he points to a few links that he claims "go deep" on the subject here:

http://www.slate.com/blogs/moneybox/2013/03/19/cyprus_tries_to_renegotiate_bailout_terms.html

[koganbot]

Actually had prepared a whole comment full of links, including to the Daniel Davies game at Crooked Timber that Yglesias linked, but I accidentally deleted before hitting submit. Andrew Ross Sorkin at the NYTimes thinks this is way less of a big deal than others think it is, some people think it's not an immediate emergency except for the Cypriots but that it just proves in the long-term the Europeans have painted themselves into an impossible corner and that as long as they keep touting austerity there's no way out (and Davies presumably says that you've got to take German politics into account, and that given the situation the Eurocrats are at least trying to be more rational than they're given credit for, though I haven't had time yet to read his post), Krugman says that people who are wrong continue to be wrong and that people who are stupid continue to be stupid, and the Cypriot parliament refused the deal anyway, an action that is pretty extraordinary given the way all the other legislatures in Europe have caved.

DD's game

[dubdobdee.livejournal.com]

http://crookedtimber.org/2013/03/19/what-would-you-do-part-2-the-island-of-surpyc/

(I haven't had time to read this yet either)

Re: DD's game

[koganbot]

Krugman recommends this summary by Paul Murphy:

http://ftalphaville.ft.com/2013/03/22/1435062/cyprus-just-pop-the-red-pill-please

(You may need to register (for free) at the Financial Times.)

Krugman himself is uncharacteristically hopeful that the resolution will involve kicking offshore depositors in the teeth, which he thinks is the right way to resolve this and achieve a semblance of an Iceland-like recovery. He'd feared that the Cyprus govt. would resist, as they still seemed hopeful of preserving the island's status as a tax haven for Russians.

We'll see.

Do Capital Controls Mean Cyprus Has Already Left the Eurozone?

[koganbot]

Guntram B. Wolff: "the value of a euro in a Cypriot bank becomes significantly inferior to the value of a euro in any other bank in the euro area."

Tim Duy: "Is this how the Eurozone experiment will end? Not with a formal 'exit,' but with a return to banking dominated by national boundaries and enforced by capital controls? No longer a true common currency, but a dozen currencies sharing the same name, each with a different value?"

Re: Do Capital Controls Mean Cyprus Has Already Left the Eurozone?

[koganbot]

Krugman: "unrestricted movement of capital is looking more and more like a failed experiment." So he, at least, thinks the restrictions may be a good thing: "the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out."

Re: Do Capital Controls Mean Cyprus Has Already Left the Eurozone?

[koganbot]

But today, following Kevin O'Rourke, he's wondering if Cyprus's being in the Euro maintains any advantages (I wouldn't know what it takes to leave, and he isn't saying whether or not Cyprus should).

Having your own currency raises transaction costs and makes business more difficult; but giving up your own currency means that you have to adjust to overvaluation through deflation, which is much more costly than devaluation. At this point, however, Cyprus has made doing business very difficult via capital controls, while retaining its inability to deal with overvaluation via currency realignment. So it has created a pessimal currency area, offering the worst of both worlds.

And he's saying that Cyprus is facing a deep depression and asks: Is it worth it?

"Cyprus should leave the euro. Now."

[koganbot]

Krugman again:

Staying in the euro means an incredibly severe depression, which will last for many years while Cyprus tries to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding.

Rolling Debt Crisis

[koganbot]

Andrew Higgins and Liz Alderman in yesterday's NY Times, saying that EU finance leaders helped plant seeds for the current Cyprus crisis by their decision in 2011 to force investors in Greek bonds to take a big hit, Cyprus banks being very invested:

"I cannot remember that European policy makers have seen anything coming throughout the euro crisis," said Paul de Grauwe, a professor at the London School of Economics and a former adviser at the European Commission. "The general rule is that they do not see problems coming."

I like their use of the phrase "Rolling Debt Crisis" later in. Could be an ilX thread.

Liz Alderman in today's NY Times says what Wolff, Duy, and Krugman have also been saying, though she's saying it in a news story, not in an opinion piece ("Cyprus Sets Up Tight Controls as Banks Prepare to Reopen"):

By imposing capital controls, European and Cypriot officials have effectively created two classes of euro: cash that can be freely spent, and cash that is locked up by capital controls, effectively diminishing its value.

"And yet they fail to reap most of the advantages of leaving the euro"

[koganbot]

Tyler Cowen, too, is saying that in effect Cyprus is no longer in the euro:

The capital controls will have to be strict. What will the price of a Cypriot euro be, relative to a German euro? 50%? I call this Cyprus leaving the euro but keeping the word "euro" to save face. And yet they fail to reap most of the advantages of leaving the euro, such as having an independent monetary policy.