Thursday, March 21, 2013

Go ahead, EU-elites - continue to ignore advice!

I vividly remember the frustrations I felt early on in the Greek crisis when I observed how arrogant and financially incompetent EU-politicians rejected advice from people who had extensive experience with sovereign external payments crises. William R. ("Bill") Rhodes often recounted how he had offered advice to EU-elites (and to Mr. Papandreou, for that matter) and how he was told that the Eurozone was something special and could not be compared with prior financial crises, possibly in emerging markets.

The IMF must be having celebrations. Up until Greece and the Eurozone, the IMF was always in the front row of sovereign external payments crises. They always unfolded their standard program and they were always hated by people suffering from IMF-imposed austerity. I understand that Mr. Papandreou originally, and correctly so, wanted to go to the IMF but his EU-colleagues bullied him out of that idea. The result? Mme. Lagarde can today attend meetings more or less as a relaxed observer who offers advice and tries to help. Instead of being blamed as in the past, the supra-national IMF appears today as the objective mediator and the national governments get all the heat. Well done, EU-elites!

Lee Buchheit is credited world-wide as possibly the most competent lawyer on issues surrounding sovereign debt crisis. He helped Russia in 1998 and Mr. Papademos could not have pulled off history's largest sovereign debt haircut without Mr. Buchheit.

Mr. Buchheit has now made a proposal for Cyprus. It consists of a grand total of 3 pages. As my American bosses used to tell me early in my career: "It's not the length; it's the content!" Well, these 3 pages include all the content one requires to solve the Cyprus problem. Felix Salmon made a good analysis of the Buchheit-proposal on Reuters.

So, here we go. Today, Cyprus is expected to announce 'Plan B'. If this plan follows the framework outlined by Mr. Buchheit, we will have seen the precedent that, for the first time, at least some EU-politicians accepted the advice from those who know what they are doing.

PS: I just read on Twitter that the Head of the Eurogroup, Jeroen Dijsselbloem, accepted responsibility for the Eurogroup's wrong decision. Well, that would be a first step toward 'Plan B'.


  1. I like the plan. I'd never heard of "certificates of deposit" before, in fact. Turning highly mobile dodgy capital into long-term investors in cyprus.

    Err. I hesitate to mention one practical difficulty. Some of people whose deposits suddenly turn into Certificates of Deposit are going to be russian or ukrainian mafia.

    They might take a painful revenge on the luckless cypriot politicians.

    1. A CD is nothing other than a time deposit in a bank. When one makes a time deposit in an Austrian bank, one gets nothing other than an account statement showing it. In the US, one gets a formal Certificate of Deposit for it.

      The difference is that a CD is a security which can be sold (a bank account balance cannot be sold). If you make a 1-year time deposit with an Austrian bank but you need the money after, say, 6 months, the bank - if things are fine - will agree to an early dissolution of the time deposit. That will cost you a fee but it's not out of the world. If the bank has a liquidity problem, it will not even entertain your request for early dissolution.

      If your 1-year deposit is a CD, you can sell it any time you want to. You may not get the price you want, but you can sell it.

      Suppose you have a 1-year CD and, after 6 months, the bank is getting into trouble. You want to get out and seek a buyer for your CD. Your buyer may say that, in view of the risk, he won't pay more for it than 50 cents on the Euro. You may say that 50 cents now is better than perhaps zero cents after 1 year.

      If the bank survives, the buyer of your CD has doubled his investment. Who has paid for his profit? Not the bank. You (or as they say 'the market') have paid for it. But you did that voluntarily.

      I have just read this astounding news where the Cypriot Church has allegedly said that it would use 'all its considerable wealth' to support the state by buying CDs issued by the state. Now, if the Church's considerable wealth is currently invested outside of Greece, that would indeed be an Act of God, or something close to it.

      If, however, the Church currently has its funds in Cypriot banks, it would be a smart move. They would exchange the risk of Cyriot banks (if they fail, the Church's deposits would evaporate) into the risk of the Cypriot state. Maybe not a perfect solution for the Church but a lot better than having all the money in a bank which is out of business.

      Here closes the circle: the state would put the money which it gets from the Church in exchange for CDs into the Cypriot banks. The bank's liquidity is indifferent to that: what it pays out to the Church, it gets back from the state. The bank now has the state (instead of the Church) as a depositor and the Church now has the state (instead of a bank) as its counter-party.