Cypriot SME Cash Holdings and the “corralito”

Data on these are hard to get. The best and its not very good, is the Amadeus Database by Bureau Van Djik. 

Looking throught this this AM, I extracted the “cash and cash equivalent” balance sheet item for 2011 (the latest year for which there are accounts) for a set of Cypriot companies. These were non-financial non-state corporations, independent (as in not subsidiaries) and SME’s as per the european classification. 

Remember that all deposits up to 100k are safe; remember also that even the most financiallly unaware Cypriot SME must have been thinking about the safety of their cash since 2011.

Average Cash – €487 ; Median Cash €66k 

A lot of Cypriot SME’s if the distribution is similar now as it was then (which is imho still probable – who would think that the bank deposits would be in play, right?) will be badly hurt. 

Remember : “its all hot russian money”….

A song for europe…and cyprus

To some a song for Europe will always be Ted and Dougal…. but for the modern generation the superb Gavin Kostik has, following from his 10 Commandments, a new one.

There’s a hole in the system, dear Draghi, dear Draghi,
There’s a hole in the system, dear Draghi: a hole.

Then fill it dear Olli, dear Olli, dear Olli,
Then fill it dear Olli, dear Olli: fix it.

With what shall I fill it, dear Draghi, dear Draghi,
With what shall I fill it, dear Draghi: with what?

With taxes dear Olli, dear Olli, dear Olli,
With taxes dear Olli, dear Olli: try tax!

But the tax take is falling, dear Draghi, dear Draghi,
But the tax take is falling, dear Draghi: it falls!

Increase them dear Olli, dear Olli, dear Olli,
Increase them dear Olli, dear Olli: whack’em on!

But tax take falls more now, dear Draghi, dear Draghi,
But the tax falls more now, dear Draghi: it fell!

Squeeze the sovereigns, dear Olli, dear Olli, dear Olli,
Squeeze the sovereigns dear Olli, dear Olli: squeeze them!

But the sovereigns are bursting, they’re bursting, they’re bursting,
But the sovereigns are bursting, they’re bursting: some burst!

Try the savers, dear Olli, dear Olli, dear Olli,
Try the savers dear Olli, dear Olli: try them!

The hole just got bigger, got bigger, got bigger,
The hole just got bigger, got bigger: it grew!

Then the bondies, dear Olli, dear Olli, dear Olli,
If you must it’s the bondies, it’s the bondies: burn them!

Now the system is creaking, is creaking, is creaking,
Now the whole system is dear, dear Draghi: it creaks!

[female voice]

Inflate it dear Draghi, dear Draghi, dear Draghi,
Inflate the system it dear Draghi, dear Draghi: inflate!

But I don’t have a mandate dear Christine, dear Christine,
But I don’t have a mandate dear Christine: don’t ask!

Well then print it, dear Draghi, dear Draghi, dear Draghi,
Well then print it dear Draghi, dear Draghi: please print.

But we don’t have a printer, dear Christine, dear Christine,
We don’t have a printer, dear Christine: there’s no ink!

Well who make money, dear Draghi, dear Draghi?
Well who can make money, dear Draghi: who can?!

Well the banks are supposed to, dear Christine, dear Christine,
Well the banks are that system, the banks: that’s who!

[All together now]

But there’s a hole in the system, dear Draghi, dear Draghi,
There’s a hole in the system, dear Draghi – a hole!

a (deliberately provocative ) post by Namawinelake on How Ireland can benefit from Cyprus woes….

NAMA Wine Lake

We’ve seen over the past fortnight how the Cypriots are a deeply stupid people that have allowed their economy to collapse, and consigned their society to immiseration and decline for a long period ahead. Well, too bad for Cyprus, how can Ireland benefit from their self-inflicted fiasco?

(1) Cyprus’s corporate tax brand is destroyed. The original Cyprus bailout plan included a term compelling Cyprus to raise its headline corporate tax rate from 10% to 12.5%, there is no mention of that term being dropped in the latest version of the bailout, so it seems the change still stands. Now a 25% increase is still just an additional 2.5% but it has destroyed the Cypriot brand. Businesses now considering basing themselves in Cyprus might appreciate the 12.5% corporate tax rate as relatively low, but they know that it has been changed, and apparently without much resistance from the Cypriots. On…

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Cartoons of Cyprus

 

 

ok So its not really a laughing matter but some rueful chuckles…

 

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Whatever the problem, the solution lies in Cyrpus

Wonderful as ususl from Japlandic

Some more thoughts on that awful Cypriot Business Model

I wrote yesterday on the “dead” cypriot business model.

Some more thoughts and data below on this.

First Cyprus is not that different to many many other countries in terms of the % of its GDP derived from the financial sector.

Second, Cyprus was not that out of line in terms of its percentage of employment (full time equivalent, hours worked) in the financial sector. It was the highest but…

Third, as a % of the total wage bill it was quite highly dependent on the financial sector – it was a well paid sector in the cypriot economy, a well paid sector now dead. Is it any wonder the hole is now beginning to get bigger – as of pixel time 1320h sunday the Toika have decided that Cyprus needs 2b more…

Finally, as a % of total employment in Financial Services,  Cyprus is not that out of line with the rest

The Ten Commandments of Eurozone Membership (for small states)

The quite wonderful Gavin Kostick of Fishamble Theatre has a comment on Irish Economy which is too good to linger there… It's super.

 

And Draghi came down from the mountain with two tablets of stone.

(1) Thou shall love the god of the market. Thou shall have no other god before it.

(2) Thou shall have no other engraved image except the Euro. There shall be no other image on thy coin, for I run a jealous central bank

(3) Thou shall not take the name of the Euro in vain or speak slightingly thereof, for those who seek to destroy confidence will not be held guiltless.

(4) Thou shall work all of the days, excepting none, for this is the will of the free market. And you shall remember that you are a debt slave as you once were in Egypt.

(5) Honour Germany and France and the contract they made in their betrothal at the altar of the European Coal and Steel Community: for these are your mother and father to whom you must be obedient.

(6) Thou shalt not kill the bondholders.

(7) Thou shalt not commit adultery with other nations, neither the Russians nor the Chinese, nor any other nation against which we set our face.

(8) Thou shalt not steal deposits with high interest, low tax or any other wiles against which we set our face.

(9) Thou shalt not falsely accuse the ECB of running a tyranny, or threatening to implode your banks, being subservient to German interest, nor any other false witness against them.

(10) Thou shalt not covet a living possessed by your neighbours, but rejoice in the purification of your impoverishment.

 

Posted with Blogsy

Just how bad was the Cypriot business model ?

One of the more nasty strains of meme going round the Cypriot crisis is this : Cyprus has a business model (Converting russian deposits to lending) which is wrong. Well, its now dead. We know its dead because Angela Merkel said its dead. And who are we or Cyprus to argue with Dr Merkel. To be fair, its not just her, theres a lot of talk on blogs and social media that “at 7x its GDP the Cypriot banking sector is too big”

Theres a whiff here of how dare these hairy olive botherers have a success. For all its industrial might Germany is relatively muted as a financial sector. Cyprus has sunshine and not a whole pile else. Its economic potential lies untapped due in no small part to the ongoing division of the island post 1974. So how bad was the system? An interesting paper by a World Bank economist provides some clues.

Its banks were prudent : the tradition was to ring fence foreign deposits from local lending. The reclassification after 2004  of Greek deposits as “local”, concomitant on they both being now in the EU led to a boom in lending, and a significant amount of that went back to Greece. And therein lies a large part of the problem.

Cyprus had a large banking sector in 2004. But no larger than say Ireland or Malta or the UK or even the Netherlands. The post 2004 era saw its growth from large to supersized  but compared to Luxembourg its a tiddler. I must have missed the warnings that the Luxembourgois need to go back to steel and vineyards…

Second, the Cypriot economy was not a one trick pony. Yes, the large financial sector was large but its contribution to the Economy was not such as to make Cyrpus one big financial services company. Eurostat data suggest that we should be worrying about the disproportionate size of the financial sector in Bulgaria and the Czech Republic, or even Denmark or Austria as much as we should the Cypriots.  I must have missed that memo…

Cyprus has every right to decide its own way of doing business. It had a large sector and that got holed below the waterline by the Troika in Greece. Its now going to be punished for its success and by the failure of the center to be able to make joined up policy on who bears what losses where and on whose account. But rather than face up to that instead we get auld palver on flawed business models, dodgy Russians and a whiff of  “suck it up άνθρωποι ξωτικό”

Germany’s Dilemma – Sacrifice Cyprus or Make Sacrifices Itself…

This is an updated and linked version of a column published in The Irish Examiner Saturday 24 March 2013.The deposit tax debacle in Cyprus is rich in historical resonances as well as showing that frankly as Leigh Phillips suggests in the EUobserver Europe is run by the three stooges. Skinning the Cypriots is not new. In 1571 in the height of the venetian ottoman war the defenders of Famagusta stood staunchly against the ottomans. On surrendering the leader was, despite promises of safe passage, skinned alive. Now we see that despite promises to “do whatever it takes” the ECB has supported skinning cypriot deposits. How doing whatever it takes squares with destroying trust in banking, bullying small nations and serially upping the ante is beyond me. Its even  almost beyond Karl Whelan.

Europe seems unable to work in a sensible manner, and is devolving into a crisis junkie. Again we see a meeting at 3am making decisions that in a fog of fatigue may have seemed sensible but on waking perhaps less so. The historical ironies pile up and people make mistakes.  Cyprus is a small nation, far away. In 1939 a hegemonic Germany called the president of the independent rump of Czechoslovakia to a meeting. Hacha though the meeting was going to be bad but was subjected to a grilling and a haranguing that resulted in his collapse and the death of his country. What we saw in the meetings last week was, I would argue, little different. No, Im not suggesting that the Troika are Nazis. I am suggesting that big countries and their acolytes tend to have modes of operation that can be hidden for decades and then, to everyones surprise, come back to the fore. While not suggesting that anyone is going to invade the 60% of Cyprus not under occupation, the reports of the Eurogroup meeting are frankly nauseating. A hegemonic Germany, its allies and with the silent acquiescence of the rest of europe  placed unreasonable demands on a small country. But we have seen this time and again and not just in the 1930s. If this is to be a union then it must be a union of equals. Even in the USA the bigger states cannot dictate to the smaller, save via the federal system.

The historical ironies mount up. A century ago nobody really wanted a pan european war (At least not in 1914) and yet we found ourselves at war through a combination of poor diplomacy, overreaction to minor events, and a rigid adherence to plans laid in different times.  Even as late as the start of the war Kaiser Wilhelm wanted to call it off to be told that the ReichBahn couldnt alter its plans and the trains were rolling. I dont know if Germany wants to kill the Cypriot model, although it has made it clear that they see it as dead. I do know that this approach, of frankly bullying and using the golden rule in its most naked form, is neither in the political or economic interest of the union. If you think that I am alone consider the views of Christopher Mahoney, who argues that the approach being taken will result in a latin american style EU. We may yet (although I do not think so) see Cyprus leaving the euro, and showing that that is possible, from a combination of these same factors. We have learned nothing in a century – neither how to live with a strong Germany nor how to contain a rampant Germany.  There is an excellent article on the new German problem in The New Statesman.

The genie is now out of the bottle with regard to depositors. Just this week and under the radar Spain introduced a deposit tax. Yes, it will be small (for now) and yes it will be paid by the banks (of course they wont pass it onto the customers…of course) but there it is. Commerzbank have mused on  deposit tax for Italy. Deposits, including guaranteed deposits, are now in the firing line and we should all be wary and aware of that.El-Arian of PIMCO compared this to “lighting dynamite”, and he is right. Again go back to Mahoney of Moodys, linked above. He notes that we are now seeing the rise of “non convertible euros”, something unique. And why? for a few billon euro. Never has so much been at stake for so little.

 There are good arguments for bailing in creditors of failing banks, depositors  at some stages included. What there are not good reasons for is crashing an entire economy or for destroying fundamental trust. Even with capital controls, Cyprus is in for a massive crash. .  Simple economics (remember them?) remind us that MV=PY. M is money, V is how quickly it moves around, P is the price level and Y is income. This isn’t a model it is not a forecast its an accounting identity. With M in Cyprus going to fall like a stone then either money works harder, the price level falls (deflation, more destructive than inflation arguably) or the income level falls. Most probably all will happen but given prices tend to be downwardly sticky I suspect the majority of the adjustment will come on the level of national income. Estimates from market sources are for a 20% drop, and this is supposed to be the good outcome? Even with capital controls in place, and In passing we might wonder how exactly we can build a union built on free movement of goods, capital and people with capital controls, who now will trust cypriot banks? You dont have to be a wild eurosceptic to think that the introduction of capital controls is the death knell of the euro. There is an excellent blog on this issue in the Telegraph. Imagine capital control in say Warwickshire viz a viz the rest of the UK, Vermont versus the USA, Leitrim versus the rest of Ireland. Thats what we are now proposing.

The proposal now (friday morning) on the table is to save guaranteed deposits and move unguaranteed (those over 100k) into a bad bank where they might end up getting only 40-50% return. There will also be a sovereign solidarity fund and some gas bonds. While few will grieve for oligarchs losing money lets sit back. companies, charities, people with money saved prudently and legally, anyone who is in the middle of a transactions chain with cash at the moment will also be cut. This will hit prudent cypriots and Cypriot SMEs hard. It might well hit some oligarchs but to be honest they will have their money stored in yachts in Monaco and Belgravian mansions not on deposit in Laki bank. The Russians that will be hit are those middle class savers who have done well from the last two decades and who, legally or no, saved that money in Cyprus to reduce the chance of expropriation. Sure, some mafiosi will be cut but are we now adopting collective punishment?

Cyprus has been sacrificed on bad grounds. Its banks are overly large (although not as large as some other EU countries as % GDP) and the business model was flawed. But they were holed below the waterline with greek bond cuts and the collapse of the greek economy.They asked repeatedly over the last 9 months for assistance and when it came it was too late and flawed.  The unwillingness of the europeans to consider flexibility in how to deal not with a bank but a banking system that was imploding is dogmatism at its worst. There are alternative plans out there that will deflate the cypriot banking sector without crashing the economy. But none of them seem to satisfy what is increasingly looking like a teutonic desire for exemplary punishment “die andere zu ermutigen” as it were….Every time a proposal emerges for sensible enhancement of the crisis management capacity of the eurozone so too will some obscure german to explain why the voters in lower thuringia won’t like it. The banking union, the existence of which might have saved this from being a quasi existential crisis, is stalled, on the rocks of German intransigence and unwillingness to realise that they are the leaders and that that involves leading. And sometimes to lead is to incur costs.  Germany is not the eurozone and its time that this was made clear by the others.  Either they pull their weight, and yes that may mean some costs somewhere down the line, or the eurozone staggers on at best with a lost generation at worst towards a breakup that will cost Germany anyhow. Forget Cyprus – Germany is the real problem state in Europe right now. Brendan Simms posits it well in his New Statesman article

The question we face now is this: how can the Federal Republic, which is prosperous and secure as never before, be persuaded to take the political initiative and make the necessary economic sacrifices to complete the work of European unity?

Over to you Germany….

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What capital controls were like – a page from my Dad’s passport. With the passing tonight of capital control legislation we might see this again.