Tag: European Union

The migration of refugees from conflict torn Libya has become a huge humanitarian crisis for European nations, especially Italy. But the solution to stemming the tide of thousands fleeing the region by vessels used by human traffickers isn’t the way.

EU to launch Mediterranean naval mission to tackle migrant crisis

EU ministers have agreed to launch a sea and air mission that could in its later phases destroy vessels used by human traffickers, which have carried an estimated 1,800 migrants to their deaths in the Mediterranean this year.

An intelligence-gathering operation will herald the mission’s first phase, with the UK expected to offer drones and surveillance equipment as a partial riposte to calls for it to take in more refugees.

In later phases, hostile vessels suspected of harbouring migrants could be boarded, searched, seized or disposed of in Libyan territory or international waters – as long as a chapter 7 UN resolution to authorise the use of force to do so is obtained first. [..]

The mission’s rules of engagement have still to be thrashed out and one diplomat described the deployment of such forces as “the next step in terms of operational details”. The level of collateral damage considered acceptable would also be discussed after the mission was up and running, he said.

The operation will have its headquarters in Rome and be run by an Italian rear admiral, Enrico Credendino, with an initial year-long mandate.

Concerns about the militarisation of the migrants issue will probably be raised at the UN, though, with Libya already describing the mission as very worrying, citing concerns over its potential to mistakenly target fishermen’s boats.

Refugee rights groups fear that bombing the escape routes of people fleeing for their lives from Syria, Eritrea and west Africa – where most migrants begin their journeys – will simply lead to more deaths, away from the public spotlight.

During his interview with Democracy Now!‘s Amy Goodman in London’s Ecuadoran Embassy, Wikileaks’ founder Julina Assange revealed that Wikileaks has released documents that detail the EU plans for the military intervention against “refugee boats” in Libya and the Mediterranean

Today, WikiLeaks is releasing two classified EU documents, outlining the planned military intervention against boats travelling from Libya to Italy. The more significant of the two documents was written by the combined military defence chiefs of the EU member states. The plan was formally approved by representatives from all 28 countries on 18 May 2015.

Importantly, one of the documents acknowledges that “the political End State [of the military intervention] is not clearly defined” and recommends that the European Commission issue further guidance.

The documents lay out a military operation against cross-Mediterranean refugee transport networks and infrastructure. It details plans to conduct military operations to destroy boats used for transporting migrants and refugees in Libyan territory, thereby preventing them from reaching Europe. The EU member states’ military chiefs advice is that there is a need to:

   “[draw] on the full range of surveillance, intelligence and information capabilities available to MS [member states] and Partners, and supported by Brussels (inter alia EEAS [European External Action Service] Single Intelligence Analysis Capacity – SIAC)“.

The plan also acknowledges the possibility of EU military use of force against groups such as ISIL “within the Libyan sovereign area”:

   “the threat to the force should be acknowledged, especially during activities such as boarding and when operating on land or in proximity to an unsecured coastline, or during interaction with non-seaworthy vessels. The potential presence of hostile forces, extremists or terrorists such as Da’esh [ISIL] should also be taken into consideration“.

The documents mark a departure from previous EU military strategy in its overt targeting of civilian infrastructure in Libya. Numerous EU countries, including Belgium, Bulgaria, Denmark, France, Greece, Italy, the Netherlands, Romania, Spain, Sweden and the United Kingdom participated in NATO-led air strikes on Libya in 2011.

If you’ve turned on your television, the radio or read any on line news, you know there was a revolution in the Ukraine that overturned the government of Viktor Yanukovych. Yanukovych refused to step down, even after he was removed by the Parliament and a warrant for his arrest was issued for the deaths of protesters when the police used snipers to kill unarmed demonstrators in Kiev. Yanukovych disappeared showing up in Russia where Russian President Vladimir Putin declared the deposal of Yanukovych an unconstitutional coup d’etat, On Friday, Putin sent troops into Ukrainian Peninsula of Crimea and blockading the Black Sea deep water port of Sevastopol. The UN Security Council met at the New York City headquarters yesterday and NATO will meet for the second time in three day in Brussels at the request of member nation Poland that shares a border with Ukraine.

Crimea crisis: Putin rules out war but will use force ‘as last resort’

• We will not go to war with the Ukrainian people, says Putin

• Claims ousting of Ukrainian president was ‘coup d’état’

• Yanukovych ‘still legitimate head of state’

• Pro-Russian troops and Ukrainian soldiers in tense standoff

Vladimir Putin ruled out war with Ukraine on Tuesday, but also reserved the right to use force “as a last resort” days after his forces took control of the Ukrainian peninsula of Crimea.

Breaking his silence for the first time since the revolution in Ukraine toppled Viktor Yanukovych, Putin denounced the takeover as an unconstitutional coup d’etat, insisted Yanukovych was still the legitimate head of state, although he declared him politically dead, and said he would not recognise presidential elections being held in Ukraine at the end of May.

Putin emphasised that Russia had no intention of invading Ukraine, or of annexing territory. But he also kept his options open by claiming Yanukovych had written a letter asking for Russian help.

It appeared that Putin was also seeking to send signals to the west, keen to ward off growing US-led pressure for sanctions against his regime and to sow divisions among the Europeans who are economically much more engaged in Russia than the Americans.

He also warned that sanctions were a two-way street that would effect those applying them.

Kerry, Arriving in Kiev, Offers $1 Billion in Loan Guarantees to Ukraine

KIEV, Ukraine – In a demonstration of support for Ukraine’s fledgling government, Secretary of State John Kerry arrived here on Tuesday with an offer of $1 billion in American loan guarantees and pledges of technical assistance, a senior State Department official said on Tuesday.

The purpose of the loan guarantee is to support Ukraine’s efforts to integrate with the West and to help offset the reduction of energy subsidies from Russia, which has challenged the new government’s legitimacy and occupied the Crimean Peninsula.

The United States will also send technical experts to help Ukraine’s national bank and finance ministry, provide advice on how to fight corruption and train election monitors to help establish the legitimacy of Ukraine’s coming election.

As Prime Russian Trading Partner, Germany Appears Crucial to Ending Crisis

In the face of the diplomatic maneuvering over how to confront a bellicose Russia in Ukraine, one country appears to hold the key to any long-lasting entente: Germany, Europe’s economic powerhouse and one of Russia’s primary trading partners.

Whether it is importing fuel from Gazprom or selling Mercedes-Benz to billionaire oligarchs, trade with Russia has played an important role in Germany’s emergence as an economic superpower over the last decade. Germany is now heavily reliant on Russia for its energy needs, importing more natural gas from Russia than any other country in Europe.

But Germany’s enhanced status on the world stage – combined with the end of the commodity boom and the onset of economic stagnation in Russia – has also shifted the balance of power. Some analysts argue that it is Russia that has the most to lose if economic sanctions are ever imposed.

This dynamic could offer insight into the role that the German chancellor, Angela Merkel, will play in any negotiations with the Russian president, Vladimir V. Putin.

Timothy Snyder, professor of history at Yale University and Ray McGovern, activist and former senior CIA analyst joined Amy Goodman on Democracy Now! to discuss the crisis and who is provoking the unrest.

Russia is vowing to keep its troops in the Ukrainian region of Crimea in what has become Moscow’s biggest confrontation with the West since the Cold War. Ukraine’s new prime minister, Arseniy Yatsenyuk, said Russian President Vladimir Putin had effectively declared war on his country. Concern is growing that more of eastern Ukraine could soon fall to the Russians. Earlier today, Russian troops seized a Ukraine coast guard base in the Crimean city of Balaklava. On Sunday, the new head of Ukraine’s navy defected to Russia

As the United States scrambles to cover up the contradictory web if lies it has woven over the NSA spying, the Europeans have expressed their displeasure and threatened to scuttle talks on the trade agreement with the US. This left President Barack Obama, who has been touring Africa, trying to mend fences:

After the Guardian’s disclosure that US agencies were secretly bugging the French embassy in Washington and France’s office at the UN in New York, (French president, François) Hollande called for an immediate halt to the alleged spying.

“We cannot accept this kind of behaviour between partners and allies,” he said. “We ask that this stop immediately … There can be no negotiations or transactions in all areas until we have obtained these guarantees, for France but also for all of the European Union … We know well that there are systems that have to be checked, especially to fight terrorism, but I don’t think that it is in our embassies or in the European Union that this threat exists.”

(German chancellor, Angela) Merkel delivered her severest warning yet on the NSA debacle. “We are no longer in the cold war,” her spokesman, Steffen Seibert, said. “If it is confirmed that diplomatic representations of the European Union and individual European countries have been spied upon, we will clearly say that bugging friends is unacceptable.”

Seibert said Berlin was keen on the trade talks with Washington, but qualified that support: “Mutual trust is necessary in order to come to an agreement.” [..]

Martin Schulz, the president of the European parliament, likened the NSA to the Soviet-era KGB and indirectly suggested a delay in the talks. Greens in the European parliament, as well as in France and Germany, called for the conference to be postponed pending an investigation of the allegations. They also called for the freezing of other data-sharing deals between the EU and the US, on air transport passengers and banking transactions, for example, and called for the NSA whistleblower, Edward Snowden, to be granted political asylum in Europe. French Greens asked Hollande to grant Snowden asylum in France.

Back in the US, Director of National Intelligence James Clapper is still in hot water despite for his halfhearted letter of apology to Congress for “erroneous” responses to questions he was given days before.

But Clapper did not say in the letter why he had taken him until June to correct the mistake. Senator Wyden’s spokesman made it clear on Monday that the senator had made attempts to get Clapper to correct the record before the revelations in the Guardian, but was rebuffed. “Senator Wyden had a staff member contact the Office of the Director of National Intelligence on a secure phone line soon after the March hearing to address the inaccurate statement regarding bulk collection on Americans.

“The ODNI acknowledged that the statement was inaccurate but refused to correct the public record when given the opportunity. Senator Wyden’s staff informed the ODNI that this was a serious concern.

“Senator Wyden continued to raise concerns about the government’s reliance on secret law in the weeks following the hearing, prior to the Guardian publishing its first story several weeks later.”

A bipartisan group of senators expressed their displeasure  and accused Clapper of intentionally misleading congress to prevent a public discussion of secret interpretations of the Patriot Act thus undermining public trust in government.

A week ago, Sens. Ron Wyden (D-Ore.) and Mark Udall (D-Colo.) wrote Gen. Keith Alexander, head of the NSA, that documents on its web site intended to clarify the two surveillance programs, Section 215 of the Patriot Act and Section 702 of FISA, were ” misleading and inaccurate.” The “fact sheet” were scrubbed from the web site shortly after the senators complaint.

Following a complaint from two senators, the National Security Agency has removed from its website two fact sheets designed to shed light on and defend a pair of surveillance programs. Users now trying to access the documents detailing surveillance under legal authorities known as Section 215 and Section 702 receive an error message when they try to load the fact sheets. [..]

The documents, still available here, were published in the wake of revelations about the extent of the NSA’s surveillance programs. They sought to highlight the safeguards the NSA uses to make sure American communications aren’t caught up in its surveillance – or if they are, what the NSA does to remove identifying information about U.S. citizens. Wyden and Udall, both of whom sit on the Senate Intelligence Committee, have long called for more transparency on how the NSA protects Americans’ privacy — but said the NSA’s fact sheets gave the wrong impression.

Meanwhile in Russia Edward Snowden remains at the Moscow airport without a valid passport. With his asylum options shrinking, he has withdarwn his request for  asylum with Russia after President Vladimir Putin required he stop leaking information about the US spy programs.

Icelandic investigative journalist and spokesperson for WikiLeaks, Kristinn Hrafnsson appeared with Amy Goodman and Aaron Mate on today’s Democracy Now blasting the United States for leaving Snowden “stateless.”

The banks in Cyprus re-opened on Thursday, the chaos that many feared was averted, for now. Cyprus is far from out of the economic woods.

Cyprus banks reopen – but stock exchange will remain closed

by Jill Treanor, Helena Smith and Josephine Mould, The Guardian

Small queues as bank staff turn up for work early in Nicosia and cash is delivered under heavy security

Cyprus’s banks returned to business on Thursday with only limited queues (video), amid strict controls to stop people withdrawing all their savings and triggering a catastrophic bank run. [..]

As planned, banks closed around 6pm (4pm GMT). The Cyprus stock exchange, however, remained shut for the day, having abandoned plans to reopen less than an hour before trading was due to start.

Hopes that Cyprus’s new capital controls would be lifted in a week’s time were dashed tonight, as foreign minister Ioannis Kasoulides predited they would last for “about a month”. [..]

On Thursday, the German finance minister, Wolfgang Schäuble, tried to limit fears of contagion, saying Cyprus was a very special case and the EU had found the right solution for it. He said Luxembourg had a completely different business model to Cyprus and any comparison of the two would be absurd.

Analysts at Fathom Research said that the relief surrounding the Cyprus deal would be temporary. “The relief is misplaced and will be short lived, since the ‘doom-loop’ undermining the euro, between insolvent banks and their indebted sovereigns, has not been broken but emphatically reaffirmed.”

Cyprus bank restrictions could last ‘a month’

from Al Jazeera

Curbs imposed after island secured bailout to be lifted over a period of about a month, foreign minister says.

Cyprus is the first country in Europe’s single currency zone to impose losses on bank depositors.

The government initially said the controls would remain in place for a week, subject to review.

Economists say they will prove hard to lift as long as the economy is in crisis.

Cyprus: investors were withdrawing money before crisis hit, figures show

by Larry Eliot, The Guardian

Bank figures reveal deposits were being run down in February – well before first proposals for a bailout were made public

Investors were removing money from banks in Cyprus long before the onset of the two-week financial crisis that forced the small eurozone country to impose controls on capital flight.

Data from both the European Central Bank and the central bank of Cyprus revealed that deposits were being run down in February – well before the first proposals for a bailout were made public in mid-March.

ECB figures show that private sector deposits in Cypriot banks fell by 2.9% in February – a generally calm month that saw both consumers and companies increase their holdings at Greek and Spanish banks.

And last but not least, Herr Doktor.

Debt and Devaluation, Mediterranean Edition

By Paul Krugman, The New York Times

When I talk about Cyprus and the possibility of leaving the euro, one immediate question people raise is what about the government’s debt, which is of course in euros. Wouldn’t an exit make that debt unsupportable, and force default?

There are, I’d say, two answers, one more fundamental than the other.

The less fundamental answer is, what makes you think that Cyprus can avoid default even if it stays on the euro? [..]

The more fundamental answer is, holding the nominal exchange rate fixed and relying on “internal devaluation” rather than devaluation devaluation does not, in fact, help make debt more manageable. [..]

So the debt is not a good reason to stay on the euro. I guess that if I were arguing for keeping the euro, I would instead be making mainly a political case – basically, that you’ll get better treatment from Brussels and Berlin if you remain a good soldier. But boy, will the cost be high.

Soldier on.

As the dust of enthusiasm settles over this morning’s Cyprus deal with the European Union that closed the country’s second-largest bank and created a set of capital controls to prevent a run on the remaining banks, the financial world is taking a closer look and they aren’t happy. The agreement adheres to the law protecting insured accounts less than 100,000 euros. Supposedly, this deal prevented the immediate collapse of the Cyprus economy and its exit from the euro and, possibly, the European Union. Several economic analysts discuss the ramifications on the global banking and economy.

The Prodigal Greek has the simplest explanation of what capital controls entail (h/t Yves Smith):

Here is what a cash economy looks like:      

• Restrictions in daily withdrawals
• Ban on premature termination of time savings deposits
• Compulsory renewal of all time savings deposits upon maturity
• Conversion of current accounts to time deposits
• Ban or restrictions on non cash transactions
• Restrictions on use of debit, credit or prepaid debit cards
• Ban or restriction on cashing in checks
• Restrictions on domestic interbank transfers or transfers within the same bank
• Restrictions on the interactions/transactions of the public with credit institutions
• Restrictions on movements of capital, payments, transfers
• Any other measure which the Finance Minister or the Govern or of Cyprus Central Bank see necessary for reasons of public order and safety

In other words, Cyprus euros can only be spent in Cyprus and cannot be taken out of Cyprus to any other country; checks, debit and credit cards are useless. It is a strictly cash and carry local economy since Cypriots will not be able to make internet purchases. It will restrict travel into and out of the island, as well. The agreement has isolated the tiny island from the rest of the EU. Economics and financial analyst, Frances Coppola explains the ramifications of these restrictions:

From Tuesday, Cyprus becomes a black hole in the Eurozone: any money that goes into it stays there, and no money can leave……From a safe distance, it will appear frozen in time, a small cash-based economy, isolated from the rest of the EU. While inside, invisible to all except those who actually go there – or live there – its social fabric is torn apart as its economy collapses. Note the final clause in the capital control bill:

   Any other measure which the Finance Minister or the Governor of Cyprus Central Bank see necessary for reasons of public order and safety

So as people’s livelihoods are destroyed and their standard of living crashes, other measures may be introduced to ensure that they can’t take matters into their own hands.

From Yves Smith at naked capitalism is her summation of the attempt to contain Cyprus:

First, confiscating bank deposits is now on the table in any future crisis. That’s toothpaste that’s not going back in the tube. Commerzbank chief economist Jörg Krämer has already suggested (Google translates) “a one-time property tax levy” for Italy and “a tax rate of 15 percent on financial assets.” And adding fuel to the fire, the Leader of the UK Independence Party has urged expats in the periphery countries, in particular the 750,000 British in Spain to “Get your money out of there while you’ve still got a chance.”

Second, capital controls in Cyprus mean that there are now two Euros in effect: The Euro that you can use only in Cyprus, and the Euro you can use elsewhere in the so-called “monetary union.” So from the perspective of people in Cyprus, the results are in some ways worst that a breakup: rather than having depreciated dough, you have dough that has been impounded, particularly in terms of using it outside Cyprus. [..]

Third, these concerns may be amplified by how rapidly and visibly the Cypriot economy craters. The “rapidly” is due to the fact, as discussed in greater detail in the post from Cyprus.com below, that the Cyprus economy will suffer a one-two punch: the loss of a big chunk of wealth, plus the disappearance of much of the financial services sector, which was 45% of GDP.

The capital controls have isolated Cyprus from the rest of the EU without actually expelling the country.

The deal may have stayed the immediate crisis but it hasn’t stopped the eventual collapse of the Cyprus economy or its future exit from the euro. Not only that, it is the shot across the bow for other economically troubled EU countries of things to come.  

Up Date 3.23.2013 0100 AM EDT: The Cyprus Parliament has passed part of a bailout plan but has delayed voting on a tax for unsecured deposits:

One of the provisions Parliament approved Friday would impose new restrictions on withdrawing cash or moving money out of the country when the banks reopen. These new capital controls would prohibit or restrict check-cashing and bar “premature” account closings or any other transaction the authorities deemed unwarranted.

Lawmakers also voted to restructure the nation’s largest and most troubled bank, Laiki Bank, by splitting off its troubled assets into a so-called bad bank. Accounts with no problem would be transferred to the nation’s largest financial institution, the Bank of Cyprus. Lawmakers also voted to require that any bank on the verge of bankruptcy be split apart in the same way. [..]

Still to be voted on is the measure to impose a tax of 22 to 25 percent on uninsured deposits at the Bank of Cyprus. That proposal was made after lawmakers rejected a plan earlier in the week to tax insured deposits to help raise the amount needed to secure the bailout. The Parliament appears to be trying to make up the difference in part by shifting the burden to large account holders.

Cyprus Finance Minister Michael Sarris returned empty handed from Russia after the Russians ruled  out helping until after a deal is struck with European Union. Yesterday, German Chancellor Angela Merkel rejected the proposal to nationalize pension funds and insisting that depositors, especially large savings accounts, be taxed to raise the needed €5.8 billion of the €10 billion bailout deal. Part of the reason for the refusal to accept nationalization of pensions as part of the deal is that Germany did just that to finance both world wars. Germans also face an election in six months and have been reluctant to give up on the bank levy since it protects them from accusations of using European taxpayers money to bail out big Russian investors in Cyprus.

In a nut shell, Cyprus got into this mess because the country’s banks were using Russian deposits to buy Greek bonds to help forestall the collapse of the Greek banks. The Greek bonds went bad, and the Cypriot banks lost a bundle. No good deed goes unpunished.

So where is Cyprus now? At this time, the Parliament is going over a series of bills that would consolidate its ailing banks and the creation of a fund that pools state and church assets, i.e. real estate and pensions, against which they would issue bonds. The deputy leader of he ruling Democratic Rally party, Averof Neophytou, cleared the way for the reconsideration of tax levy on savings accounts which had been flatly reject ted on Tuesday.

The other monkey wrench in all of this is Turkey’s challenge of the any move by Cyprus to speed up offshore natural gas exploration as a way of attracting desperately needed investment to save the economy.  

“This resource belongs to two communities and the future of this resource can’t be subject to the will of southern Cyprus alone. (We) may act against such initiatives if necessary,” one of the Turkish officials told Reuters.

“The exclusive use of this resource … by Southern Cyprus is out of question … and unacceptable.”

Cyprus has been divided between the Greek Cypriot south and Turkish north since a Greek coup d’etat followed by a Turkish army invasion in 1974. Efforts to reunite the island have repeatedly failed and Turkey is the only nation to recognise the self-declared Turkish Republic of Northern Cyprus.

At the Washington Post‘s “Wonkblog”, Dylan Matthews predicted two possible scenarios if Cyprus accepts the EU bailout terms:

What’s the best case scenario from a bailout?

The best we can hope for is that Cyprus takes the hit, gets some money, recapitalizes its banks, and recovers from there. It had a fairly conservative banking sector before the crisis, with deposits far outstripping loans, and its government was actually running surpluses, so it doesn’t have to engage in the kinds of fundamental structural reforms that appear necessary in Greece. So if the Greek losses were just a temporary shock, the rescue money should get the country back on its feet.

And the worst-case scenario?

The worst-case scenario under a plan with a haircut is that the plan triggers a run on banks not just in Cyprus (that appears to already be happening) but in other vulnerable countries like Spain and Italy as customers worry that the E.U. will try to impose similar conditions there. That would exacerbate an already bad situation as it would increase bank shortfalls; fewer deposits, after all, mean a worse deposit-to-liability ratio. Those kinds of runs could lead to a continent-wide crisis of the kind observers have been fearing since the euro zone started its slow-motion collapse back in 2009.

However, the failure of the initial haircut plan renders this outcome less likely. It does render a Cypriot exit from the monetary union quite a bit more likely. That would trigger bank runs in Cyprus as people try to get their money out before the Cypriot pound falls dramatically in value relative to the Euro, and could trigger further runs in Spain and Italy. That’s bad for the same reason haircut-inspired bank runs are bad.

Truthfully, it’s all bad and there is no reason for this since as Ezra Klein points out that the solution is to just give Cyprus the money:

Seriously. €15.8 billion ($20.5 billion) is not a lot of money in the scheme of European finance. It is trivially easy for the European Central Bank, or the IMF, or the Federal Reserve, or really any central bank of any consequence to just hand it over. That the troika is already committing €10 billion ($13 billion) is evidence enough. All the troubles in the negotiations are linked to the demand that €5.8 billion ($7.5 billion) come from Cyprus’ own coffers. Dropping that requirement could solve everything.

The Germans will never allow that until they are in the same boat. This is also why the euro will eventually fail.  

Cyrus banks will remain closed until Tuesday as the government of Pres. Nicos Anastasiades struggles to find away to avert a banking failure and withdrawal from the euro.

Crisis talks among the political leadership in Nicosia are set to resume on Thursday after late-night meetings to discuss a “Plan B” broke up on Wednesday without result.

EU officials voiced frustration but little sympathy for an ambitious but now bust banking system that extended itself well beyond the island; Russia, whose citizens have billions to lose in those Cypriot banks, called the EU a “bull in a china shop”. [..]

Finance Minister Michael Sarris extended a stay in Moscow, where Russian officials said he asked for a further 5 billion euros on top of a five-year extension and lower interest on an existing 2.5-billion euro loan from Moscow.

According to Yves Smith at naked capitalism not all of Cyprus’ banks are in the same shape and “the back story is complicated”

It’s key to understand that this crisis was created by the Troika. Cyprus asked for a bailout nine months ago and the deadline is a bond payment this June. And while it has become fashionable to pin the blame for this mess on Cyprus, the backstory is more complicated. From Cyprus.com:

   Not all the banks are in the same condition.

   (a) Cyprus has two money-center type banks: Laiki (Popular) Bank and Bank of Cyprus.

   (b) Laiki was purchased by a Greek vehicle (Marfin Investment Group) backed by Gulf money. Marfin’s purchase of Laiki took Laiki from being a fairly conservative local bank to being highly exposed to Greece. Laiki is definitely insolvent and needs to be restructured.

   (c) Bank of Cyprus has been more conservative vis-a-vis Greece, but still has meaningful exposure. It is conceivable that, given time, Bank of Cyprus could survive.

   (d) Beyond the main two banks, there is Hellenic Bank (a much smaller bank with much less Greek exposure), Cyprus Development Bank (no Greek exposure), the Co-ops (no Greek exposure) and the Cyprus subsidiaries of foreign banks (aka, Russian, English, etc banks), also with no Greek exposure.

   (e) All the local oriented banks (BoC, Laiki, Hellenic, Coops) have exposure to the local real estate market that went through a bubble during the 2000-2009 period. This exposure however is not short-term and could be resolved over the period of years. It is a problem, not a crisis, and is offset by the fact that the two main banks have quasi-monopolistic earnings power locally. Given the time and some financial represssion (a la the United States) and the local issues would be manageable.

In other words, the bank that is the epicenter of the problem was driven into the ditch by foreign buyers. Now admittedly, the local bank supervisors did nothing to stop that, but can you point to a single national bank regulator (ex the Canadians) that put much in the way of constraints on their banks prior to the crisis.

Paul Krugman’s take on this:

Still trying to wrap my head around the Cyprus situation; what makes it so interesting (as in “may you live in interesting times”) is the role of the island as a tax, regulation, and law enforcement haven.

It’s not just about the Russian connection, but that connection is really huge. Here’s another metric: Cyprus is, according to official figures, the largest single foreign direct investor in Russia – this from an economy roughly the same size as metropolitan Scranton PA. What’s that about? The FT explained it a while back: [..]

And a key aspect of the current mess is that the Cypriot government isn’t willing to give up this business. That’s why solutions like converting large deposits into CDs haven’t been on the table; once round-tripping Russians know that they can find their money trapped for long periods, they’ll go find another treasure island.

Stay tuned for more to come.

The Cyprus Parliament has rejected the European Union’s bail out deal that would have imposed a hefty one time tax on all deposits to raise  €5.8 billion of the total €10 billion bailout cost. The original terms of the bailout called for a one-time tax of 6.75 percent on deposits of less than €100,000, or $129,000, and a 9.9 percent tax on holdings of more than €100,000.

NICOSIA – The Cypriot Parliament on Tuesday overwhelmingly repudiated a €10 billion international bailout package that would have set an extraordinary precedent by taxing ordinary depositors to pay part of the bill.  The lawmakers sent President Nicos Anastasiades back to the drawing board with international bailout negotiators to devise a new plan that would allow the country to receive a financial lifeline and avoid the specter of a devastating default that would reignite the euro crisis.

Lawmakers rejected the plan with 36 voting no and 19 abstaining arguing that it would be unacceptable to take money from account holders. Some in the opposition party even suggested abandoning a European Union bailout altogether and appealing to Russia or China to lend Cyprus the funds it needs to keep the economy and its banks afloat.

The deal was brokered last week with Cypriot President Nicos Anastasiades in a meeting at a European Union summit in Brussels. According to reports in The Guardian, the newly elected president was literally “sucker punched” by  the International Monetary Fund, the European Commission, and the European Central Bank as it sought to broker a bailout for its ailing banks:

(..) (T)he centre-right Cypriot leader was given a 12-hour stay of execution until the early hours of Saturday on what, highly conveniently, was a Cyprus bank holiday weekend. He went home with a €10bn euro bailout and a eurozone taboo-busting obligation to expropriate every saver in every bank in Cyprus. [..]

It was not the two-day summit that decided to confiscate savers’ money for the first time in more than three years of currency, banking and sovereign debt crisis. Rather, the Dutch finance minister Jeroen Dijsselbloem called an emergency session of the eurogroup in the same drab building in Brussels to kick off on Friday just as the leaders were heading for the airport. [..]

The key players were Wolfgang Schaeuble, the German finance minister, his former deputy, Jörg Asmussen, from the ECB, Christine Lagarde of France for the IMF, and Finland’s Rehn from the commission.

Anastasiades lingered in the building, but did not take part in the meeting which began at 4.30pm on Friday and ended with a bombshell – under the terms of the bailout he would need to find €5.8bn by raiding bank accounts.

Needless to say the reaction of the Cypriots was predictable with attempts to withdraw as much cash from ATM’s which were quickly emptied over the weekend. The banks were ordered to keep the cash machines replenished even though the banks would remained closed until Thursday. There were worries in other EU member states that depositors would start pulling savings from accounts, particularly Italy, Spain and Greece where the economic conditions are still uncertain.

The market reactions on Monday were predictable, they fell. While the Asian market today was fairly stable on the plus side, the European market fell. On Wall Street, the S&P and NASDAQ fell while the DOW which was in the red most of the day had a late rally to end the day with a 0.03% gain, hardly impressive.

At Reuters, Felix Salmon presented an alternative solution that designed the godfather of sovereign debt restructuring by Lee Buchheit, “the godfather of sovereign debt restructuring,” and Mitu Gulati of Duke University, in a three page paper:

First, leave all deposits under €100,000 untouched. Hitting those deposits was by far the biggest mistake of the Cyprus plan as originally envisaged, and everybody would be extremely happy if guaranteed depositors could be kept whole.

Second, term out everybody else by five years, or ten if they prefer.

That’s it! That’s the whole plan, and it’s kinda genius. If you have bank deposits of more than €100,000, they will be converted into bank CDs, with a maturity of either five years or 10 years – your choice. If you pick the longer maturity, then your CD will be secured by future Cypriot gas revenues, which could amount to hundreds of billions of dollars.

And if you have sovereign bonds, they too will be termed out by five years, giving Cyprus a bit of breathing room to get its act together.

According the paper, this plan would reduce the size of the bailout by more that the €5.8 while not touching anyone’s principle. There would still be a “present value haircut” to accounts over €100,000 but that is going to happen in any bailout scenario.

Cyprus has long been a money stashing haven for Russian oligarchs who have over €20 billion in the banks, nearly one third of all deposits.  

This was an unprecedented move by the EU to force regular depositors and, rightly, the outrage was justified, immediate and predicted. Even Paul Krugman was predicting bank runs. That question looms large:

if the taxpayers of the rich northern members of the eurozone are going to force a country that represents only 0.2% of the club’s GDP to part-finance their own bailout, will they be any more generous when it comes to some of the big-country members such as Italy and Spain that might be next in line? And in the event that the Italians and the Spanish get an inkling that a bailout is looming, won’t they immediately withdraw all their euros immediately, triggering a bank run?

The question now is what next? Will the Russians or Chinese come to the aid of Cyprus to protect their citizens deposits? Can they afford to? Will Cyprus withdraw from the EU and risk the failure of its banks? Can a tiny island nation of 1.1 million be the downfall of the euro?

Stand by, as events will happen very fast to avert a global monetary disaster.

While we have been distracted by the irrational exuberance of a second term for Barack Obama, Benghazi (again) and gun control, the European Union has come around to the realization that there is a need to do something about the economy. On Tuesday the the EU approved a financial transaction tax (FTT) for eleven nations:

Eleven countries won the EU’s backing for a financial transaction tax (FTT), with Germany, France, Italy and Spain adding their names to eurozone neighbours Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia.

The UK, which already imposes a tax on share trades, could benefit from a shift in banking business if Germany and France tax foreign exchange or derivatives trading in Frankfurt and Paris.

The levy, which could raise as much as €35bn (£29.3bn) a year for the 11 countries, is designed to prevent a repeat of the conditions that stoked the credit crunch by reining in investment banks. Following the decision, the European Commission will put forward a new proposal for the tax, which if agreed on by those states involved, would mean the levy could be introduced within months. Although critics say such a tax cannot work properly unless applied worldwide or at least across Europe, countries such as France are already banking on the extra income from next year.

Former Labor Secretary Robert Reich tweeted:

Despite past unsuccessful attempts to introduce a FTT, two Democratic representatives, Rep. Peter DeFazio (D-OR) and Sen. Tom Harkin (D-IA), will reintroduce the FTT which would raise an estimated $352 billion over the next decade by imposing a 0.03 percent tax on trades. That translates to 3 dollars on every $100 in trades. Critics have said that it will have a detrimental effect on economic growth, one of the bill’s sponsors have stated that has already been proven to be false:

“For 50 years we had a tax that was about seven times larger than this when the country was seeing the greatest growth in its history, post-World War II,” he said. “So we’ve proven this will not have a detrimental impact on growth. In fact, it perhaps is beneficial to growth. It’s not necessarily beneficial to salaries of hedge fund managers on Wall Street.”

Complaints that an FTT would encourage businesses to move elsewhere are countered by the facts that 52 financial executives, including several former heads of mega-banks JP Morgan and Goldman Sachs, endorsed the idea and forty countries around the world have already embraced a transactions tax.

Journalist Economist and author David Cay Johnston joined Ed Schultz on the The Ed Show what the FTT would mean for the American economy.

With the capitulation on filibuster reform and the feral children still running the asylum, there is little chance that something this sensible will even get out of committee. That is a very sad state of affairs for this country.

Correction: We received a very kind e-mail from Pulitzer Prize winning journalist David Cay Johnston noting that he is not an economist. He is a renowned investigative journalist who has written about economics and the US tax system.

Last Thursday Mario Draghi, the president of the European Central Bank, won almost unanimous support for an unlimited bond purchase that would relieve the pressure on financial troubled countries by spreading the repayment of debt to Euro Zone countries as a whole:

The central bank’s program will not solve the deep structural problems of the euro, Europe’s common currency. But it will buy time for the political leaders of the 17-nation euro zone to follow through on their past promises to discipline each others’ spending more closely and work harder to relax labor regulations and barriers to business creation that are regarded as impediments to growth.

The central bank will buy bonds on open markets, without setting any limits, in contrast to an earlier bond-buying program that proved too hesitant to be effective. The bank said it would act only after countries agreed on certain conditions with the euro zone rescue fund, the European Stability Mechanism. That fund, known as the E.S.M., would buy bonds directly from governments, taking responsibility for imposing the conditions, while the central bank would intervene in secondary markets. [..]

The one dissenting vote came from Germany’s central bank, the Bundesbank, that was cast by Jens Weidmann despite Chancellor Andrea Merkel’s support for the plan.

But no so fast. The plan relies heavily on Spain and Italy to ask for help from the ECB. Both governments expressed reluctance for fear of political back lash at home and the harsh policy changes that they would have to accept. Spanish  Prime Minister Mariano Rajoy took the stance that Spain would not be forced into asking for assiatance from the ECB until the conditions were made “crystal clear”:

After Mario Draghi, European Central Bank governor, made clear that any assistance from the central bank to reduce Spanish borrowing costs would come with “strict and effective” conditionality, the Rajoy government remained steadfast in its view that a request would only be made if, and when, it is ready. High quality global journalism requires investment.

“There is no urgency,” a Spanish official said following a joint press conference between Mr Rajoy and Angela Merkel, where the German Chancellor deftly avoided a series of questions over possible new conditions for Spain. [..]

The Spanish prime minister is aware of the disastrous political consequences a direct request for a bailout would have on a nine-month-old government that was elected on a pledge to avoid the fate of Greece, Portugal and Ireland.

At the FDL News Desk, David Dayen gives his analysis:

Basically, Rajoy is saying “do your worst.” And he has some leverage. The Eurozone might be able to survive without Greece, but Spain is too big to fail. Draghi is adamant that he will not rescue the bond yields of any state that does not comply, but that has not been confirmed by events. So we have a game of chicken. And Rajoy, who campaigned on avoiding the fate of Ireland and Greece and Portugal, has political reasons to remain steadfast. He wants to keep the troika out of Spain; it’s political suicide if they come in and tell him how to manage the Spanish economy.

The knowledge among bondholders that Rajoy could at any time sign up for aid may be enough to keep them at bay relative to Spanish debt, and the debt of other sovereigns. That’s my hope, anyway. Because forcing Spain into more brutal austerity will turn out just the way it has turned out in Britain and any other country with a fragile economy.

From the annual Ambrosetti Forum at Lake Como on Friday, economist Nouriel Roubini gave his assessment:

“The ECB move is helpful but is not a game-changer. The eurozone is still in crisis,” said Nouriel Roubini, head of Roubini Global Economics.

“Unless Europe stops the recession and offers people in the peripheral countries some light at the end of the tunnel – not in five years but within 12 months – the political backlash will be overwhleming, with strikes, riots and weak governments collapsing.”

Professor Roubini said the German Bundesbank and will insist that “severe” conditions are imposed on Spain once the country requests a rescue from the eurozone EFSF/ESM bail-out funds and signs a memorandum ceding budgetary sovereignty.

“Plenty of accidents can still occur. There is austerity fatigue in the periphery and bail-out fatigue in the core. Eveybody is restless,” he said [..]

This current plan only kicks the can down the road. There are structural problems of the Eurozone system that must be addressed to adequately resolve this crisis:

There is a structural contradiction within the euro system, namely that there is a monetary union (common currency) without a fiscal union (e.g., common taxation, pension, and treasury functions). In the Eurozone system, the countries are required to follow a similar fiscal path, but they do not have common treasury to enforce it. That is, countries with the same monetary system have freedom in fiscal policies in taxation and expenditure. So, even though there are some agreements on monetary policy and through European Central Bank, countries may not be able to or would simply choose not to follow it. This feature brought fiscal free riding of peripheral economies, especially represented by Greece, as it is hard to control and regulate national financial institutions. Furthermore, there is also a problem that the euro zone system has a difficult structure for quick response. Eurozone, having 17 nations as its members, require unanimous agreement for a decision making process. This would lead to failure in complete prevention of contagion of other areas, as it would be hard for the Euro zone to respond quickly to the problem.

In addition, as of June 2012 there was no “banking union” meaning that there was no Europe-wide approach to bank deposit insurance, bank oversight, or a joint means of recapitalization or resolution (wind-down) of failing banks. Bank deposit insurance helps avoid bank runs.

So countries like Greece, Ireland, Italy, Spain and Portugal, who find themselves in a financial crunch, must rely on the not so “goodwill” of countries like Germany who are reluctant to share the pain.