Sowing the Wind and Reaping the Whirlwind? The E ect of Wind Turbines on Residential Well-Being Christian Krekel DIW Berlin, German Institute for Economic Research, German Socio-Economic Panel (SOEP), Mohrenstra
For the first time, small bank depositors will take a hit. Small depositors have long been regarded as sacrosanct. Although in theory they rank alongside bondholders and large depositors in the queue for funds, in practice they have always been protected – usually by taxpayers. Depositors losing money when banks are kept afloat, when they would have escaped unscathed if the banks failed, seems both unfair and illogical. Hence the reason for the “shock and awe” response to the Cyprus bailout terms. A 6. 7. 5% one- off “stability levy” will be imposed on deposits covered by deposit insurance (under 1. Euros). The levy on larger deposits will be 9. Euros. Additionally, there will be higher withholding taxes on interest. These penalties will be applied to all deposits, including those in well- managed banks that don’t require bailout. The description of this as a “tax” or levy is a bit of a fudge. Under what type of taxation scheme are people provided with shares to compensate them for the taxes they have paid? But that is what is happening here. SOWING IN THE WIND, REAPING UNDER CLOUDS 'He that observeth the wind shall not sow; and he that regardeth the clouds shall not reap. Before dawn on June 22, 1941, German bombers began to rain destruction down on a swath of Soviet cities from Leningrad to Sevastopol. It was the beginning. What does it mean to sow the wind and reap the whirlwind? What does Hosea 8:7 mean? What's New; Search Our Site; FAQ Archives. The proverb uses an illustration gleaned from the agricultural process of sowing and reaping. The terms of Cyprus's bank bailout have shocked the world. For the first time, small bank depositors will take a hit. Small depositors have long been regarded as sacrosanct. Although in theory they rank alongside bondholders. Depositors will be provided with bank shares to the value of their losses. They are being “bailed in” in the same way as junior bond holders: a percentage of their deposits are being converted to equity. The money taken from the depositors will go to the sovereign to compensate it for the cost of bailing out the banks. At the end of the process, the sovereign will be left with a manageable amount of debt, and the banks will be owned by their depositors and junior bondholders. In effect they will have become mutuals. When I explain it like that, it doesn’t sound so bad, does it? The problem for depositors is twofold, really: their liquid assets (cash deposits) will have been replaced with illiquid ones (shares in banks that currently have little market value)they are forced to take the risk that the future value of those banks will not compensate them for the money surrendered to the sovereign. So depositors have an immediate liquidity problem, and the possibility of future real losses. They are not suffering a real immediate loss of capital at all. The sovereign is providing them with shares to the value of their losses. Yes, I know those shares look like duds, but there is no market for them so it is impossible to obtain a real market price. The sovereign is valuing the shares as it sees fit. It remains to be seen whether the sovereign’s valuation is correct. I have considerable doubts about this, but that is for reasons that have nothing to do with the current bailout and everything to do with the real economic issues in Cyprus and the utterly inept and counterproductive measures being taken to deal with them. Plenty of people have questioned why small depositors had to be hit at all. The German financial minister, Wolfgang. The IMF took a similar view. It seems that the Cypriot government did not agree. There is considerable speculation as to why the Cypriot government preferred to see small depositors hit. To me it seems most likely that it has to do with the Cypriot government’s wish to avoid upsetting Russia, given Nicosia’s hope that. But it is also possible that Nicosia is still hoping to maintain its foothold in the international tax haven network. Even with the 2. 5% increase imposed as part of this bailout, corporation tax is a very competitive 1. Cypriot government has encouraged growth of the financial sector by attracting deposits from overseas investors. The large depositor haircut is a mortal blow to Cyprus’s ambitions to be an international financial centre – and that has serious implications for its economy. Cyprus’s economy is dwarfed by its financial sector, whose total assets are 8 times its GDP. It’s uncannily like Ireland without the property bubble but with a much larger neighbour and trading partner in a horrible mess. And like Ireland, the sovereign cannot afford to bail out its banks. A taxpayer bailout like that done in Ireland would leave the sovereign with estimated debt of 1. GDP. The IMF considers this unsustainable, and under its own rules would therefore be unable to contribute to the bailout fund. As the Eurogroup is expecting the IMF to contribute, clearly a taxpayer bailout of Cyprus banks would be out of the question, unless it was immediately followed by Greek- style PSI restructuring of sovereign debt. No- one wants to go there. Although I have explained above why this is perhaps not such a terrible deal for depositors as it seems, that is not how they will see it. Cyprus was forced to introduce temporary restrictions on the movement of capital to prevent depositors removing their funds to avoid the levy. And although this choked off an immediate acute bank run prior to the levy being imposed, I do not think depositors will want to keep funds in banks any more. After all, it’s not very long since the Cypriot President? Small depositors will withdraw funds in cash and stuff their mattresses, or they might buy gold. In particular, the dominant financial sector will suffer a severe contraction, putting thousands of jobs at risk and paralysing lending to Cypriot households and businesses. And that is IN ADDITION to the estimated 4. Cyprus in 2. 01. 2 to reduce its fiscal deficit, and the further measures required in this bailout. A major bank run will be economically catastrophic. And the effect of that economic disaster will be to increase both the fiscal deficit and the public debt as a proportion of GDP. After all, even if the government doesn’t increase borrowing, a collapse in GDP immediately raises the debt burden to unsustainable proportions, spooking investors and causing unaffordable rises in yields on sovereign debt. Cypriot banks may or may not become insolvent. They will become completely dependent on central bank funding, of course, just like their Greek counterparts. But a second bank bailout is not a complete certainty. What in my view is a racing certainty is a SOVEREIGN bailout due to GDP collapse some time in the next two years. This bailout may have averted the immediate risk of disorderly default and Euro exit, but economically it is completely insane. And it is dangerous, not just for Cyprus but for other countries too. For the fact is that deposit insurance everywhere in the EU has now been undermined. The precedent has been set for insured depositors to suffer losses in order to protect Russian oligarchs and reckless banks. If the Eurogroup can impose this on Cyprus, it can do so elsewhere too. But haven’t we heard this before? Wasn’t the Greek bailout “unique”, and the Irish bailout, and the Portuguese bailout, and the Spanish bailout? It is only “unique” until the next domino falls. I would not be surprised now to see bank runs across the entire Eurozone periphery, and perhaps in other EU countries too. They have. If that is true then it exposes the European Union for what it is rapidly becoming – a nascent totalitarian state. UPDATE 2. It says the ECB threatened to stop providing liquidity to Laiki, Cyprus’s second- biggest bank, which would have caused an immediate disorderly collapse. I have written previously about the ECB’sdisgraceful behaviour. This is the worst example yet. Share the post . Actually I write about finance and economics generally. And about anything else that interests me - so you may occasionally find posts on this site that have nothing to do with banking, economics or finance. In fact they might have something to do with music, since I'm a Associate of the Royal College of Music and a professional singer and teacher. I'm also an alumnus of Cass Business School, where I did an MBA with a specialism in finance and risk management. Latest posts by Frances Coppola (see all)Did you have a comment or question about this post, finance, economics or your love life?
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