What Happened to Cyprus's Deposit Insurance Scheme?

So much for all quiet on the Eurozone front, a quiet which barring election rumblings from Italy has largely been enjoyed since Drahgi's LTRO blitz.

While it's unclear whether this weekend's 'bailing in' of Cyrpiot depositors will prove the trigger point for the final Eurozone reckoning, what is clear is that all the 'crazies' who have been stashing their money under their mattresses perhaps weren't so crazy after all.

One thing I'm curious about, which I haven't seen discussed in any detail anywhere else, are the mechanics behind what happened to Cyprus's deposit insurance scheme.

For example, is the insurance scheme, like the entire Cypriot banking system, insolvent? If yes, by how much? Could it be recapitalized through a tax? Etc.

The high level details of Cyprus's deposit insurance program, which goes by the name Deposit Protection Scheme (DPS), are discussed on the Central Bank of Cyprus's webpage here. As has been widely reported, depositors in Cypriot banks are supposed to be fully insured for €100.000 "per depositor, per bank".

Some reports state that if Cyprus's banks were allowed to fail then the small, fully insured depositors would be made whole. So do depositors who have €100.000 or less of insurable deposits have recourse for legal action in Cyprus?

One thing is clear: if I were a Cypriot depositor I would much rather have cash right now than shares in an insolvent bank.

Greek ATM Withdrawal Limits Under Discussion

More here.

Greece Can Physically Print Its Own Euros In Spite Of ECB 'Choke' Efforts

Euro printing press

As the long ago predicted Greek 'bank jog' accelerates there is much talk in the econoblogosphere of the Greek banking system being 'choked off' by the ECB.

If this is in fact the Brussels/Frankfurt plan to force Greece out of the euro there is a perhaps not insignificant obstacle to this strategy: as noted in this post last year, Greece has its own euro printing press. 

The ECB does not print any euro banknotes but actually assigns this task to local member country central banks, with the ECB instructing the local central bank how much of which denominations to print.

So what does this mean?

In opinion polls Greeks want two things: a) to default on their sovereign debt less fiscal austerity and b) stay in the Eurozone. However, European elites (read: Germany) are saying to Greece that you can't have both. But is Germany correct?

An important point to keep in mind here is that there is no legal mechanism to force Greece to drop the euro and readopt the drachma. Hence the idea of choking off the Greek banking system and forcing the Greeks to renounce the euro versus organizing some type of formal action, such as a vote to eject Greece from the euro, which would not be allowed under current EU law.

But in the event of a full-fledged run on Greece's banking system, where Greek banks literally have no cash on hand to give to depositors, it would seem reasonable and (crucially) perhaps legal for the Greek central bank to start printing euro notes even if the ECB disavows this action.

If this were to take place is there anything the ECB could do to stop the Greek central bank from printing euros? Probably not.

It's hard to imagine the situation reaching a stage where the Greek central bank openly revolts against the ECB and starts printing euros. However, Greece need only hint at playing this card for it to have the desired effect, which is to force the ECB to continue accepting Greek bank collateral on reasonable terms. In other words, the fact the Greeks can print their own euros nullifies the ECB's ability to choke the Greek banking system into submission and force a 'voluntary' abandonment of the euro.

Your move, Angela.

Greece Just Publicly Threatened Its Trump Card

Greece just decided to start 2012 off by significantly upping the ante:

"The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro," spokesman Pantelis Kapsis told Skai TV.

 Here's my previous piece explaining why in the European sovereign debt crisis Greece holds all the cards.

The Fed's $1.2 Trillion in Secret Bank Loans

Interactive chart detailing previously secret Federal Reserves loans to each bank here. Bloomberg deserves an award for their doggedness and reporting on this issue.

Euro Reading Roundup - Who Will Be Getting Booted Out of the Eurozone?

Or perhaps the more important question is which country will be the first to experience a a more serious bank run than the slow motion runs which have been occurring in Greece, Ireland, and Italy?

1. Departures from the Eurozone are "inevitable" (Rodrik)

2. Europe's Darkness at Noon (Eichengreen)

3. Thinking Through the Unthinkable (Wolf)

4. 'In 31 years, I've never seen markets this crazy' (Jim Cramer)

5. Wall Street Ignoring Europe? (Tim Duy) Smells like 2007

Video: Niall Ferguson Says Financial Repression Preventing Full-Scale Italian Bank Run

Niall's latest comments on the Eurozone crisis after the jump:

What is Money? (or How is Money Created?)

I just did a Google search on 'what is money?' and 'how is money created?', and many of the top results are probably confusing for someone looking for a simple explanation of the broader concept of money.

(Note: this post is not about physical cash or coin, which I trust most people correctly understand to be minted by the government. It is instead about a more complete measure of money in all its physical and non-physical forms: cash, coin, demand deposits, savings, etc.)

Courtesy of Dan Hind here's a simply explanation of how money is created:

Banks create money through the act of lending it. They don't have to limit themselves to lending out the money deposited with them. In fact, they can end up lending huge multiples of the money they hold in reserve. 

When they authorise a loan or extend credit in the form of an overdraft, the money is conjured out of nowhere.

So there you have it. Banks create the vast majority of the money supply out of thin air (electronic bits these days) when they make loans. Simple, right? Here's Dan again:

The economist and ironist JK Galbraith once wrote that "the process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent". Offered the unadorned truth, stripped of any technocratic flim-flam, we can scarcely believe it. It seems preposterous that money should have such humble origins, as though it is beneath money's dignity that it should begin life at a banker's keystroke.  

The truth about money creation is a bit like the end of The Wonderful Wizard of Oz, when it turns out that there is no all-knowing wizard, only an old man behind a curtain, making things up as he goes along.

A perhaps more interesting question is why the subject of how money is created is not taught in secondary school? The reason can't be that it's too complicated. But as one of the commenters on Dan's article notes:

 "it is truly preposterous how little the public knows about arguably the single most influential conception humanity has ever created."

Education Site: Educate yourself on various aspects of the financial industry with classes from accredited online colleges.

AEP on Euro Endgame: "Sorry Deutschland. History has conspired against you, again."

Evans-Pritchard on the Eurozone's Debt Endgame:

The Geithner Plan must be accompanied a monetary blitz, since the fiscal card is largely exhausted and Germany refuses to lower its savings rate to rebalance the EMU system. The only plausible option is for the ECB to let rip with unsterilized bond purchases on a mass scale, with a treaty change in the bank's mandate to target jobs and growth. 

This would weaken the euro, giving a lifeline to southern manufacturers competing with China. It would engineer an inflationary mini-boom in Germany, forcing up relative German costs within EMU. That would be the beginning of a solution, albeit a bad one. 

Sorry Deutschland. History has conspired against you, again. You must sign away €2 trillion, and debauch your central bank, and accept 5pc inflation, or be blamed for Götterdämmerung. It is not fair but that is what monetary union always meant. Didn't they tell you?

Full article here. 

Greek Referendum on Leaving the Euro

Update: a rumor no longer. Latest polling shows 60% of Greeks oppose last week's bailout deal, while 70% want to keep the euro. The vote will supposedly take place sometime early next year. I stand by my earlier prediction that this vote will never take place for the reasons described below. The prospect of a Greek vote on not just the bailout but Eurozone membership, hanging over the financial system like a Sword of Damocles, cannot possibly be tolerated for the next three months.

The latest rumor:

As pressure from Greece’s foreign creditors and austerity-weary citizens mounts on the government, Prime Minister George Papandreou is considering calling for a referendum on whether Greece should continue to tackle its debt crisis within the eurozone or by exiting the single currency. 

According to sources, Papandreou hopes that the outcome of such a vote would constitute a fresh mandate for his Socialist government to continue with an austerity drive backed by Greece’s international lenders -- the European Commission, the European Central Bank and the International Monetary Fund.

A bill submitted in Parliament, paving the way for a referendum to be carried out, is to be discussed in coming days.

Here's the source.

Will Greeks be allowed to vote on whether or not they want to remain in the Eurozone? Extremely unlikely, IMO.

The Eurozone is like the Eagles' Hotel California: countries which have been invited can check in any time they like, but they can never leave. A formal legal process for leaving the Eurozone was intentionally left out of Maastricht.

The situation on the ground in Greece is already incendiary enough as it is. Putting the euro to a Greek vote, while democratic, would trigger far too much chaos. And if the majority voted in favor of leaving the euro and returning to the drachma there would be an immediate, full run on Greek banks (if it hadn't already been completed in anticipation of the voting result).

If Greece decides to leave the Euro, which looks increasingly likely, it won't be done through a popular vote.

Why oh why on Earth is anyone still keeping their euros in a Greek bank? Or to put it another way, why aren't the Greeks behaving more like the Irish?

Irish Banks Have Lost 40% Of Deposits, Why Have Greek Banks Only Lost 19%?

Irish banks have lost 40% of their deposits over the past 18 months, whereas Greek banks have lost 19%. (Without thinking I almost inserted a 'just' in front of the Greek figure, but 19% is still a significant number!)

Right now the risk is much greater for Greece than Ireland of either leaving or getting kicked out of the euro, followed by:

1. Declaring a bank holiday
2. Enacting capital controls
3. Restricting Shengen and imposing limitations on travel, reducing the amount of money which can be taken out of the country per visit, or both
4. And then devaluing the new currency by approximately 50%

Naturally, one would expect deposit withdrawals to be much higher in Greece than Ireland, but according to official statistics the opposite is the case.

From Bloomberg:

Deposits by financial institutions in Greek banks, which make up 21 percent of the total, have fallen by one-third since the beginning of 2010, while those by non-financial firms and residents dropped 9 percent, according to Bank of Greece data. 

People “are now afraid of the possibility of returning to the drachma,” said Giannoulis, referring to the Greek currency in circulation before the country adopted the euro in 2001. “Just a headline is enough to spook depositors.” 

Something doesn't smell right here. If Greek depositors were really afraid of returning to the drachma then they'd be pulling euros out en masse and stashing them under the mattress or opening bank accounts in other countries.

Greece has reported wildly inaccurate economic figures since the crisis began so one possibility here is that the 19% in withdrawals is another fraudulent Greek figure and massively understated. Recently Greece quietly activated the Emergency Liquidity Assistance (ELA) program in what was described as 'last stand' for Greek banks:

The ELA was designed under European rules to allow national central banks to provide liquidity for their own lenders when they run out of collateral of a quality that can be used to trade with the ECB. It is an obscure tool that is supposed to be temporary and one of the last resorts for indebted banks. So far it has only be used in Ireland. 

By accepting a lower level of collateral the debt in the ELA is, in theory, supposed to be the responsibility of Greece. However, since the Greek state is surviving on eurozone bailouts and Greek banks are reliant on ECB funding, in practice the loans are backed by the eurozone. The terms of lending and other details are not disclosed publicly. 

Mr Ruparel said: "Though the ELA is meant to be a temporary emergency solution, we know from Ireland, where the programme has been running for almost a year, that once banks get hooked on ELA they rarely get off it."

More about the slow motion European bank run here.

Greece Can Legally Introduce Capital Controls Under EU Article 143

From Spiegel:

Contrary to earlier assumptions, restrictions on the movement of capital, which could be used to prevent Greek citizens from moving their money abroad (something that would endanger the country's banks), are now seen as being compatible with EU law. Article 143 of the Treaty on the Functioning of the European Union offers a loophole, in that it permits certain countries to "take protective measures."

The new line is not entirely uncontroversial, however. This became apparent at a meeting of the euro zone's deputy finance ministers last Monday, when the so-called troika of the European Commission, European Central Bank and IMF gave its report on the situation in Greece. 

The group was divided in the end. For the first time, there was a majority, led by the Germans, Dutch and Finns, that advocated pulling the ripcord on Greece. 

The southern countries, including France, were considerably more reserved. They feared that if funds were cut off for Greece, they could be next in line. 

Can someone please explain to me why so many Greeks still have their euros in a Greek bank? According to the latest official figures since Jan. 2010 Greek bank deposits have only declined by 20%. Assuming these figures are accurate (a big assumption) I would have expected the outflow to be much greater.

Is the slow motion bank run currently underway in Greece about to accelerate?

Why anyone in Greece is still keeping their euros in the Greek banking system right now is beyond me.

The latest here.

European Debt Mexican Standoff: Why Greece Holds All the Cards

A no-win scenario?

Markets are signalling that tonight's vote of confidence for the government of Greek Socialist leader George Papandreou will pass.

If that happens (I don't take anything for granted in the Eurozone kabuki theatre these days) then the next step in this Greek tragedy will come next week when a package of austerity measures is put to a vote before the Greek parliament.

The new austerity measures include spending cuts, tax increases and the sale of government assets. If the Greeks don't pass these measures then the EU and IMF have threatened to not release new funds to Greece (whether they would carry through on this threat is an open question). Without these new funds Greece will run out of cash next month and default.

The Greek Bargaining Position

While a Greek default would perhaps be bad in the short-run for Greece, it would be far, far worse for the Eurozone and rest of the world. Given the risks of financial contagion and a pan-European, if not global, banking crisis that a Greek default could trigger, the Greeks find themselves in a relatively strong negotiating position. And the Greeks, the EU, the ECB, and IMF all know this.

Continue reading at Seeking Alpha here.

Breaking: Greece May Drop Euro & Reintroduce Drachma

From Germany's reliable Der Spiegel comes the predicted but potentially destabilizing late-Friday news bomb:

Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.

Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany's behalf. 

According to German Finance Ministry estimates, the currency (Drachma) could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt.

The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to "write down a significant portion of its claims as irrecoverable." In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion) "Given its 27 percent share of ECB capital, Germany would bear the majority of the losses," the paper reads. 

In short, a Greek withdrawal from the euro zone and an ensuing national default would be expensive for euro-zone countries and their taxpayers. Together with the International Monetary Fund, the EU member states have already pledged €110 billion in aid to Athens -- half of which has already been paid out.

A slow motion bank run in Greece, Ireland, etc. has been taking place since this time last year. Any credible whiff of news that a Eurozone member might drop the euro currency could trigger a panic, rapidly accelerating the move out of euros, not just in Greece but other European periphery nations, into safer currencies.

Continue reading the full article at SeekingAlpha here, including thoughts on which currencies stand to benefit most from this development.