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.

On The Problem With Postponing the Inevitable

Today's Eurogeddon must read.

Lagarde Sacrifices Herself to Help Greece's Pro-Bailout New Democracy Party?

The Eurogeddon chess game is getting desperate so don't be surprised to see a few political/PR curveballs over the next few weeks in front of the 17 June Greek election runoff.

Case in point is this weekend's snarky comment from the typically ladylike Madame Lagarde. But before we get to that, some background:

The single worst thing than can happen from the perspective of the Troika (the IMF, EU, and ECB) and Greek elites right now is for Syriza and its 37-year old leader, 'Sexy Alexis', as he's now being called, to do well in the 17 June Greek election runoff.

In the most recent May elections Greek voters turned away from the two pro-bailout/austerity parties, PASOK and New Democracy, as they were seen as tools of the Troika. This rejection by voters sent a shiver up the Troika's spine as they know that should Syriza and Alexis Tsipras prevail he will likely walk away from the terms of the bailout and thereby call the Troika's bluff to either a) cut off Greece's banking system from further ECB funding or b) terminate any further bailout money to Greece's government. Either one of these moves will likely trigger a financial panic and spoil everyone's summer vacation plans.

So the Troika are now desperate to see PASOK and or New Democracy do better in the 17 June election. So how can they help them?

Agent Provocateur: Christine Lagarde, IMF Chief

Angry Greek voters are looking for someone to blame, and as long as PASOK and New Democracy are seen as part of the problem it's unlikely that voters will put them back into power. So one strategy is to try and reshift the political blame onto the external Troika, which would have the effect of diverting negative feelings away from PASOK and New Democracy. This would help the two pro-bailout Greek parties reposition themselves as domestic victims rather than as co-conspirators with the hated foreigners.

And now you understand why the typically politie Christine Lagarde, head of the IMF, probably deliberately roiled the Aegean kettle this weekend with a comment about how it's 'payback time', and Greeks need to pay their taxes.

Queue the Greek firestorm.

And lo and behold, New Democracy, who of course along with PASOK quickly denounced Lagarde's rhetoric, is again rising in the polls.

Nice move, Troika.

And, by the way, Lagarde doesn't pay any taxes on her $551,700 in annual compensation.

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.

Video: Phase Three of the Global Crisis

This is from a year ago but still worthwhile if you haven't seen it.

Speaker: Paul Mason

This event was recorded on 31 January 2011 in Sheikh Zayed Theatre, New Academic Building

As countries adopt competitive exit strategies from the global crisis Paul Mason surveys the political economy of a flat recovery. He argues that mainstream economics have still refused to draw the lessons of asset price bubbles and situates the divergent recovery, east and west, within a long-wave explanation of the crisis. Paul Mason is the award-winning economics editor of BBC Newsnight, covering an agenda he describes as 'profit, people and planet' and author of the Idle Scrawl blog , which was shortlisted for the Orwell Prize 2009. His first book, Live Working or Die Fighting: How the Working Class Went Global, was longlisted for the Guardian First Book Award. This event marks the publication of his latest book Meltdown: The End of the Age of Greed.