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.

Why Italy Isn't In Such Bad Shape, But the U.S. and UK Are

Bill Gross runs PIMCO's huge flagship bond fund which, having engaged in an untimely shorting of U.S. Treasuries, has hit a bit of a rough patch in recent times. Some have suggested that the 69-year old might be a few years past the recommended portfolio manager retirement age and that it's no longer as useful as it once was to read his monthly investment newsletters.

Think again.

While Gross's timing on shorting U.S. treasuries has been poor, and his revealing in this month's column of memory issues is a little unnerving, his analysis of the fundamentals and medium to long-term sovereign fiscal picture remains sound.

Take his updated 'Ring of Fire II' chart, the first version of which he first published a few years back. The chart (below) plots countries by both their annual public sector deficit (y-axis), which is the difference between government spending and taxes, and what is termed a 'fiscal gap' (x-axis). The fiscal gap takes into account future expenditures, which in the U.S.'s case include entitlements such as Social Security, Medicare, and Medicaid.

As you can see from the chart Italy appears to be in better fiscal shape than several 'Ring of Fire' members like the U.S., Japan and the UK.  How is this possible? Italy has been experiencing what economists refer to as a 'speculative attack' from the sovereign bond market, while the three Ring of Fire countries are currently enjoying record low yields on their government debt. 

Continue reading the full article here.

Lies, damned lies, and statistics: Spanish and Greek youth unemployment much lower than reported

One of the most commonly cited Eurozone crisis statistics over the past several years has been youth unemployment, which in hard hit countries such as Spain and Greece has been reported to be as high as 50%.

In a recent post over at Project Syndicate Steven Hill dissects Eurostat's unemployment rate methodology and comes up with markedly different figures:

Unemployment estimates also are surprisingly misleading – a serious problem, considering that, together with GDP indicators, unemployment drives so much economic-policy debate. Outrageously high youth unemployment – supposedly near 50% in Spain and Greece, and more than 20% in the eurozone as a whole – makes headlines daily. But these numbers result from flawed methodology, making the situation appear far worse than it is. 

The problem stems from how unemployment is measured: The adult unemployment rate is calculated by dividing the number of unemployed individuals by all individuals in the labor force. So if the labor force comprises 200 workers, and 20 are unemployed, the unemployment rate is 10%. 

But the millions of young people who attend university or vocational training programs are not considered part of the labor force, because they are neither working nor looking for a job. In calculating youth unemployment, therefore, the same number of unemployed individuals is divided by a much smaller number, to reflect the smaller labor force, which makes the unemployment rate look a lot higher.

So what we have here is a simple division problem: the unemployment numerator is accurate, but the labor force denominator has been fudged.

What are the real youth unemployment figures in countries like Spain and Greece?

The youth unemployment ratio – the number of unemployed youth relative to the total population aged 16-24 – is a far more meaningful indicator than the youth unemployment rate. Eurostat, the European Union’s statistical agency, calculates youth unemployment using both methodologies, but only the flawed indicator is widely reported, despite major discrepancies. For example, Spain’s 48.9% youth unemployment rate implies significantly worse conditions for young people than its 19% youth unemployment ratio. Likewise, Greece’s rate is 49.3%, but its ratio is only 13%. And the eurozone-wide rate of 20.8% far exceeds the 8.7% ratio.

Certainly these much lower youth unemployment figures are still a matter for serious concern. And as Hill notes later in his post it is likely that at least a significant portion of young people who are in school are there because they cannot find work.

There is, however, a substantive difference between the 50% shock headline figures and the real picture of youth unemployment, and this difference may explain why we have not seen a full-on revolution in countries like Greece or Spain (at least not yet).

The final question is why has the media only reported the much larger youth unemployment figures and not the arguably more meaningful, lower youth unemployment ratio? Certainly the larger figure is much more sensational and attention grabbing.

At the risk of sounding conspiratorial, another way of asking this question is who benefits by reporting the larger figure? Undoubtedly larger figures aid the narrative of the pro-bailout and pro-stimulus, anti-austerity contingent. 50% youth unemployment sounds pretty drastic, and drastic times call for drastic measures.

As they say, "never waste a good crisis".

Video: The Great Euro Crisis (BBC)

A good series of interviews for understanding why many Greeks (and Germans) still prefer that Greece keep the euro rather than return to its previous currency, the drachma. 

Self-confessed Eurosceptic Michael Portillo visits debt-stricken Greece. He believes that the euro crisis must have shaken the Greeks' faith in Europe's single currency and wonders if there'll be a desire to revert to the free-floating drachma. In Athens he meets everyone from a destitute young family to the former finance minister and the outgoing Prime Minister, and is surprised by some of their answers. Meanwhile in Germany, Europe's economic powerhouse, Michael encounters the taxpayers who are paying most towards Greece's mammoth financial bailout while having to watch angry Athenians burning the German flag.

Greece vs. Germany: Football Showdown Between Europe's Arch Debt Crisis Antagonists Looks Likely

Germany vs. Greece

Greece's national football team just scored to go up 1-0 against Russia. If Greece can hold on to beat Russia and advance as the runner-up in Group A they would play the winner of Group B, which is looking like it will be....Germany!

Anyone following the vitriol which has been spewed in the Greek and German media towards each respective country these past two years can't help but be intrigued by a possible matchup of the two Eurozone debt crisis antagonists on the football pitch.

Will Angela Merkel extend an olive branch and invite Greece's newly elected 'Sexy Alexis' Tsipras to share the spectators box at the match? Will tempers fueled by 2+ years of economic depression and feelings of being cheated and bullied boil over amongst the players? Would a lopsided German victory serve to further engrain in the Greek psyche the notion of a German-dominated Europe?

Or, more optimistically, will sport -- in its unique role in our society -- do what it does when it's at its best and serve as a means to bring disagreeing peoples together to help form the basis for a constructive way forward in the Eurozone crisis?

A more pressing question is how would Greece's advance to the quarterfinals affect tomorrow's national election? One can imagine the euphoria from victory over Russia working in favor of status quo parties such as New Democracy, which appear to have positioned themselves as more pro-Europe, and against protest parties like Syriza, which have benefitted from a frustrated, angry electorate.

If the matchup between Greece and Germany happens it would take place on Friday 22 June at 19:45 GMT.

Update: Greece did their part, beating Russia 1-0. Now if Germany can win Group B tomorrow we'll have our showdown.

Greek ATM Withdrawal Limits Under Discussion

More here.

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 QOTD: "Papadreou was clueless. Papademos was complicit. Where does blame really lie?"

Atta boy, AEP.

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.

Young People CAN and ARE Making a Difference in Europe

Getting more young people (and women) into positions of political power is a good thing.

Alexis Tsipras, leader of Syriza

Whether you agree or disagree with the politics of 37-year old Alexis Tsipras, the leader of a leftist-Greek coalition which surprised in the weekend election, he has demonstrated that not every member of the next generation is politically impotent.

While this blog probably would not be characterized as far left-wing, we do celebrate seeing someone under-40 years of age achieving political success.

Bravo, Alexis!

Photo of the Week: Athens On Fire

Tonight Athens burns

The German flag is burned in Athens earlier in the week

h/t Zerohedge and Guardian

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.

Greece Has Its Own Banknote Printing Facility; Ireland Mulls Boosting Its

From the WSJ:

Most euro-zone central banks maintain at least limited capacities to print bank notes. While the European Central Bank is responsible for determining the euro zone's supply of bank notes, it doesn't actually print them. The ECB outsources the work to central banks of euro-zone countries. Each year, groups of countries are assigned the task of printing millions of bank notes in specific denominations. 

The countries have different arrangements for printing their shares of the notes. Some, like Greece and Ireland, own their printing presses. Others outsource to private companies. 

The assignments vary from year to year. Last year, Ireland printed 127.5 million €10 notes, and nothing else, according to its annual report. This year, it was among 11 countries assigned to print a total of 1.71 billion €5 notes.

Full story here.

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

Clarifying What Is Meant By 'Lender of Last Resort'

As the European debt crisis continues to worsen there are growing calls for the European Central Bank to purchase ever greater quantities of Italian and other troubled sovereign debt. Berkeley Professor Brad DeLong recently wrote a widely discussed piece arguing that the ECB is failing in its central banking duty as 'Lender of last resort'. But is it?

Professor DeLong makes some good points, particularly about the importance of establishing credibility with the market. However, he fails to differentiate between a central bank serving as a lender of last resort to the banking system versus a lender of last resort to sovereign countries. So far as I know (central bank operations are often murky by design) the ECB has continued to serve as the former but has resisted becoming the latter. There is a big difference between the two so this is an important omission by Professor DeLong.

With respect to the European banks, the ECB has opened and accessed U.S. dollar swap lines with the New York Federal Reserve Bank while also providing certain "unlimited" lending facilities to European banks. In short, the ECB is in fact playing the role of 'Lender of last resort' to Europe's banks. However, as DeLong notes, the ECB has only purchased European sovereign debt in limited quantities. How come?

The Germans get blamed for the ECB's spendthrift ways, with the not-so-distant memories of the Weimar hyperinflation still weighing on Teutonic minds (or so the usual armchair-Freudian analysis goes). But there is some prima facie evidence for this hypothesis: even though the ECB has (so far) not chosen to crank up the printing press full-bore two German ECB board members have resigned in the past year. The most recent, Juergen Stark, publicly stated that his reason for quitting was the ECB's resumption of Italian and Spanish sovereign debt purchases.

While the ECB may continue to hold back for now I suspect that if things get extremely ugly it will in fact print a much greater quantity of money than it has to date to bail the Eurozone out of its debt problem. If this happens euro bulls beware.

The other alternative is for the proper lender of last resort to sovereign countries -- the IMF -- to step in. The IMF was in fact created precisely for situations like the current Eurozone debt crisis. Given this you might be wondering why the experts, in near unanimity, are instead pointing towards the ECB? The answer, in short, is because the ECB has a printing press and the IMF (for now) does not.

Other countries, such as China, do have the funds to bolster the IMF to bailout Europe. But they'll want something in return, such as a greater voting share on the IMF's Board. This is an unappealing prospect to the U.S. and (in particular) Europe, which has since the IMF's inception held a perennial lock on the top job at the Fund. And so in the minds of many that leaves only the ECB.

Ciao G-Pap

Greek Prime Minister George Papandreou is departing following the quick withdrawal of his referendum gambit, as it came to be called.

The word 'gambit' turns out to be quite a prescient or fortuitous choice. Of Italian origin, the literal translation of gambetto is 'tripping up'.

Another day in the Eurozone crisis and another politician bites the dust. With G-Pap gone it's your move Herr Berlusconi.

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gambit |ˈgambit|

noun

(in chess) an opening in which a player makes a sacrifice, typically of a pawn, for the sake of some compensating advantage.

• a device, action, or opening remark, typically one entailing a degree of risk, that is calculated to gain an advantage : his resignation was a tactical gambit.

ORIGIN mid 17th cent.: originally gambett, from Italian gambetto, literally ‘tripping up,’ from gamba ‘leg.’

Recommended links

1. Why is Greece turning down the “bailout” (Tyler Cowen)

2. Circular commitments lead to a Ponzi economy (Letter to the FT). Here's the key quote:

If governments stand behind banks and banks stand behind governments and the central bank lends freely to both and also underwrites financial markets, then financial asset prices become completely detached from economic reality. In this “system”, the central bank implementing more quantitative easing is no different, in economic terms, from Bernie Madoff marking up his client accounts every month.

3. The Bailout That Busted China's Banks (WSJ)

4. Mr. Hoenig Goes to Washington (Simon Johnson)

5. Bond Dealers See Fed Holding Rate Near 0% at Least Through First Half of 2013 (WSJ)

6. Papandreou Is Right to Let the Greeks Decide (Spiegel)

7. Live European debt crisis coverage (BBC) and (Telegraph)

Recommended links

1. Rogoff: 80% chance that Greece will leave the euro (Bloomberg)

2. More Greece love from Sarkozy: Greece should have been denied euro (BBC)

3. Nominal GDP targeting is unlikely to work (INET)

4. World power swings back to America (Telegraph)

5. Hugh Hendry at LSE Alternative Investment Conference (Greshman's Law). My writeup on Hugh's Jan. 2011 interview at the AIC can be found here. Hugh has agreed to come back to the 2012 AIC conference, which I look forward to attending.

6. Portugal enters the 'Grecian vortex' (Telegraph). AEP has been on a roll lately.

7. Italian 10-Year Yield Tops 6% in Auction, Setting Record (CNBC)

Photo of the Day: Angela Merkel Sizes Up the Eurozone Bailout

(click to enlarge)

h/t Barry