Posted by Steve Markowitz on March 30, 2013
The European Union’s first bailout attempt of Cyprus was a dismal failure. That plan included a tax on all bank deposits that was rejected by the Cypriot Parliament. A more recent deal scraps the tax on depositors, but will still include losses for depositors and bondholders.
Cyprus’s largest bank, Laiki Bank, will be wound down with major bondholders taking losses. In addition, depositors with over €100,000 will be penalized. Some of Laiki Bank’s debt will be moved over to the Bank of Cyprus, the country’s largest lender, which will survive after the bailout. However, many Bank of Cyprus depositors facing losses over 50% of their assets. Since this will not be a tax it does not require Cypriot parliamentary approval.
Cyprus is a meager part of the European Union’s GDP, less than 1% with less than 1 million residents. The banking crisis became a much larger problem for Europe for two reasons. First, Cypriot banks became haven for foreign investors, mainly Russian making its banks eight times larger than the entire economic output of Cyprus. In addition, as part of the European Union, allowing it to implode risk contagion to other peripheral EU countries. Finally, it should be noted that the Cypriot banks took huge losses and became insolvent because of its holdings of Greek sovereign bonds, another EU basket-case.
While Cyprus’s is an insignificant piece of the European Union’s economy, the way the crisis has been “resolved” will likely lead to huge consequences for Europe going forward. Unlike in other EU bailouts, Cypriot depositors were forced to take haircuts on deposits. This brings into question an issue not raised in Western banks since the Great Depression; the safety of deposits. If the issue is contained to Cyprus, it will be insignificant. However, it is only a matter of time before depositors in other weak European countries become concerned about the safety of their bank deposits. This will lead to a run on those banks. Prime candidates are Italy and Spain, countries that are indeed “too big to fail”, but at the same time the EU does not have the assets to bail them out.
The bailout of Cyprus is reported to cost the EU less than $10 billion. Given this relatively small amount as compared to the total European Union GDP, why have they risked so much for the future of the larger EU banking system? The answer is political. Germans voters are wary of the bailouts of weaker neighbors and Andrea Merkel’s party faces an election. This tough approach to Cyprus is designed to mollify German voters. However, in the long run it places much more at risk for European unity.
Another interesting question is why the fiscally conservative Germany remains part of the European Union with its many weaker and fiscally irresponsible partner countries. The answer is self-interest. Germany is much more efficient than its southern partners. In previous years these countries could have lowered the value of their currency to become competitive against Germany. With the creation of the Euro, the cost of products from these inefficient countries has risen compared to Germany’s products. Is not surprising, therefore, that while Spain’s unemployment rate is currently 25%, Germany is a mere 6%. While the cost of the bailouts for Germany is high, the cost of dissolving the European Union would be even higher.
With the template of the Cypriot bailout in place, the EU has made it policy that under some circumstances it will demand member states seize depositor assets as a price for bailing out its banks. The message for depositors in European peripheral countries is clear; should banks in your country become financially at risk, your deposits will also become at risk. Human nature demands action of these depositors. Depositor funds will move from weaker countries to stronger ones, thereby exasperating the already existing financial strain on weaker European countries’ banks. This has the makings of Europe’s next banking crisis and it will be the result of self-inflicted wounds.
Posted in Banks, European Union | Tagged: Bailout, Banks, Cyprus, Europe, Germany, Laiki, Run | Leave a Comment »
Posted by Steve Markowitz on March 19, 2013
Yesterday we posted Cyprus Bailout Taxes Bank Deposits that reviewed the proposed bailout of Cypriot banks by the European Union. The entire banking system in Cyprus is insolvent and requires a bailout from the European Union, which means from Germany. Germany has a case of bailout fatigue after the bailouts of Ireland, Greece and Portugal. Prior to agreeing to the proposed Cypriot bailout, the EU placed some unique demands on Cypriot bank depositors in the form of taxing the deposits.
Today the Cypriot Parliament not surprisingly rejected the bailout plan with not one politician voting in favor of it. Even if taxing bank deposits was reasonable, no politician could survive in a democracy by agreeing to such terms.
The European Union and its Central Bank should have understood the political realities of their proposed Cypriot bailout, but instead with arrogance proposed a plan that could not be approved by the government. There is a more dangerous aspect to this error than merely bad judgment. Should depositors in other European banks fear for the safety of their deposits, contagion could result in runs on banks far outside of Cyprus. Should that type of panic begin it is hard to determine where will end.
It would not be surprising to see upward pressure on the price of gold as a result of the Cypriot bailout fiasco.
Posted in Bailouts, Banks | Tagged: Bailout, Banks, Cyprus, EU, European Union, Parliament, Reject | Leave a Comment »
Posted by Steve Markowitz on January 8, 2013
During the first week of January most of the financial focused on America’s “Fiscal Cliff”. While an interesting diversion, the world’s economic challenges are much broader than America’s deficits and debt. While Europe’s financial issues are not currently making front-page news, its challenges remain daunting.
Last week the Wall Street Journal reported on Spain’s economic problems in article titled Spain Drains Fund Backing Pensions. Spain is the “S” of Europe’s so-called PIIGS. A few examples of Spain’s problems include:
- The country’s unemployment rate is about 25% with it being much higher for those under 30 years of age.
- Spain will have to issue over €200 billion in debt for 2013, an increase of approximately €20 billion, over the previous year.
- In 2012, both Moody’s and Standard & Poor’s lowered Spain’s bond rating to junk status.
Instead of addressing its problems, Spain is compounding them with financial gimmicks. Its Social Security System had previously created a rainy day fund that would be required in future years as fewer workers will be paying into the fund with more retirees withdrawing from it. That fund, however, has been robbed by the government who is forcing its Security System to use these funds to purchase Spanish government’s risky bonds. It is estimated that 90% of the fund is now invested in Spain’s debt. Not only will these “borrowed” funds ultimately need to be paid back if it’s obligations are to be met, but this pool is now tapped out. These realities will add to the pressure that will ultimately require Spain to seek a bailout from the European Union.
In addition to Spain’s security system having its fortunes tied to the country’s bad debt, Spain is has also forced its commercial banks to invest their funds in the government’s debt. This game of having one arm the government, as well as its banks, lend to another arm is a Ponzi scheme that would make Bernard Madoff smile.
If the sovereign financials shell games were limited to Spain or a few countries, the potential problems internationally could be contained. However, many governments use similar financial tactics, including the United States. Politicians, particularly those on the Left, either ignore the problem or are delusional with claims that economies can grow their way out of the debt. Such fantasies are akin to physicists believing in perpetual motion.
Posted in European Union, Sovereign Debt | Tagged: Bailout, Debt, Pension, Spain | 1 Comment »
Posted by Steve Markowitz on December 5, 2012
Earlier this week at a city Council meeting, Detroit Councilwoman JoAnn Watson made an open statement to President Obama saying: “Our people in an overwhelming way supported the re-election of this president and there ought to be a quid pro quo and you ought to exercise leadership on that” and, “after the election of Jimmy Carter, the honorable Coleman Alexander Young, he went to Washington, D.C. and came home with some bacon. That’s what you do.”
What a quick reaction to Ms. Watson is that her request is a bit crass, but at the same time it is refreshingly honest. This is how politics works. You support the politician with money and votes and in return the politician supports you by taking money from those that did not support them and giving it to your special interest.
This is a great example of the corruptive culture of the political elite, which is unfortunately a necessary evil in democracies. In general, this corruption remains within acceptable bounds until restraints are removed on the amount of money government is allowed to spend, i.e. reward its supporters with.
President Obama’s current class warfare attacks on wealthier Americans might be acceptable if its goal was to cut the Country’s deficit. However, Obama’s call for higher is but another money grab with the purpose of being able to hand out more bacon to supporters.
Posted in Politics | Tagged: Bacon, Bailout, Councilwoman, Detroit, JoAnn Watson, Obama | Leave a Comment »
Posted by Steve Markowitz on November 14, 2012
Now that the presidential election is over, the media has focused its attention on the so-called “Fiscal Cliff”. This event is artificial, a creation of President Obama and the Congress when they could not agree to a budget in the previous year. Obama and the Democrats wanted tax increases. The Congress, Republicans, wanted spending cuts. With neither side being willing to compromise, they did what politicians nearly always do: kicked the can down the road.
A “super-committee” of Republican and Democrat Congressman and Senators was created and given the task of creating a budget that would cut the deficit. They failed in the matter was punted back to the Congress and President with a restriction: if a budget was not agreed to by the end of 2012, significant spending cuts would automatically occur throughout the federal government and taxes would increase significantly for many.
So there we have it, another crisis created by government. Look for both sides to take the Country to the brink and then miraculously save us by once again by kicking the can down the road even further.
The various economic challenges facing the Country are the result of orgy-like spending since the early 1980s, both in the private and public sectors. Now, even with trillion dollar deficits the economy remains weak. The problem in the United States, and in most Western countries, is excessive debt. Significant economic growth cannot occur without reducing the debt, but reducing the debt will hurt the economy even more in the short run.
On a nearly daily basis it is reported that some state, municipality or other government agency/organization is in trouble. The Wall Street Journal added the Federal Housing Administration (FHA) to the list. According to the Journal, for the first time in its 70 year history, the FHA will need a taxpayer bailout. This would be in addition to the nearly $140 billion of taxpayer money already given to Fannie Mae and Freddie Mac for mortgage related problems.
The FHA was created during Franklin Roosevelt’s Administration to promote homeownership for first-time buyers. This agency acted as an insurer of mortgages for mortgage providers. It remained solvent even through last decade’s housing bubble because it maintained sound lending practices. However, as the housing market took a nosedive after the bubble popped, the FHA relaxed its lending rules in another failed governmental attempt to prop up the housing market.
Currently, about 25% of the FHA’s mortgages guaranteed in 2007 and 2008 are delinquent. Over 700,000 of its loans are more than 90 days past due or in foreclosure. Should these mortgages fail, the FHA (taxpayers) could be on the hook for over $100 billion. However, its current reserve are only slightly more than $1 billion. Remarkably, because of the FHA’s status of having “permanent and indefinite” budget authority, these funds would automatically come from the U.S. Treasury if needed and would not require Congressional approval.
The FHA’s insolvent financial condition is emblematic of the public sectors debt problems. It is also an example of how politicians irresponsibly spend the peoples’ money. Finally, it is an example of how governmental policies often start with good intentions only to be corrupted by political influences and interference. The FHA had been one of the better run government agencies requiring over eight decades to become insolvent.
Posted in Government Ineptness, Government Waste | Tagged: Bailout, Federal Housing Administration, FHA, Mortages, Taxpayers | Leave a Comment »
Posted by Steve Markowitz on July 22, 2012
The Daily Caller posted an article indicating that General Motors has been fixing the numbers in order to make itself and the government that bailed them out look good. The numbers are being manipulated via two methods:
Overbuilding – GM has built more automobiles than the market requires. In the short run this inflates profit margins as overhead costs are spread over a greater number of units resulting in a lower per unit cost in the short term. While GM has admitted to overbuilding, it justifies the move based on some supposed future plant closings.
Channel Stuffing – GM has also over shipped automobiles to dealers. Since sales are booked on shipments, this offers a short-term boost while the inventory grows. A class-action lawsuit in New York has been initiated concerning this GM tactic.
Both overbuilding and channel stuffing have led to GM having robust second quarter financial results. However, these tactics will hurt the Company’s quarter results, according to a Standard & Poor’s analysis. It should come at no surprise that the third quarter figures will not be released until after November’s presidential election.
President Obama promotes his bailout of the auto industry a major success for his administration stating two weeks ago: “When the American auto industry was on the brink of collapse, more than one million jobs were on the line, Governor Romney said we should just let Detroit go bankrupt. I refused to turn my back on communities like this one.” A reality check tells a different story:
- What about the ultimate cost to taxpayers? GM stock currently sells for about $20 per share. According to the Reason Foundation, the stock would have to sell for $55 per share in order for taxpayers to be repaid in full.
- How about the disadvantage to GM’s competitors? Why shouldn’t more successful companies like Ford, Toyota, Hyundai, Honda, etc. have replaced the failed General Motors?
- GM’s bailout did not come from thin air. Successful companies of all types that paid their taxes were penalized for their success in order to bail out the failed General Motors.
The bailout of General Motors was ill advised and cannot be justified by economics. It once again showed Progressives propensity to reward failure and penalize success. Just as grotesque, the bailout was payback by the Obama Administration to organize labor in return for future political “favors”.
Posted in Bailouts, General Motors | Tagged: Bailout, channel stuffing, financial results, General Motors, GM, Obama, overbuilding | Leave a Comment »
Posted by Steve Markowitz on May 24, 2012
One of the accomplishments President Obama often touts cornering his first term is the supposed success of the auto industry bailout; i.e. General Motors. The claim of success relates to the fact that GM is still in business and is once again profitable. However, this simplistic view of success is an illusion and would only come from people who have no experience running a business. Any first year business student knows that the definition of business success must be defined in the terms of a cost and benefit. Specifically, does the benefit exceed the cost of an investment? The Obama Administration has never done such a study for rather obvious reasons.
Lee sent in the video below that helps explain why the GM bailout was a failure. Specifically, this $80 billion bailout benefits people outside the United States more than Americans. Here are some of the facts in the video:
- 7 out of 10 General Motors cars are currently made outside of the United States. So much for helpful US workers.
- General Motors has 11 joint ventures in China with Chinese government controlled companies.
- GM is moving a significant portion of its R & D from the US to China.
While the video is critical of President Obama, it appropriately points out that Mitt Romney supporters have also profited handsomely from the auto industry’s bailout by the US government.
Conclusion: Get the government out of the business of bailing out failed companies. The funds used ultimately benefit some citizens (or foreigners) at the expense of paying taxpayers.
Posted in Uncategorized | Tagged: Bailout, China, General Motors, GM, Obama | Leave a Comment »
Posted by Steve Markowitz on March 8, 2012
The European Central Bank (ECB) has acted decisively in response to the ongoing sovereign debt crisis facing various countries. That action included an additional €529 billion of printed money that is on top of the nearly €490 billion printed in December. The money printing presses of Europe are working more efficiently than even the rapid acting presses in the United States.
The idea behind the ECB’s bailouts goes beyond the obvious, i.e. bailing out Greece who cannot pay back its debt. However, the actual reason behind the bailout is to assist commercial banks in various European countries that hold Greece’s bad debt. Once again powerful interest groups are being bailed out by Progressive governments.
It defies logic that a problem of excess debt can be resolved by creating more debt. To believe this is akin to believing in alchemy. At best the new debt kicks the can down the road when the problems will once again arise, but even larger.
The potential consequences of the ECB bailout is discussed in detail by economist John Mauldin in his piece titled “Unintended Consequences“. Mauldin points out the following:
- The ECB’s holdings of rather questionable debt that has increased fourfold in the past six months.
- While the ECB has printed substantial amounts of money that has then been loaned at low rates to European commercial banks, these banks are not making loans to businesses. Instead, they are buying European government bonds and earning the spread that may improve their balance sheets, but not stimulate economic growth.
- The cost of short-term borrowing by the weak European governments substantially decreased with the ECB’s interventions. As a result these countries have replaced their more expensive long-term debt with cheaper short-term notes supported by the ECB. While on the surface this seems positive for the debtor countries, it is creating a dangerous situation whereby their debt will now mature in the nearer term. This will create another crisis within a few years when the new debt comes due.
- The bailout of Greece is not being unnoticed in the other problematic countries, including Spain, Portugal and Ireland. This will likely lead to those countries asking for concessions requiring still additional European bailouts.
- The ECB bailouts have placed draconian austerity measures on Greece that will further contract their economy making servicing the discounted debt more problematic.
- Mauldin concludes that in unintended consequence of the European bailout is a higher likelihood that the European Union will be broken up.
As this Blog has proffered in the past, governments are not qualified to efficiently allocate capital (tax dollars), which is what they do when intervening with bailouts or picking winners and losers, such is with green energy companies. John Mauldin more eloquently states this reality in the introduction to his “Unintended Consequences” that is posting below. Hold on and wait for the consequences.
“For every government law hurriedly passed in response to a current or recent crisis, there will be two or more unintended consequences, which will have equal or greater negative effects then the problem it was designed to fix. A corollary is that unelected institutions are at least as bad and possibly worse than elected governments. A further corollary is that laws passed to appease a particular group, whether voters or a particular industry, will have at least three unintended consequences, most of which will eventually have the opposite effect than the intended outcomes and transfer costs to innocent bystanders.”
Posted in Greece, Sovereign Debt | Tagged: Bailout, Debt, ECB, EU, Europe, Greece, Sovereign Debt | Leave a Comment »
Posted by Steve Markowitz on November 3, 2011
The ongoing actions by the Progressive governments in Europe indicate that the Greek financial mess is spiraling out of control. Greece is up to its eyeballs in sovereign debt. Most unbiased economics concluded months ago that Greece cannot repay this debt and that their default is inevitable. This reality has not, however, stopped European leaders from continuing the charade that another outcome is possible.
Last week the European Union (EU), with the backing of its two biggest economies France and Germany, came up with yet another bailout plan for Greece. Equities markets rejoiced with stock prices at first increasing. Then, on Monday Greece President Pompidou put a crimp in the bailout plan when he announced that he would put the matter up to a referendum by the Greek people.
Frances Sarkozy and Germany’s Merkel went ballistic at Pompidou’s decision and threatened Greece with expulsion from the EU. Well, today Pompidou abruptly changed course and called off the referendum. He clearly feared that the referendum would go against the bailout deal, and likely also caved in due to the pressure from France and Germany.
Greece’s about-face came as leaders of the world’s largest economies were meeting in Cannes, France, for the Group of 20 economic summit, as well as for some good food and drink curiously of their taxpayers. President Obama said at the summit: “The most important task for us is to resolve the financial crisis here in Europe.” Hmmmm …… nice sound bite, but it does not offer solutions.
Past interventions by Progressive governments in the markets have created not only the current Greek Tragedy, but the financial mess that many Western countries currently face. But Progressives are an unrepentant lot. After having their fill of caviar and fine wine in Cannes, these Progressives will undoubtedly offer still more interventions in an attempt to kick the can down the road once again. Yikes!
Posted in European Union, Greece | Tagged: Bailout, cannes, Debt, EU, G-20, Greece, Merkel, Obama, Pompidou, Referendum, Sarkozy | Leave a Comment »
Posted by Steve Markowitz on October 27, 2011
European countries, specifically France and Germany, have announced the long-awaited bailout plan for Greece. The world’s financial communities will rejoice that we have once again avoided the day of reckoning. It remains to be seen Europe’s debt problem has actually been resolved or the can has merely been kicked down the road a bit.
The announced plan calls for European commercial banks to take a 50% loss on their Greek debt. While this action will significantly decrease Greece’s debt, it is estimated that it will still remain at 120% of GDP by 2020.
The complex debt plan also requires European banks to raise significant additional capital. In addition, the European bailout fund will be doubled to $1.4 trillion. This second item is required due to the fear of other European countries’ (the PIIGS) with huge debt, including Portugal, Spain and Italy.
When announcing the Greek bailout plan, the politicians claimed victory with French President Nicolas Sarkozy saying “The results will be a source of huge relief to the world at large, which was waiting for a decision”. German Chancellor Angela Merkel said: “I believe we were able to live up to expectations, that we did the right thing for the euro zone, and this brings us one step farther along the road to a good and sensible solution.”
Reality should temper the politicians’ victory lap. First, it was just few months ago that European leaders estimated the cost to commercial banks for the Greek write-downs to be only 21%. Now that figure is up to 50%. In addition, Europe has not yet determined where it will obtain the approximately $700 billion required to increase its bailout fund. Finally, and possibly most unknown, is the reaction of the remainder of the PIIGS to this deal. Will these other countries stand by and take the austerity measures required to continue paying back their debt or will they use the threat of default to extract concessions? The answer seems obvious.
The GDP of Greece is a trivial percentage of Europe’s total. Still, Greek debt has taken center stage in the European crisis for well over a year. While it remains to be seen if this Greek tragedy has actually been resolved, more significant challenges remain from the larger PIIG’s. Equities’ markets will start weighing in on this question in the coming weeks after the euphoria of this Greek deal wears off.
Posted in Bailouts, Banks, Greece | Tagged: Bailout, Debt, Europe, France, Germany, Greece, PIIGS, Write down | Leave a Comment »