Imagine you woke up one day to discover your bank account has been raided by another country's government. Just like that, $1 in every $16 of your supposedly safe money is gone. If you're wealthy enough to have more savings, it could be $1 in $10. Is it a nightmare? The opening chapter of a Kafka story? A Bond villain plot to start a bank run and bring down the government?
Nah, it's just the new reality facing bank depositors in Cyprus. And it might just set off a fresh wave of financial panic in the euro zone. Because we haven't had enough of that lately.
Cyprus is the forgotten sick man of Europe. It's so forgotten that it hasn't even cracked the acronym of troubled European economies (the PIIGS or GIIPS, depending on your taste). But being forgotten has made it no less troubled. It needs money. And Germany isn't exactly enthusiastic about handing over money, particularly in an election year for Chancellor Angela Merkel. Indeed, Germany has insisted on more than its usual pound of austerity in return for a bailout. It's insisted that Cyprus pick up a large part of its own check. And that's been terrible news for Cypriot savers. (And Russians. We'll get there, soon.)
The terms of the Cypriot bailout (and bail-in) are as simple as they are startling. Germany will cough up about $13 billion, and, in exchange, Cyprus will levy a "one-time" tax on bank deposits to raise an additional $7.5 billion. This tax will take 6.75 percent from insured deposits of €100,000 ($129,000) or less, and 9.9 percent from uninsured amounts above €100,000. Depositors will get bank stock equal to whatever they lose from the tax. If you're wondering why anybody would keep their money in a Cypriot bank now, well, they wouldn't. This is an open invitation for an old-fashioned run on their banks. The only reason that isn't happening now is their banks are closed for an extended holiday.
This bailout is the right answer to the wrong question. The wrong question is how Germany can bailout Cyprus (and a bunch of less-than-savory Russians) without risking Merkel's reelection. The right question is how does Germany bailout Cyprus in a way that doesn't risk the future of the euro at all.
Of course, there are all sorts of other questions here, all of them involving the word hell (or some other four-letter variation). Questions like: what the hell were they thinking, why the hell would Cyprus go along with this, and how the hell did an economy equal to 0.2 percent (!!!) of euro zone GDP become any kind of threat to the future of the euro? Well, as has often been the case, the answer begins with too big to fail, and in this case, too big to save, banks.
There's Something Rotten in Cypriot Banks
There are four things you need to know about Cypriot banks. First, they have assets equal to roughly eight times the country's GDP. Second, they get a huge percentage of their deposits from tax-dodging Russians. Third, they invested a ton of money in Greece. And fourth, they are highly dependent on central bank financing to stay afloat. In other words, Cypriot banks are too big for Cyprus to save. But somebody needs to save them.
How did all this money get into Cyprus banks? Like many other small islands, Cyprus has found that turning itself into a tax haven (and money-laundering center) is a pretty lucrative business. Money has poured in from Russian oligarchs and mobsters looking to avoid taxes back home, and that Russian money has bloated Cypriot banks to a size far beyond the government's ability to bail out. Indeed, roughly 37 percent of the island's €68 billion of deposits come from abroad -- and as Kate Mackenzie of FT Alphaville points out, this foreign money makes up €25.5 billion of the €37.6 billion of deposits over €100,000. In other words, almost all of the foreign money is in uninsured accounts, and 68 percent of all uninsured accounts come from abroad.
So, what did Cyprus banks do with all of this money?Well, they invested it where they thought they had a competitive advantage: Greece. After all, southern Cyprus is ethnically Greek (the northern half is occupied by Turkey), and the Greek economy, which is 12 times larger than the Cypriot one, looked like an ideal place to expand. It wasn't. Cypriot loans to the Greek government and businesses have opened black holes on bank balance sheets. In 2012 alone, two of the biggest Cypriot banks, Cyprus Popular and the Bank of Cyprus, lost a combined €3.5 billion on Greek bonds. That's over 10 percent of GDP in a €31.8 billion Cypriot economy. It'd be like if Citigroup and JP Morgan lost $1.5 trillion in a single year (or approximately 250 times the "London Whale" losses).
The Cypriot banking system would have collapsed long ago were it not for emergency funding okayed by the European Central Bank (ECB). Here's how it works. Suppose you run a euro bank desperately short on cash, collateral, and confidence. In other words, you need more money, but you so obviously need more money that nobody will lend it to you except on a secured basis -- and only then against top-notch collateral, which you don't have. Well, this is what lenders-of-last-resort are for, assuming your bank is illiquid and not insolvent. You can take your slightly crappy collateral to the ECB, and get a loan subject to a haircut. Technically-speaking, the worse your collateral, the higher the interest rate the ECB charges you.
But suppose your collateral isn't just slightly crummy; say it's really crummy. Well, don't worry, you're still in luck! The ECB won't give you a loan, but your national central bank will, pending ECB approval. Welcome to the wonderful world of "emergency liquidity assistance" (ELA). Now, this sounds confusing (and that's probably the intent behind it), but it's really not. It's the same idea as before, only with crappier collateral and higher interest rates. Remember, the ECB sets monetary policy for every euro member, but those members retain their own central banks, which carry out the ECB's policy decisions. These national central banks can basically accept any collateral -- really, anything -- as long as they apply more severe haircuts and get the okay from the ECB. The only other big difference here is the national central banks, not the ECB, are on the hook in case of default.
Cypriot banks have stayed alive by gorging on this ELA funding. The chart below from Joseph Cotterill of FT Alphaville shows the balance sheet of the second-biggest Cypriot bank, Laiki. Notice it gets a third of its capital from the central bank. That's, um, a lot.
This dependence on central bank financing leaves Cyprus quite open to, shall we say, ECB persuasion. This, ladies and gentlemen, is what we call "foreshadowing".
An Offer Cyprus Can't Refuse -- or Can't Accept?
Cyprus needs €17 billion. Germany doesn't want to give it €17 billion. Merkel doesn't want to bail out Russian gangsters in an election year. So she's forcing Cyprus to come up with €7 billion even though the government can't afford it.
There are two ways a broke government could still come up with this money. First, it could force its own creditors or the banks' creditors to take losses. But, as Joseph Cotterill points out, the Cypriot government can't logistically force losses on its foreign lenders, and its domestic lenders are mostly its banks. In other words, the only losses the government can force on its bonds would make the banks' problems all the worse.
That leaves the banks' creditors. Most banks fund themselves with three classes of lenders: junior bondholders, unsecured senior bondholders, and secured senior bondholders, including insured depositors. If the bank goes bust, the secured senior bondholders are at the front of the line for whatever's left, and so on. But Cypriot banks are almost entirely funded with deposits and ELA money. Now, junior bondholders did take €1.4 billion in losses, but there basically no unsecured senior bondholders. As Charles Forelle of the Wall Street Journal points out, the two biggest banks in Cyprus have €46 billion in deposits and €184 million in unsecured senior debt. In plain English, Cyprus has to make its depositors or its national central bank accept €5.8 billion in losses -- and it can't make its national central bank take losses.
So Germany is making Cypriot depositors pay. The questions are which depositors, and how much of their deposits. Cypriot president Nicos Anastasiades originally agreed to a 7 percent levy on deposit amounts above €100,000 and 3 percent below that, but the Germans decided that wasn't enough, according to Peter Spiegel of the Financial Times. When Anastasiades tried to walk out in protest, ECB officials promptly informed him they would cut ELA funding for the second-biggest Cypriot bank, Laiki, if he didn't agree. That would send Laiki into bankruptcy, and cost Cyprus €30 billion, versus the €5.8 billion the Germans wanted. It's quite something when the ECB lets Germany use it as its debt collector. Of course, Anastasiades eventually acquiesced -- though he insisted the top tax rate not exceed 10 percent, likely to preserve Cyprus' future viability as a tax haven. That meant insured depositors had to be charged 6.75 percent to make the math add up.
It's a total clusterf***. These tax rates still has to be approved by the Cypriot parliament, and, well, that's not happening. The vote has already been postponed twice, and the Cypriots are back negotiating what they hope will be more politically acceptable tax rates. Under the latest plan, deposits under €100,00 would get 3 percent haircuts, deposit amounts between €100,000 and €500,000 would get 10 percent haircuts, and amounts over €500,000 would get 15 percent haircuts. This has the virtue of mostly hitting foreign depositors, and mostly sparing poorer, domestic ones. It should pass, but, then again, insured deposits shouldn't be getting hit at all. Should is no guarantee.
Is the Euro Worth 5.8 Billion Euros?
The entire euro crisis comes down to a single question. Is a euro in a Spanish (or a Cypriot) bank worth the same as a euro in a German (or a Dutch) bank?
If Spain leaves the euro, then any euros in its banks will get turned into much cheaper pesetas overnight. Spanish depositors would be entirely rational to move their money to a German bank if they think there's any chance Spain will abandon the common currency. Even a slow-motion bank run would only starve Spain of even more credit, and drag it down even further -- making a euro exit all the more attractive. In other words, it's a self-fulfilling fear.
Or at least it was, until ECB chief Mario Draghi stopped the vicious circle. Last July, he promised to do "whatever it takes" to save the euro -- and those words alone were enough to end the panic. A Spanish euro was worth the same as a German euro once again. But what about a Cypriot euro? The tax on insured deposits resurrects the questions about whether a euro in a peripheral bank is worth the same as one in a core bank. It's just due to fiscal risk now instead of exchange rate risk -- but the effect is the same. Peripheral depositors would once again be rational to move their money. "One-off" events have a way of not always being so.
Now, that's not to say that a continental bank run is looming. Credit default swaps on peripheral debt increased a bit relative to core debt as of 9:45 this morning, as you can see below in the chart from Bloomberg, but there's no sign anything worse will happen. Markets have been mostly calm.
But just because there hasn't been any contagion so far doesn't mean it made sense to risk it over €5.8 billion. There's nothing more destructive than giving people the idea that insured bank deposits are not so inviolable.
It's a dangerous roll of the dice, for not much pay-off.
Thicker ink, fewer smudges, and more strained hands: an Object Lesson
Recently, Bic launched acampaign to “save handwriting.” Named “Fight for Your Write,” it includes a pledge to “encourage the act of handwriting” in the pledge-taker’s home and community, and emphasizes putting more of the company’s ballpoints into classrooms.
As a teacher, I couldn’t help but wonder how anyone could think there’s a shortage. I find ballpoint pens all over the place: on classroom floors, behind desks. Dozens of castaways collect in cups on every teacher’s desk. They’re so ubiquitous that the word “ballpoint” is rarely used; they’re just “pens.” But despite its popularity, the ballpoint pen is relatively new in the history of handwriting, and its influence on popular handwriting is more complicated than the Bic campaign would imply.
Wine snobs, string quartets, and the limits of intuition
Several months ago, this author sat at a classical music concert, trying to convince himself that wine is not bullshit.
That may seem like a strange thought to have while listening to Beethoven’s Symphony No. 7 in A major. But Priceonomics had recently posted an article investigating The Price of Wine, part of which reviewed research that cast doubt on both consumers’ and wine experts’ ability to distinguish between quality wine and table wine or identify different wines and their flavors. It seemed a slippery slope to the conclusion that wine culture is nothing more than actors performing a snobbish play.
Listening to an accomplished musician while lacking any musical experience resulted in a feeling familiar to casual wine drinkers imbibing an expensive bottle: Feeling somewhat ambivalent and wondering whether you are convincing yourself that you enjoy it so as not to appear uncultured.
In the name of emotional well-being, college students are increasingly demanding protection from words and ideas they don’t like. Here’s why that’s disastrous for education—and mental health.
Something strange is happening at America’s colleges and universities. A movement is arising, undirected and driven largely by students, to scrub campuses clean of words, ideas, and subjects that might cause discomfort or give offense. Last December, Jeannie Suk wrote in an online article for The New Yorker about law students asking her fellow professors at Harvard not to teach rape law—or, in one case, even use the word violate (as in “that violates the law”) lest it cause students distress. In February, Laura Kipnis, a professor at Northwestern University, wrote an essay in The Chronicle of Higher Education describing a new campus politics of sexual paranoia—and was then subjected to a long investigation after students who were offended by the article and by a tweet she’d sent filed Title IX complaints against her. In June, a professor protecting himself with a pseudonym wrote an essay for Vox describing how gingerly he now has to teach. “I’m a Liberal Professor, and My Liberal Students Terrify Me,” the headline said. A number of popular comedians, including Chris Rock, have stopped performing on college campuses (see Caitlin Flanagan’s article in this month’s issue). Jerry Seinfeld and Bill Maher have publicly condemned the oversensitivity of college students, saying too many of them can’t take a joke.
The Islamic State is no mere collection of psychopaths. It is a religious group with carefully considered beliefs, among them that it is a key agent of the coming apocalypse. Here’s what that means for its strategy—and for how to stop it.
What is the Islamic State?
Where did it come from, and what are its intentions? The simplicity of these questions can be deceiving, and few Western leaders seem to know the answers. In December, The New York Times published confidential comments by Major General Michael K. Nagata, the Special Operations commander for the United States in the Middle East, admitting that he had hardly begun figuring out the Islamic State’s appeal. “We have not defeated the idea,” he said. “We do not even understand the idea.” In the past year, President Obama has referred to the Islamic State, variously, as “not Islamic” and as al-Qaeda’s “jayvee team,” statements that reflected confusion about the group, and may have contributed to significant strategic errors.
On the desperation behind the migrant tragedy in Austria
On Thursday, as Krishnadev Calamur has been tracking in The Atlantic’s new Notes section, Austrian authorities made a ghastly discovery: a truck abandoned in the emergency lane of a highway near the Hungarian border, packed with the decomposing bodies of 59 men, eight women, and four children. They are thoughtto be the corpses of migrants who suffocated to death, perhaps two days earlier, in the bowels of a vehicle whose back door was locked shut and refrigeration and ventilation systems weren’t functional. Stray identity documents suggest that at least some of the victims were Syrian—refugees from that country’s brutal civil war. The truck featured an image of a chicken and a slogan from the Slovakian poultry company that the lorry once belonged to: “I taste so good because they feed me so well.”
The new drama series, which follows the Colombian kingpin’s rise to power, feels more like a well-researched documentary than the gripping saga it wants to be.
Netflix’s new series Narcos is possibly arriving at the wrong time: The doldrums of summer aren’t really the ideal moment for a narratively dense, documentary-like look at the rise and fall of the Colombian drug kingpin Pablo Escobar. Narrated in voiceover by DEA Agent Steve Murphy (Boyd Holbrook), the early hours of Narcos feel like a history lesson, though an visually sumptuous one.
As Netflix continues to expand its streaming empire, it’s making a concerted effort to appeal to worldwide audiences, and Narcos fits neatly into that plan, alongside last year’s expensive critical flop Marco Polo. Narcos was shot on location in Colombia and stars the acclaimed Brazilian actor Wagner Moura as Escobar. It takes full advantage of its setting, loaded with sweeping helicopter shots of the Colombian jungle where Escobar founded his cocaine empire, filling a power vacuum left by various political upheavals in late-’70s South America.
Bruce Springsteen’s breakout album embodied the lost ‘70s—the tense, political, working-class rejection of an increasingly unequal society.
Forty years ago, on the eve of its official release, “Born to Run”—the song that propelled Bruce Springsteen into the rock-and-roll stratosphere—had already attracted a small cult following in the American rust belt.
At the time, Springsteen desperately needed a break. Despite vigorous promotion by Columbia Records, his first two albums, Greetings from Asbury Park, N.J. and The Wild, The Innocent, and the E Street Shuffle, had been commercial flops. Though his band spent virtually every waking hour either in the recording studio or on tour, their road earnings were barely enough to live on.
Sensing the need for a smash, in late 1974 Mike Appel, Bruce’s manager, distributed a rough cut of “Born to Run” to select disc jockeys. Within weeks, it became an underground hit. Young people flooded record stores seeking copies of the new single, which didn’t yet exist, and radio stations that hadn’t been on Appel’s small distribution list bombarded him with requests for the new album, which also didn’t exist. In Philadelphia, demand for the title track was so strong that WFIL, the city’s top-40 AM station, aired it multiple times each day. In working-class Cleveland, the DJ Kid Leo played the song religiously at 5:55 p.m. each Friday afternoon on WMMS, to “officially launch the weekend.” Set against the E Street Band’s energetic blend of horns, keyboards, guitars, and percussion, “Born to Run” was a rollicking ballad of escape, packed full of cultural references that working-class listeners recognized immediately.
The Republican frontrunner has offered Bush the perfect chance to display some passion—but he’s declined to take it.
Donald Trump has gotten a boost in his efforts to maul Jeb Bush in recent days from an unexpected source: Jeb Bush himself.
Trump’s attack on Jeb isn’t mostly about issues. As with most things Trump, it’s mostly about persona. The Donald thinks Jeb is a dud. “He’s a man that doesn’t want to be doing what he’s doing,” Trump said in June. “I call him the reluctant warrior, and warrior’s probably not a good word. I think Bush is an unhappy person. I don’t think he has any energy.”
Over the last week, Jeb has proven Trump right. Trump, and his supporters, continue to demonize Mexican American illegal immigrants. On Tuesday, Trump threw the most popular Spanish-language broadcaster in America out of a press conference. That same day, Ann Coulter warmed up for Trump in Iowa by offering gruesome details of murders by Mexican “illegals,” and suggesting that once Trump builds his wall along America’s southern border, tourists can come watch the “live drone shows.”
The woman who gave her name to the women-in-culture standard would, true to the method, prefer to share the credit.
It’s come to be known as the Bechdel test, and it goes like so: For a given work of fiction to pass the test, the work must 1) have at least two women in it, who 2) talk to each other, about 3) something other than a man.
The test is a blunt, basic measure of gender equality in a given film/show/book/etc. It revels in its own absurd simplicity. And it is often—still, ridiculously—not passed by Hollywood movies. It’s often failed in other settings, too. As the A.V. Clubsummed up the current controversy at Duke, which involves incoming students’ refusal to read Bechdel’s celebrated graphic novel on the grounds of its sexual themes: “Duke students refuse to read Alison Bechdel’s Fun Home, will probably fail the test.”
Grasses—green, neatly trimmed, symbols of civic virtue—shaped the national landscape. They have now outlived their purpose.
The hashtag #droughtshaming—which primarily exists, as its name suggests, to publicly decry people who have failed to do their part to conserve water during California’s latest drought—has claimed many victims. Anonymous lawn-waterers. Anonymous sidewalk-washers. The city of Beverly Hills. The tag’s most high-profile shamee thus far, however, has been the actor Tom Selleck. Who was sued earlier this summer by Ventura County’s Calleguas Municipal Water District for the alleged theft of hydrant water, supposedly used to nourish his 60-acre ranch. Which includes, this being California, an avocado farm, and also an expansive lawn.
The case was settled out of court on terms that remain undisclosed, and everyone has since moved on with their lives. What’s remarkable about the whole thing, though—well, besides the fact that Magnum P.I. has apparently become, in his semi-retirement, a gentleman farmer—is how much of a shift all the Selleck-shaming represents, as a civic impulse. For much of American history, the healthy lawn—green, lush, neatly shorn—has been a symbol not just of prosperity, individual and communal, but of something deeper: shared ideals, collective responsibility, the assorted conveniences of conformity. Lawns, originally designed to connect homes even as they enforced the distance between them, are shared domestic spaces. They are also socially regulated spaces. “When smiling lawns and tasteful cottages begin to embellish a country,” Andrew Jackson Downing, one of the fathers of American landscaping, put it, “we know that order and culture are established.”