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.
Many point to unromantic 20-somethings and women’s entry into the workforce, but an overlooked factor is the trouble young men have in finding steady, well-paid jobs.
TOKYO—Japan’s population is shrinking. For the first time since the government started keeping track more than a century ago, there were fewer than 1 million births last year, as the country’s population fell by more than 300,000 people. The blame has long been put on Japan’s young people, who are accused of not having enough sex, and on women, who, the narrative goes, put their careers before thoughts of getting married and having a family.
But there’s another, simpler explanation for the country’s low birth rate, one that has implications for the U.S.: Japan’s birth rate may be falling because there are fewer good opportunities for young people, and especially men, in the country’s economy. In a country where men are still widely expected to be breadwinners and support families, a lack of good jobs may be creating a class of men who don’t marry and have children because they—and their potential partners—know they can’t afford to.
The transcript of the president’s conversation with The New York Times throws his shortcomings into greater relief than ever before.
“Now Donald Trump has finally done it” is a sentence many people have said or written, but which has never yet proven true. As Trump gained momentum during the campaign season, errors that on their own would have stopped or badly damaged previous candidates bounced right off.
These ranged from mocking John McCain as a loser (because “I like people who weren’t captured”), to being stumped by the term “nuclear triad” (the weapons of mass destruction that he as U.S. president now controls), to “when you’re a star ... you can grab ‘em by the pussy” (my onetime employer Jimmy Carter had to spend days in the 1976 campaign explaining away his admission to Playboy that he had sometimes felt “lust in the heart”), to being labelled by an in-party opponent a “pathological liar,” “utterly amoral,” and “a narcissist at a level I don't think this country's ever seen” (the words of his now-supporter Ted Cruz). I kept my list of 152 such moments in the Time Capsule series as the campaign went on.
The Linkin Park singer, dead at 41, may have been the purest voice of angst on the radio this millennium.
Chester Bennington started as a rock star by saying that he was finished. “I cannot take this anymore / saying everything I’ve said before” went the opening lines to Linkin Park’s first smash, “One Step Closer,” which is among the many, many songs that take on an awful resonance after the news that Bennington has died, in what’s being investigated as suicide, at age 41.
Linkin Park became one of the most popular and most divisive bands of the new millennium because of their genre blending and pop polish, but to listen to that debut single is to remember that they were also differentiated by a core of raw, convincing pain. It almost entirely came from Bennington. He was arguably the purest font of angst—and inarguably one of the most powerful male voices—in mainstream music since 2000.
“Look, Sessions gets the job. Right after he gets the job, he recuses himself,” Trump said. “So Jeff Sessions takes the job, gets into the job, recuses himself. I then have—which, frankly, I think is very unfair to the president. How do you take a job and then recuse yourself? If he would have recused himself before the job, I would have said, ‘Thanks, Jeff, but I can’t, you know, I’m not going to take you.’ It’s extremely unfair, and that’s a mild word, to the president.”
The president’s lawyers are looking at multiple ways to undermine or curtail the Russia inquiry, including his issuing pardons.
President Trump is exploring steps to curtail Special Counsel Robert Mueller’s criminal investigation into the president’s campaign and business dealings, inching the country closer to uncharted constitutional waters.
The New York Times reported Thursday that Trump’s private legal team is scouring the backgrounds of Mueller and his prosecutors for potential conflicts of interest and damaging information to be used against them. According to the Times, that research is part of a broader effort by Trump to curtail and discredit the former FBI director’s probe into whether the Trump campaign colluded with the Russian government to influence the 2016 election.
The Times’s account depicted a president who is increasingly angered by the sprawling Russia investigation that has become a central feature of his young presidency. Trump displayed flashes of that anger during a lengthy interview Wednesday with the Times, in which he flitted between channeling his ire towards Mueller, Attorney General Jeff Sessions, Deputy Attorney General Rod Rosenstein, and Deputy FBI Director Andrew McCabe, as well as James Comey, the former director of the FBI ousted by Trump in May.
The group has adapted to battlefield setbacks. But that doesn't mean it factored territorial losses into its master plan.
As Mosul is finally freed in its entirety from the Islamic State (ISIS) and the offensive in Raqqa continues, the predictable question becomes: What’s next for the group? Without control of territory, its complex state administration project cannot function. This project was probably ISIS’s biggest selling point in relation to its rivals in the global jihadist movement.
The end of ISIS as a functioning state project on the ground clearly does not herald the end of ISIS as an entity. In many areas long since cleared of ISIS control, the organization has continued to function as an effective insurgency with both small and large-scale attacks. Around the world, ISIS will remain a terrorist threat, as illustrated by events from Europe to the Philippines. The ISIS footprint on the internet is large and unlikely ever to be removed in its entirety. The group’s ideals will still appeal to some segments of society, whether out of disillusionment with the established order and a search for meaning in one’s life, or on account of identity crises, or all of these factors combined.
A new study explores why the latter are far more likely to opt for an elite college where they'd struggle than a so-so one where they'd excel.
There’s a saying in China that it’s better to be the head of a chicken than the tail of a phoenix. The premise of the aphorism—it’s better to be over-qualified than under-qualified relative to one’s surroundings—is so widely accepted that similar versions of it exist across cultures. In Japan, they tend to say that it’s better to be the head of a sardine than the tail of a whale. Americans and Brits often declare that it’s better to be a big frog (or fish) in a small pond than a little frog in a big pond.
Extensive research supports these axioms, particularly in the realm of education. Longitudinal studies have consistently shown that high-performing students at less-selective schools feel more competent, have higher GPAs, and have more ambitious career aspirations than low-performing students at more-selective schools.
No matter what the subject, the president finds someone to compare himself to. And in every comparison, he comes out the winner.
The transcript of Donald Trump’s interview yesterday with the New York Times runs over 7,000 words. But you can boil down its essence to two words: I’m better. No matter what the subject, Trump finds someone to compare himself to. And in every comparison, he comes out the winner.
The Times reporters start the interview by asking Trump about health care, where the Senate—by refusing to even vote on a bill to repeal and replace Obamacare—has handed him a major defeat. Trump doesn’t admit any mistakes. He barely mentions the substance of the bill. Instead, he immediately compares himself to Hillary Clinton and Barack Obama. In the fourth sentence of the interview, he declares that, “Hillary Clinton worked eight years in the White House with her husband as president and having majorities and couldn’t get it done.”
As beloved as Shakespeare, she shaped a vision of personal flourishing that still feels thoroughly modern.
On the bicentenary of her death, Jane Austen is still everywhere, often where one least expects to find her. Most of her devotees will have their own story; mine occurred in a Manhattan courthouse, with its stale-coffee smell and atmosphere of anxious boredom, in the midst of jury selection for a criminal trial involving a double homicide. Upon learning that I taught British literature, the defendant’s attorney—a woman who spoke with intimidating speed and streetwise bluntness—skipped the usual questions (how much did I trust police testimony, had I ever been a victim of a violent crime) and asked instead whether I taught Jane Austen. Puzzled by her indirection, I answered yes. A theatrical flash of disgust crossed her face: I was, evidently, one of those people. At which point the presiding judge interrupted to say: “Careful, counsel. Some of us here like Jane Austen.”
The “A Bit More” button doesn’t reinvent the appliance’s form. It finds its soul instead.
Last year I fell in love with a toaster.
It looks like most others. A brushed, stainless-steel housing. Four slots, to accommodate the whole family’s bread-provisioning needs. It is alluring but modest, perched atop the counter on proud haunches.
But at a time when industry promises disruptive innovation, Breville, the Australian manufacturer of my toaster, offers something truly new and useful through humility rather than pride.
The mechanism that raises and lowers the bread from the chassis is motorized. After I press a button atop the frame, the basket silently lowers the bread into the device to become toast. On its own, this feature seems doomed to mechanical failure. But the risk is worthwhile to facilitate the toaster’s star ability: the “A Bit More” button. That modest attribute offers a lesson for design of all stripes—one that could make every designed object and experience better.