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.
It’s a shame that the standard way of learning how to cook is by following recipes. To be sure, they are a wonderfully effective way to approximate a dish as it appeared in a test kitchen, at a star chef’s restaurant, or on TV. And they can be an excellent inspiration for even the least ambitious home cooks to liven up a weeknight dinner. But recipes, for all their precision and completeness, are poor teachers. They tell you what to do, but they rarely tell you why to do it.
This means that for most novice cooks, kitchen wisdom—a unified understanding of how cooking works, as distinct from the notes grandma lovingly scrawled on index-card recipes passed down through the generations—comes piecemeal. Take, for instance, the basic skill of thickening a sauce. Maybe one recipe for marinara advises reserving some of the starchy pasta water, for adding later in case the sauce is looking a little thin. Another might recommend rescuing a too-watery sauce with some flour, and still another might suggest a handful of parmesan. Any one of these recipes offers a fix under specific conditions, but after cooking through enough of them, those isolated recommendations can congeal into a realization: There are many clever ways to thicken a sauce, and picking an appropriate one depends on whether there’s some leeway for the flavor to change and how much time there is until dinner needs to be on the table.
Activists threatened to drag local Republicans off a parade route if they weren’t excluded from a local celebration. Organizers cancelled the entire event in response.
On the day after Donald Trump was inaugurated, perhaps 3 million Americans took to the streets in peaceful protest to register their opposition. When news of his travel ban broke, I stood at LAX watching Angelenos sing the Star Spangled Banner and Amazing Grace. Across the nation, peaceful protest against President Trump continues. But a violent fringe has been using Trump’s rise as a justification for political violence, as if his authoritarian impulses justify authoritarianism from his opponents.
This tiny faction knows that most of their compatriots on the left are committed to nonviolence, so they frame their aggressive actions as a narrow exception to the rule.
Most famously, they insisted that it was okay, or even righteous, to punch white supremacist Richard Spencer because he was “a Nazi.” That position impels the debate down a slippery slope. And now, activists in Oregon caused the cancellation of the 82nd Avenue of Roses Parade, a community event in the southeast quadrant of Portland, by threatening to forcibly drag “fascists” off the parade route if they weren’t excluded.
The most comprehensive review of evidence on health consequences of caffeine use has just been published.
That’s what a Los Angeles news anchor said earlier this month, in response to the announcement that “the world’s strongest coffee” is now available in the United States. The product is called Black Insomnia, a playful nod to apotentially debilitating medical condition that can be caused by the product.
The anchor’s tone took a dramatic decrescendo as she read from the teleprompter: “The site Caffeine Informer says Black Insomnia is one of the ‘most dangerous caffeinated products.’” Her smile faded. “Oh. I’ll have to have this one sparingly.”
Black Insomnia is actually in competition for the title of “world’s strongest coffee.” Another, similar purveyor sells coffee grounds called Death Wish. They come in a black sack with a skull and cross bones. On its Amazon page, Death Wish claims to be “the world’s strongest coffee” and promises its “perfect dark roast will make you the hero of the house or office.”
“Somewhere at Google there is a database containing 25 million books and nobody is allowed to read them.”
You were going to get one-click access to the full text of nearly every book that’s ever been published. Books still in print you’d have to pay for, but everything else—a collection slated to grow larger than the holdings at the Library of Congress, Harvard, the University of Michigan, at any of the great national libraries of Europe—would have been available for free at terminals that were going to be placed in every local library that wanted one.
At the terminal you were going to be able to search tens of millions of books and read every page of any book you found. You’d be able to highlight passages and make annotations and share them; for the first time, you’d be able to pinpoint an idea somewhere inside the vastness of the printed record, and send somebody straight to it with a link. Books would become as instantly available, searchable, copy-pasteable—as alive in the digital world—as web pages.
Who wins (the rich), who loses (anybody who doesn’t like deficits), and why it might take a miracle for the plan to become a law
There are two compelling narratives around President Donald Trump’s first 100 days. The first is his transformation from heterodox populist to orthodox Republican. Although he ran as a mold-breaking renegade, his economic policies come straight out of the conservative mold, from cutting business regulations to backing off threats to label China a currency manipulator and supporting plans to reduce health-insurance coverage for the poor.
The second story is that Trump has been more focused on optimizing for his own income and branding than for political victories. He has visited no foreign leaders, passed no major laws, given no major political addresses, and disappeared as the GOP effort to repeal Obamacare failed, all while doing little to refute accusations that he’s using the office to raise membership revenue at Mar-a-Lago and mixing business and politics in ways that are unprecedented for a sitting president.
The nationalists in Donald Trump's White House appear to have come very close to persuading the president to sign an executive order withdrawing from the North American Free Trade Agreement.
A proposed draft executive order that would pull the United States out of the North American Free Trade Agreement set off the latest round in a now-familiar series in Trump’s White House: The friction of Donald Trump’s nationalist campaign promises against the reality of governance, and the tension between moderating forces within the White House and more aggressive ideological purists.
The draft of the executive order, its existence first reported by Politico, is “in advanced stages of the process,” a senior White House official told me on Wednesday afternoon. But on Wednesday evening, the White House released a readout of a call between President Trump, President Pena Nieto of Mexico, and Prime Minister Trudeau of Canada, saying that Trump had “agreed not to terminate NAFTA at this time.” It quoted Trump as saying: “It is my privilege to bring NAFTA up to date at this time,” and said the three leaders had agreed to embark on renegotiation of the deal.
Will you pay more for those shoes before 7 p.m.? Would the price tag be different if you lived in the suburbs? Standard prices and simple discounts are giving way to far more exotic strategies, designed to extract every last dollar from the consumer.
As Christmas approached in 2015, the price of pumpkin-pie spice went wild. It didn’t soar, as an economics textbook might suggest. Nor did it crash. It just started vibrating between two quantum states. Amazon’s price for a one-ounce jar was either $4.49 or $8.99, depending on when you looked. Nearly a year later, as Thanksgiving 2016 approached, the price again began whipsawing between two different points, this time $3.36 and $4.69.
We live in the age of the variable airfare, the surge-priced ride, the pay-what-you-want Radiohead album, and other novel price developments. But what was this? Some weird computer glitch? More like a deliberate glitch, it seems. “It’s most likely a strategy to get more data and test the right price,” Guru Hariharan explained, after I had sketched the pattern on a whiteboard.
Kim Jong Un’s nuclear and missile programs represent one of the most dangerous challenges since the end of the Cold War. But there are opportunities to stop it.
The drama that is playing out now over North Korea’s nuclear and missile program—accentuated Tuesday by that regime’s large-scale artillery drill—represents one of the most dangerous challenges for U.S. national security since the end of the Cold War. It is a crisis that has been building for a long time, as North Korea has broken through the nuclear barrier and possesses fissile material sufficient for 20 to 25 nuclear weapons, by one estimate. After many failed attempts, through pressure and negotiations, to bring an end to North Korea’s nuclear program, three new elements have heightened the urgency of the situation.
First, North Korea is racing to develop an intercontinental ballistic missile capable of hitting the continental United States. In his annual New Years address in January, North Korean leader Kim Jong Un declared his country to be “in the final stage of preparation for the test launch” of such a missile. Moreover, experts warn, North Korea could at some point in the next few year years make the terrifying technological leap to a hydrogen bomb, which could be up to 1,000 times more destructive than the nuclear weapons that now comprise the North Korean arsenal.
The semiaquatic mammal leverages its own buoyancy and bone density to charge through the water.
People are talking about hippos this week, at least in part because the Cincinnati Zoo’s beloved baby hippopotamus, Fiona, is now three months old—a milestone that seemed uncertain when she was born prematurely in January.
Fiona’s doing great—so great that she’s “a little bit dangerous to actually cuddle and snuggle” anymore, the zookeeper Jenna Wingate told local reporters.
Which reminds me that wee Fiona will eventually, if she continues to thrive, turn into a grown-up hippo. And grown-up hippos are not—I repeat, not—to be trifled with. Consider, for example, this video, which my colleague Ed Yong shared with me yesterday:
Look at that hippopotamus go! After sharing this video on Twitter, I got several perplexing responses. Comments like this: “Not bad for an animal that doesn’t swim,” and “And … they can’t even swim!” There is even, someone told me, a children’s book about this: Hippos Can't Swim: And Other Fun Facts. As a long-time skeptic of “fun facts,” I obviously had to know more.
Film, television, and literature all tell them better. So why are games still obsessed with narrative?
A longstanding dream: Video games will evolve into interactive stories, like the ones that play out fictionally on the Star Trek Holodeck. In this hypothetical future, players could interact with computerized characters as round as those in novels or films, making choices that would influence an ever-evolving plot. It would be like living in a novel, where the player’s actions would have as much of an influence on the story as they might in the real world.
It’s an almost impossible bar to reach, for cultural reasons as much as technical ones. One shortcut is an approach called environmental storytelling. Environmental stories invite players to discover and reconstruct a fixed story from the environment itself. Think of it as the novel wresting the real-time, first-person, 3-D graphics engine from the hands of the shooter game. In Disneyland’s Peter Pan’s Flight, for example, dioramas summarize the plot and setting of the film. In the 2007 game BioShock, recorded messages in an elaborate, Art Deco environment provide context for a story of a utopia’s fall. And in What Remains of Edith Finch, a new game about a girl piecing together a family curse, narration is accomplished through artifacts discovered in an old house.