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.
When President Obama left, I stayed on at the National Security Council in order to serve my country. I lasted eight days.
In 2011, I was hired, straight out of college, to work at the White House and eventually the National Security Council. My job there was to promote and protect the best of what my country stands for. I am a hijab-wearing Muslim woman––I was the only hijabi in the West Wing––and the Obama administration always made me feel welcome and included.
Like most of my fellow American Muslims, I spent much of 2016 watching with consternation as Donald Trump vilified our community. Despite this––or because of it––I thought I should try to stay on the NSC staff during the Trump Administration, in order to give the new president and his aides a more nuanced view of Islam, and of America's Muslim citizens.
Two of the world’s three richest people extol the virtue, and relevance, of optimism in the age of Trump—and predict a comeback for fact-based discourse.
Bill Gates, the world’s richest man, and Warren Buffett, the third richest, are—not entirely coincidentally—two of the most unremittingly optimistic men on the planet. So when I met the two of them in New York recently to talk about the state of humankind, and about the future of American democracy, I had a clear understanding of my mission, which was to pressure-test their sanguinity at every turn.
I tried, and failed, though not completely. Both men appear to doubt some of President Trump’s innovations in rhetoric and policy. Both men have warm feelings about immigrants, and also about facts, and so are predisposed to react skeptically to recent developments in the capital. When I asked whether they believed America needed to be made great again, Buffett nearly jumped out of his chair: “We are great! We are great!” And when I asked about the Trump Administration’s problematic relationship with empiricism, Gates said, “I predict a comeback for the truth.” He went on to say, “To the degree that certain solutions are created not based on facts, I believe these won’t be as successful as those that are based on facts. Democracy is a self-correcting thing.”
Long after research contradicts common medical practices, patients continue to demand them and physicians continue to deliver. The result is an epidemic of unnecessary and unhelpful treatments.
First, listen to the story with the happy ending: At 61, the executive was in excellent health. His blood pressure was a bit high, but everything else looked good, and he exercised regularly. Then he had a scare. He went for a brisk post-lunch walk on a cool winter day, and his chest began to hurt. Back inside his office, he sat down, and the pain disappeared as quickly as it had come.
That night, he thought more about it: middle-aged man, high blood pressure, stressful job, chest discomfort. The next day, he went to a local emergency department. Doctors determined that the man had not suffered a heart attack and that the electrical activity of his heart was completely normal. All signs suggested that the executive had stable angina—chest pain that occurs when the heart muscle is getting less blood-borne oxygen than it needs, often because an artery is partially blocked.
Priming kids to expect rewards for good behavior can harm their social skills in the long term.
After working with thousands of families over my years as a family psychologist, I’ve found that one of the most common predicaments parents face is how to get kids to do what they’re asked. And one of the most common questions parents ask is about tools they can use to help them achieve this goal.
One such tool is the sticker chart, a type of behavior-modification system in which children receive stickers in exchange for desired behaviors like brushing their teeth, cleaning their room, or doing their homework. Kids can later “spend” their accrued stickers on prizes, outings, and treats.
Though data on how widely sticker charts are used (and when and why they became so popular) is difficult to find, anecdotal evidence suggests that these charts have become fairly commonplace in American parenting. Google searches for “sticker chart,” “chore chart,” and “reward chart” collectively return more than 1 million results. Amazon has more than 1,300 combined product results for the same searches. Reddit, too, is teeming with forums for parents asking each other about the merits of the charts and discussing specific strategies.
The preconditions are present in the U.S. today. Here’s the playbook Donald Trump could use to set the country down a path toward illiberalism.
It’s 2021, and President Donald Trump will shortly be sworn in for his second term. The 45th president has visibly aged over the past four years. He rests heavily on his daughter Ivanka’s arm during his infrequent public appearances.
Fortunately for him, he did not need to campaign hard for reelection. His has been a popular presidency: Big tax cuts, big spending, and big deficits have worked their familiar expansive magic. Wages have grown strongly in the Trump years, especially for men without a college degree, even if rising inflation is beginning to bite into the gains. The president’s supporters credit his restrictive immigration policies and his TrumpWorks infrastructure program.
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Meet the protesters who tricked conference attendees into waving Russian flags.
Two men made trouble—and stirred up a social-media frenzy—on the third day of the Conservative Political Action Conference by conducting a literal false-flag operation.
Jason Charter, 22, and Ryan Clayton, 36, passed out roughly 1,000 red, white, and blue flags, each bearing a gold-emblazoned “TRUMP” in the center, to an auditorium full of attendees waiting for President Trump to address the conference. Audience members waved the pennants—and took pictures with them—until CPAC staffers realized the trick: They were Russian flags.
The stunt made waves on social media, as journalists covering CPAC noticed the scramble to confiscate the insignia.
An Oscar-nominated film explores possible war crimes in the country after World War II.
Had the Allies landed on the Western coast of Denmark on D-Day, the Nazis would have been ready. The German forces had built up the defensive Atlantic Wall, which stretched along the European coast from the top of Norway to south of France, to protect against an invasion launched from Britain. With Denmark offering a short route to Berlin, an invasion there seemed likely, and the Axis power prepared by planting between one and two million landmines along the Nazi-occupied nation’s shores.
Invaded by German forces in April 1940, Denmark was spared harsh treatment during most of its occupation. For the first few years, the Danish government chose to negotiate and cooperate with its German occupiers to avoid further aggression and hardship, and Danish government opposition only began in earnest in 1943 once Germany cracked down on civil unrest and made moves to deport Denmark’s Jews. When the war ended in 1945, those millions of deadly, undetonated mines remained, along with the question of who would clear them—and how.
You can tell a lot about a person from how they react to something.
That’s why Facebook’s various “Like” buttons are so powerful. Clicking a reaction icon isn’t just a way to register an emotional response, it’s also a way for Facebook to refine its sense of who you are. So when you “Love” a photo of a friend’s baby, and click “Angry” on an article about the New England Patriots winning the Super Bowl, you’re training Facebook to see you a certain way: You are a person who seems to love babies and hate Tom Brady.
The more you click, the more sophisticated Facebook’s idea of who you are becomes. (Remember: Although the reaction choices seem limited now—Like, Love, Haha, Wow, Sad, or Angry—up until around this time last year, there was only a “Like” button.)
The Bureau has long defended “Judeo-Christianity.” Minority groups have not fared as well.
Historians have looked harshly on the FBI’s legacy in dealing with religious groups. The Bureau famously investigated and threatened Martin Luther King Jr. at the peak of the civil-rights movement. A 1993 standoff with a group called the Branch Davidians in Waco, Texas, ended with a massive fire, killing more than six dozen men, women, and children. And since the terrorist attacks of September 11, the Bureau has repeatedly been accused of illegally surveilling and harassing Muslim Americans.
The story of the FBI and religion is not a series of isolated mishaps, argues a new book of essays edited by Steven Weitzman, a professor at the University of Pennsylvania, and Sylvester A. Johnson, a professor at Northwestern University. Over its 109 years of existence, these historians and their colleagues argue, the Bureau has shaped American religious history through targeted investigations and religiously tinged rhetoric about national security.