There's a simple enough way to resolve the mess in Cyprus. It doesn't even involve asking the Germans to pay more or the Cypriots to tax bank deposits. It's called printing money.
A quick recap. Cyprus needs to raise €5.8 billion ($7.4 billion) to rescue its insolvent banks or the European Central Bank (ECB) says it will cut off the "emergency liquidity assistance" (ELA) loans keeping those zombie banks afloat. It's not so easy to come up with €5.8 billion in just a €19 billion economy. So Germany has told Cyprus to tax bank deposits, including supposedly insured amounts below €100,000, to get what it needs. The Cypriot parliament hated that idea and voted in unison to reject the bank-deposit tax on Tuesday.
There are three players here -- Germany, Cyprus, and the ECB -- and each comes with a big hurdle. First, Germany insists it won't hand over any more than the €10 billion it's already committed. Angela Merkel doesn't want to fully bail out the less-than-reputable Russian oligarchs who use the island as a tax haven, particularly in an election year. Second, Cyprus doesn't want to cripple its future as an offshore financial center (although it's too late for that) with any kind of deposit tax. Third, the ECB has to sign off on any agreement.
This is what we call an impasse. Germany doesn't want to pay more, Cyprus doesn't to tax more, and the ECB doesn't want to print more. It's a game of chicken with the future of the euro potentially at stake (again). The question is who moves first. With Germany and Cyprus still quite far apart, it's up to the ECB. After all, the magic of the printing-press would make the Cyprus banking disaster much easier to solve.
Here's how Cyprus could save itself in three, easy steps -- with the ECB's tacit support.
1. Merge Cyprus' Big Banks and then Spin Off a Bad Bank
The best way to deal with the losses in Cypriot banks is to isolate them. This just means putting all the good assets from its biggest banks into a good bank pile. The rest goes into the "bad bank" pile. But how does this improve things? Well, for one, it gives the government an idea of the size of the black hole in bank balance sheets. For another, it replaces two zombie banks that won't lend with one dead bank that won't and one healthy one that will. In other words, it should, albeit slightly, increase the amount of credit in the economy.
2. Convert Uninsured Deposits to Bank CDs
Deposit tax or not, the Cypriot financial system is doomed. Its business model of giving rich Russians a place to park (perhaps ill-gotten) cash and avoid taxes is finished. Just the specter of the deposit tax will be enough to spur deposit flight from abroad.
This capital exodus will only hasten the next bailout. Cypriot banks can afford to lose a bit of their deposit base, but losing too much will turn their balance sheets even more upside down -- and make them even more dependent on ELA funding. It won't be long before the banks need more capital from the Germans.
What is to be done? As Felix Salmon points out, sovereign debt guru Lee Buchheit and Mitu Gulati of Duke University have come up with an elegantly simple solution: Convert uninsured deposit amounts above €100,000 into bank certificates of deposit, or CDs. Now, this wouldn't solve the banks' capital problems now, but it would reduce the banks' capital problems in the future. Banks would give uninsured depositors the choice of accepting either a five- or ten-year bank CD, with the latter offering either a higher interest rate or some kind of natural gas bond as a sweetener. The government would also extend the maturity on its sovereign debt by five years -- which Buchhet and Gulati estimate would save €6.6 billion.
3. Recapitalize the Bad Bank with Government-Guaranteed Natural Gas Bonds
This is where things get tricky. Even if the Cypriot government did all of the above, it would still need to recapitalize the bad bank. And that's still not easy for Cyprus to do. But with a little legerdemain, Cyprus can get the ECB to print what it needs. That is, after all, what Ireland recently did.
There's a wildcard in all of this. Cyprus might have huge natural gas reserves. Upper-end estimates value the hoped-for-reserves at €300 billion, but that's all they are for now: hoped for. Almost none of the reserves have been proved yet. And besides, even if they do exist, it would still be another decade before they came on line. But this could be enough to save Cyprus now. Here's how it would work.
First, securitize future natural gas revenue into long-term bonds. These bonds would have maturities between 25 and 40 years, and the senior-most tranche would go exclusively towards recapping the bad bank. Depositors who term out their accounts could get junior tranches if they prefer the upside risk to a lower interest rate on their CD.
Second, the government guarantees the senior-most tranche of these natural gas bonds. In other words, the government will cover the difference between what these bonds are supposed to pay, and what they do if it turns out there isn't much (or any) natural gas. Now, this looks like a pretty daunting contingent liability for a government with a €19 billion economy, but it's much more manageable over 25 to 40 years.
Third, backload the payments on the bonds.
Fourth, give these government-guaranteed bonds to the bad bank to use as collateral for ELA loans. Let's be clear what this means. These bonds would almost certainly trade far below par, but that's not what the Cypriot government cares about. It cares about giving the bad bank safe-ish assets it can use as collateral for ELA money from the Central Bank of Cyprus. The bad bank gets the capital it needs now, and the government doesn't have to pay much until much later. It's money-printing in disguise. Of course, the ECB Governing Council could overrule this extension of ELA by a two-thirds vote ... but would it would really push Cyprus out of the euro zone if crisis had been averted? Probably not.
I know this sounds incredibly fanciful. Gimmicky, even. A government driven into bankruptcy by its banks can save them, and itself, by issuing some new long-term debt to give them? Really? Well, yes. This kind of alchemy is precisely what Ireland has done.
Like Cyprus, Ireland has an outsized financial sector that made some outsized bets that went bad. Financial bankruptcy turned to national bankruptcy and then bailout after the Irish government guaranteed losses it couldn't possibly guarantee. So far, so bad. But here's where things get interesting. The Irish government nationalized its biggest problem bank, and recapitalized it with promissory notes -- basically, front-loaded government debt instruments. The now-nationalized bank then used these promissory notes as collateral for ELA funding, which allowed it to slowly wind itself down. (Irish economist Karl Whelan has the best explanation of all this, if you want the full wonk).
Then they had a revelation. Wouldn't it be great if they could exchange these promissory notes with their upfront repayments for back-loaded, longer-term bonds? Yes, yes it would. The Irish government ripped up the promissory notes and issued 25-to-40-year bonds to use as collateral instead. (For legal reasons, they also closed down the nationalized bank, and transferred its remaining assets to a bad bank). The ECB could have vetoed this, but it chose not to.
Again, the benefit of all this financial sleight-of-hand was the central bank printed money for Ireland today, and Ireland didn't have to pay it back for many years. As Wolfgang Münchau of the Financial Times explains, it was a deliberately convoluted way of printing money for the government to hide that they were printing money for the government.
Cyprus should pull an Ireland, and force the ECB to make a decision. Either the ECB refuses to accept guaranteed natural gas bonds as collateral, and Cyprus gets booted from the euro, or the ECB relents, and the panic subsides.
In other words, make the ECB decide whether the euro is worth printing 5.8 billion euros.
Trump’s attacks on the free press don’t just threaten the media—they undermine the public’s capacity to think, act, and defend democracy.
Are Donald Trump’s latest attacks on the press really that bad? Are they that out-of-the-ordinary, given the famous record of complaints nearly all his predecessors have lodged? (Even George Washington had a hostile-press problem.)
Are the bellows of protest from reporters, editors, and others of my press colleagues justified? Or just another sign that the press is nearly as thin-skinned as Trump himself, along with being even less popular?
I could prolong the buildup, but here is the case I’m going to make: Yes, they’re that bad, and worse.
I think Trump’s first month in office, capped by his “enemy of the people” announcement about the press, has been even more ominous and destructive than the Trump of the campaign trail would have prepared us for, which is of course saying something. And his “lying media” campaign matters not only in itself, which it does, but also because it is part of what is effectively an assault by Trump on the fundamentals of democratic governance.
By replacing Mike Flynn with H.R. McMaster, President Donald Trump added one of the most talented officers the U.S. Army has ever produced to his team.
Let me be as clear as I can be: The president’s selection of H.R. McMaster to be his new national security advisor is unambiguously good news. The United States, and the world, are safer for his decision.
McMaster is one of the most talented officers the U.S. Army has ever produced. That sounds like hyperbole but isn’t. In the Gulf War, he led an armored cavalry troop. At the Battle of 73 Easting—a battle much studied since—his 12 tanks destroyed 28 Iraqi tanks, 16 armored personnel carriers, and 30 trucks. In 23 minutes.
In the next Iraq war, he led a brigade in 2005 and was among the first U.S. commanders to think differently about the conflict and employ counterinsurgency tactics to pacify Tal Afar—one of the most wickedly complex cities in Iraq. He excelled at two different echelons of command in two very different wars.
Joe Moran’s book Shrinking Violets is a sweeping history that doubles as a (quiet) defense of timidity.
The Heimlich maneuver, in the nearly 50 years since Dr. Henry Heimlich established its protocol, has been credited with saving many lives. But not, perhaps, as many as it might have. The maneuver, otherwise so wonderfully simple to execute, has a marked flaw: It requires that choking victims, before anything can be done to help them, first alert other people to the fact that they are choking. And some people, it turns out, are extremely reluctant to do so. “Sometimes,” Dr. Heimlich noted, bemoaning how easily human nature can become a threat to human life, “a victim of choking becomes embarrassed by his predicament and succeeds in getting up and leaving the area unnoticed.” If no one happens upon him, “he will die or suffer permanent brain damage within seconds.”
Experts on Turkish politics say the use of that term misunderstands what it means in Turkey—and the ways that such allegations can be used to enable political repression.
Over the last week, the idea of a “deep state” in the United States has become a hot concept in American politics. The idea is not new, but a combination of leaks about President Trump and speculation that bureaucrats might try to slow-walk or undermine his agenda have given it fresh currency. A story in Friday’s New York Times, for example, reports, “As Leaks Multiply, Fears of a ‘Deep State’ in America.”
It’s an idea that I touched on in discussing the leaks. While there are various examples of activity that has been labeled as originating from a “deep state,” from Latin America to Egypt, the most prominent example is Turkey, where state institutions contain a core of diehard adherents to the secular nationalism of Mustafa Kemal Ataturk, which is increasingly being eroded by the government of Recep Tayyip Erdogan. Turkey has seen a series of coups, stretching back to 1960, as well as other activity attributed to a deep state.
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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“I’ve never seen anything quite like” Trump’s approach to national security, says a former counterterrorism adviser to three presidents.
Updated on February 20 at 4:40 p.m. ET
President Donald Trump has made national security a centerpiece of his agenda, justifying policies ranging from a travel ban to close relations with Russia. But the United States is now more vulnerable to attack than it was before Trump took office, according to the man who served as George W. Bush’s crisis manager on 9/11.
“In terms of a major terrorist attack in the United States or on U.S. facilities, I think we’re significantly less ready than we were on January 19,” said Richard Clarke, who served on the National Security Council in the George H.W. Bush, Bill Clinton, and George W. Bush administrations. “I think our readiness is extremely low and dangerously low. Certainly [government] agencies at a professional level will respond [to an attack], but having a coordinated interagency response is unlikely given the current cast of characters [in the administration] and their experience.”
It’s a great physics thought experiment—and an awful accident in 1978.
What would happen if you stuck your body inside a particle accelerator? The scenario seems like the start of a bad Marvel comic, but it happens to shed light on our intuitions about radiation, the vulnerability of the human body, and the very nature of matter. Particle accelerators allow physicists to study subatomic particles by speeding them up in powerful magnetic fields and then tracing the interactions that result from collisions. By delving into the mysteries of the universe, colliders have entered the zeitgeist and tapped the wonders and fears of our age.
Lip service to the crucial function of the Fourth Estate is not enough to sustain it.
It’s not that Mark Zuckerberg set out to dismantle the news business when he founded Facebook 13 years ago. Yet news organizations are perhaps the biggest casualty of the world Zuckerberg built.
There’s reason to believe things are going to get worse.
A sprawling new manifesto by Zuckerberg, published to Facebook on Thursday, should set off new alarm bells for journalists, and heighten news organizations’ sense of urgency about how they—and their industry—can survive in a Facebook-dominated world.
Facebook’s existing threat to journalism is well established. It is, at its core, about the flow of the advertising dollars that news organizations once counted on. In this way, Facebook’s role is a continuation of what began in 1995, when Craigslist was founded. Its founder, Craig Newmark, didn’t actively aim to decimate newspapers, but Craigslist still eviscerated a crucial revenue stream for print when people stopped buying newspaper classifieds ads.
The Border Adjustment Tax, a proposal favored by House Speaker Paul Ryan, has aroused serious opposition from Republican senators.
Donald Trump is feeling good about taxes. In his gonzo press conference last Thursday, he assured Americans that “very historic tax reform” is absolutely on track and is going to be—wait for it!—“big league.” The week before, he told a bunch of airline CEOs that “big league” reform was “way head of schedule” and that his people would be announcing something “phenomenal” in “two or three weeks.” And at his Orlando pep rally this past weekend, he gushed about his idea for a punitive 35 percent border tax on products manufactured overseas. The magic is happening, people. And soon America’s tax code will be the best, most beautiful in the world.
But here’s the thing. What Trump doesn’t know about the legislative process could overflow the pool at Mar-a Lago. And when it comes to tax reform, even minor changes make Congress lose its mind. Weird fault lines appear, and the next thing you know, warring factions have painted their faces blue and vowed to die on the blood-soaked battlefield before allowing this marginal rate to change or that loophole to close.