Global Credit Market Losers ...(continued from page 7) On March 16th, the full service of the state’s two largest banks were closed by the European Union due to insolvent securitization of Cypriot banks, backed by Greek bonds and exacerbated by a deflating real estate bubble. The European Central Bank gave Cyprus until Monday, March 25th, to propose a plan for restructuring, under the threat of cutting off all liquidity. The initial plan called for Cyprus to raise 5.8 billion euros, in return for a 10 billion-euro joint bailout from the EU and IMF. The most recent projections estimate the bailout will need to be closer to 23 bn euros, calling on Cyprus to raise another 7 billion euros. The the first round of mandates shut down the state’s second largest bank, Cyprus Popular Bank, and aggressively downsized its largest, the Bank of Cyprus. The plan to pay for the debt imposed a levy on all depositors at a rate of 9.9% with over 100,000 Euros (their FDIC equivalent) and 6.75% for those with
less. CPB limited daily withdrawals to 100 euros and the Bank of Cyprus imposed a limit of 120 euros, for fear of cash hoarding. A similarly panicked strategy was used by FDR as proposed in his famous Fireside Chat in 1933. By Monday the multibillioneuro bailout was secured from international creditors, implementing strict controls and cutting Cyprus off from much of the Euro Zone. CPB has been closed and all uninsured depositors have been levied, as well as 40% of all depositors elsewhere. The tax on depositors with fewer than 100,000 euros was cut out in the eleventh hour of bargaining. Gabriel Sterne at Exotic, a hedge fund advisory, projected a 10% decline in GDP this year and 8% in the next. He also stated, “We think the peak to trough decline in annual real GDP will be in the order of 23%, similar to Greece.” This means skyrocketing unemployment, business bankruptcies, and slumping tax revenues, all under the greater pressure of the global credit market
squeeze. Dutch Deputy Finance Minister Frans Weekers said he, “wouldn’t be surprised if [Cyprus’s financial needs] will be more.” Despite the clear evidence that Cyprus will be struggling from this collapse for many years to come, Yiannakis Omirou, president of Cyprus’s Parliament, said, “the deal was a positive development, signaling it could enjoy broader political support. [emphasis mine]” Only a well-lettered politician could say something that absurd in midst of such crisis. It is true one of the jobs of politicians, especially in states of emergency, is to minimize panic, but notions this disingenuous look more like an inappropriate affect. For the Euro Zone, Cyprus is a forgotten cough in its sickly life. But for the people of Cyprus, this begins an era of economic servitude to the more solvent nations of the north. Mr. Omirou could have been more earnest by proposing legislation to rename the Euro Zone “Animal Farm,” change his own title to “Snowball,” and welcome his people to the ranks of the PIGS. Japan’s Printing Problem As the fourth largest economy in the world, Japan is a far more concerning and complicated case. The lost decade that began in the 90’s has now been stretched to almost a quarter century. At the end of 2012, the central government of Japan reached a debt level equivalent to more than 200% of its GDP, totaling 997 trillion yen or $80 thousand per capita. Compared to the US, at around 100% of GDP or $53,000 per capita. On top of this, the revolving door at the BOJ has chewed up and spit out ten ministers of finance in the last six
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BINGHAMTON REVIEW
DECEMBER 2012