Welcome! Once more, I’m trying to help people understand how policies get made from the inside, and how something that looks like a dumb idea can often be the best choice out of a bad decision set, in the context of the ongoing Euro crisis. The last one was pretty didactic, in that I was aiming to steer people down a path to the decisions I thought were being under-rated. This time, what strikes me about the Cyprus policy agenda is the sheer amount of uncertainty and ambiguity; nearly every idea could end up succeeding brilliantly or failing horribly. So this time round, I’m introducing a large element of chance.
In this episode, as in the last one you are once again a representative of the Secret One World Government, and you have been temporarily flown in to pull the strings in the island of Surpyc, which is currently experiencing a bailout crisis…
In this game you will need two dice. At various points in the game, chance will govern the outcome. When instructed to roll the dice, you should follow the accepted methodology:
1. Check both outcome to see which is the good one
2. Decide whether you really think you deserve a bit of good luck, whether I was wrong in setting the probabilities, in general whatever rationale for picking the good outcome you can think of
3. Go back later and see whether the bad outcome was really gruesome.
Certainly, anyone trying to play it properly is going to cause me to doubt their sanity. I’ve tried to make the probabilities match up in a sort of broadly cardinal way, so that the really unlikely strategies are longshots, and the stuff that I think should probably work is about a two-to-one on. But really, assigning well-defined dice-roll probabilities to the outcomes of a complex and political process is usually a pretty bad idea unless you’re absolutely clear about what you’re doing, and that you’re in no danger of fooling yourself or anyone else that your probabilities have any basis at all in reality. Basically, I would live in fear of my signed copies of “Antifragility” and “The Black Swan” spontaneously combusting if I thought anyone was likely to take the probabilities implied below as anything other than a joke (albeit not a cheap joke, this took a whole bloody evening to do). On the other hand, there is a strong element of “Fooled by Randomness” in it, as there is literally no policy, however stupid, that can’t end up doing at least all right (and often better), and even the best ideas have a strong chance of ending up going to hell.
1.
Saturday evening
“I didn’t expect to see you again”. There’s a somewhat awkward silence between you and the occupant of the room, who is sitting on the edge of a desk drinking tea. It’s Maynard. “We didn’t part on the best of terms”.
“No, we didn’t”, he replies, guardedly. “And the fact that we’re back here working together shouldn’t be taken as a good sign. Either for our own careers, or for the problem itself. This situation has landed on our desks precisely because everyone with enough clout to wash their hands of it has done so.” He points to the tablet computer on the desktop, which is showing a spreadsheet:
Cost of bank bailout ................................EUR10bn
Budget deficit and debt rollover.....................EUR 7bn
Total...............................................EUR17bn
Maynard opens his legal pad and starts writing. “Nonetheless, bygones are bygones, I suppose. As before, I propose and you dispose. Remember that your first duty is to reach an adequate solution for Surpyc, but you will also be judged on the effect that your actions have on the wider global system. We are the One World Government, after all. As the spreadsheet shows, we need seventeen billion euro, or we’re looking at a disorderly default. First decision to make – when we get up in the morning tomorrow, are we going to negotiate with the Troika, or should we go it alone?
“We negotiate with the Troika”. Go to 10.
“The Troika reliably make things worse. We go it alone”. Go to 28.
2.
Monday morning / afternoon
You and Maynard sit in the office, drinking tea and looking at the telephone.
“Sooner or later, he’s going to crack”, you say.
“Something’s going to give, sooner or later”, Maynard responds.
Time passes.
“Masterly inactivity. Don’t give him anything to push against”, you add. Maynard appears to be doodling.
Maynard looks like he is about to say something, when the phone rings. Both of you are almost too startled to pick it up.
Roll a dice.
If it comes up with a five or six, go to 42
If it comes up any other number, go to 48
3.
Sunday night/ Monday morning
De Grieux acknowledges your call with politeness but nothing more. There is nothing to do but default and let the chips fall where they may. And the chips fall pretty much everywhere.
The markets take Surpyc’s disorderly default very badly. The banking system is in collapse and the ECB has removed support. The island has become the first country to be expelled from the Euro. The immediate consequence of this has been a rapid liquidity crunch across Europe, as it becomes clear that the ECB’s doctrine of “Anything it takes” does not really mean “anything”.
“You did what you could”, Maynard attempts to console you. “Sometimes it just isn’t meant to be. Nobody blames you”. But you have an email from your parents. They have seen you on the news, heading for the airport and they want you to know that your old room is always ready.
YOU HAVE LOST
4.
Sunday morning
Alexi Ivanovich’s office is small and not exactly what you would expect to see from an organization capable of doing billion-euro deals. Maynard takes a look at his business card and his face falls; when you read it you can see why.
He’s a fixer, agent middleman. He has no “organization”. He’s just trying to see if a deal can be talked into happening and to take a commission on it if it does.
“Let’s leave quickly”, Maynard says, and you agree. Your departure is on the very threshold of politeness.
“Where to?” the driver asks.
“Back to the office. We need to make preparations for default” Go to 40.
“To De Grieux’ office. Looks like the troika is the only game in town”. Go to 7
5.
Tuesday morning
“WHAT WERE YOU THINKING!!” Maynard has already packed and left the office. He is shouting at you over the phone, seemingly from an airport taxi.
It is a disaster. Across Europe, lines have formed in front of bank branches. The precedent you have set seems to have spooked every bank depositor into believing that they could be the next ones to be expropriated. Meanwhile, the sudden loss of EUR30bn of offshore deposits has left the banking sector on its knees, requiring another bailout. You have received a curt memorandum informing you that your services will not be required to organize this one.
YOU HAVE LOST
6.
“NOOOOO!” You are somewhat embarrassed at the volume of the howling noise that leaves your body. Maynard turns to pour some tea, rather sheepishly, but he is clearly shocked too.
“Well”, he says. “We’re in the lap of the gods now”.
“Is there time to revise the plan? Can we call the troika back?” you ask, feverishly trying to come up with ideas.
“Out of time, I’m afraid. Can’t keep having bank holidays forever.”
Roll two dice.
If the sum is two or three, go to 11.
If the sum is four or greater, go to 26.
7.
Early Sunday evening
De Grieux is visibly angry that you have kept him waiting so long. “Who have you been talking to?”, he demands. Out of professionalism, and embarrassment, you refuse to tell him.
For the rest of the meeting De Grieux is obstinate. There is no more money forthcoming from the troika, and the ECB is wholly inflexible. As he explains it, the banking system of Surpyc has been living on borrowed time for far too long. You try to make some comment about the willingness of the German government to compromise in the past, but this turns out to be a big mistake.
De Grieux is somewhat intimidating personally as he invades your personal space. “The internal politics of the troika are none of your business. You have a job to do and I suggest you do it. Make your budget, and make sure it passes the parliament. You have already wasted half a day for no obvious reason”.
Maynard smoothes things over, a little bit, and describes the problem. You can set one tax rate on uninsured deposits, and one on uninsured, but the total tax take must be EUR7bn. If you set the rate on insured deposits too high, you are going to create massive popular unrest; on the other hand, the lower the rate on small deposits, the higher the rate on uninsured deposits will have to be. If the rate on the large deposits is too big, you will effectively have closed down the financial services industry, and that too will predictably generate opposition in parliament. De Grieux makes a wholly unpleasant noise as he indicates that he would not be too sorry to see the offshore banks close forever.
Back in your office, Maynard has done some rough figuring on his legal pad. “I think there’s two solutions worth considering”, he says. “Either we levy a charge of 15.7% on the uninsured assets and leave the insured deposits untaxed. Or we keep the tax on uninsured deposits in single digits – say 9% – and tag the small deposits at 6.7%”. What do you think?
“Option 1: only tax the large deposits”. Go to 46
“Option 2: keep the top rate down and make the insured depositors pay at least something”. Go to 18
“There’s always the nuclear option. Let’s take this to the brink of default and see if De Grieux is bluffing”. Go to 2
8.
Tuesday morning
You wake up wearily, with a bad head after staying up too late the previous night, smoking cigarettes and strategizing over brandy with Maynard. The news throughout Monday continued to be bad; global markets took the news from Surpyc badly, with the Dow off as much as 260 points at the lows. Obviously you were blamed, and spent most of the afternoon fending off inquiries from your superiors, all of whom seemed to have been got to be Alexei Ivanovich and his organization.
And it didn’t even work. As soon as the banks opened after the Tuesday holiday, the lines snaked up and down the streets. The Surpyc depositors had no confidence that they would be spared second time round, and with the size of the banking sector deficit growing every day, it was increasingly obvious that there would be a second round. You still have the ticket stub from your journey home. You haven’t flown business class since that date.
YOU HAVE LOST
9.
“We won!” Maynard actually hugs you. “Extraordinary! I’d have thought it impossible!”. Clearly, “fifty fifty” was his attempt to spare your feelings. The television is now switching to the scenes of the demonstrations. They are getting distinctly rowdier, although you wouldn’t call what you see an actual riot at this stage. You stagger back to your hotel room, open the minbar and call room service. Tomorrow will be spent by the swimming pool; there is nothing to do but wait until the banks open.
Roll a dice:
If it comes up even, go to 47
If it comes up odd, go to 5
10.
Sunday morning
Maynard is already at his desk by the time you arrive. He directs you to the tablet once again. “We have offers”, he observes, placidly. “There might be some possibility here after all. But the news is decidedly not all good. The troika are … well, read it for yourself”.
Two documents have arrived on your secure email system. The first is from the troika representative. It is quite clearly bad news.
The IMF and ESM are together prepared to underwrite loans of EUR10bn. If a sustainable program with total funding EUR17bn can be agreed, the ECB is prepared to continue to extend Emergency Liquidity Assistance to your banking system. If the program cannot be so concluded, this lending will also be terminated, in which case you should make arrangements for the closure of your two largest banks.
We strongly recommend that you consider a one-off tax on deposits, to take advantage of the considerable offshore financial services industry. We would like to discuss this at your earliest convenience.
Yours, &c &c
M. De Grieux
Maynard sees the colour rise in your face and raises his eyebrows. “Had the same effect on me. Basically, requirements seventeen billion, resources, ten billion, result misery. I’ve got some provisional figures on the deposit system”. He pushes his legal pad across the desk:
Insured deposits..............EUR45bn
Uninsured deposits............EUR45bn
Total.........................EUR90bn
“Think on that. Write it down, you’ll need it. Meantime …”. He gestures back at your tablet. You start to read the second secure message, which is much shorter.
Mr Astley: Subject to agreement on minerals royalties and other commitments, my organization could be willing to advance EUR7bn on terms to be negotiated. Please contact me, immediately and in strict confidence. Best regards, Alexei Ivanovich
“So, a two way choice”, Maynard indicates. “I can set up one conference call this morning, and perhaps a second this afternoon. Who shall we speak to first?”
“The troika”. Go to 25
“The Russians”. Go to 35
“Actually it’s a three way choice. We don’t have to talk to anyone. We’re going to default. No, I know that means leaving the Euro. My mind’s made up”. Go to 40
11.
Tuesday morning
You wait for the earthquake, but the earthquake never comes. Deposits start to flood out of the country, but the ECB continues to provide the temporary loans to fund their exit. Shortly after the market open, you receive a visit in your office. M De Grieux and Alexei Ivanovich appear to have been communicating with each other independently of you. Between the two of them, they have been able to find the missing EUR7bn. The loan terms are onerous, but the show of commitment is impressive – the markets seem to be impressed that a new spirit is active in Europe, under which it can expect to see problems solved collaboratively and with much larger fiscal transfers.
“Who’d have known it? He was bluffing all along”, you chirp to Maynard, as the two of you wait for the airport taxi.
“I think we dodged a bullet there. Still, a win’s a win”.
YOU HAVE WON
12.
Sunday afternoon
Maynard swiftly and efficiently arranges a round-table meeting between you, Ivanovich and De Grieux. Talks go on for the whole afternoon, with the troika representative repeatedly leaving the room to talk on the telephone. Ivanovich never leaves the room; he clearly has authority to negotiate and sign off. He grows more and more amused as the afternoon wears on.
By seven o’clock, there is an agreement. The troika will contribute EUR11bn, Ivanovich’s company will buy the resources rights for EUR5..5bn, and the ECB will tolerate the slippage in the plan, effectively kicking the can down the road.
“Under the circumstances”, you say to Maynard, “I don’t see much benefit in us hanging around to see the market open”.
“A deal’s a deal”, he agrees. The two of you hail an airport taxi as De Grieux starts his press conference.
YOU HAVE WON
13.
Sunday night
It is hardly an hour before the phone starts ringing in response to your ultimatum. De Grieux greets you with surprising warmth. “Well”, he chuckles, “I suppose we need to open up the supposedly non-existent Plan B, then!”. The two of you work on details through the small hours, ready to draft a statement to be released before the markets open. The missing EUR7bn is back, or at least EUR5bn of it is, released from a variety of emergency budgets and bilateral loans.
Your career has survived another knock. Everyone accepts that Surpyc was an impossible situation. All the officials loudly assert that it doesn’t set a precedent, but the world knows now – when it came to the crunch, Europe blinked.
YOU HAVE WON
14.
Sunday afternoon
“Sensible”, says Maynard. “We keep some kind of concept of moral hazard alive, and we stop ourselves from having to guess the reactions of a crowd. Thump the tax on the lowest elasticity, that’s what I say”. You cannot help thinking he sounds like he’s whistling past a graveyard.
All afternoon, Maynard works with legislators on a bill for an emergency session to be held that evening, while you field increasingly intrusive and angry calls from Alexei Ivanovich. Someone is clearly leaking, and Ivanovich is equally clearly angry that you haven’t responded to his offer of a meeting. As the crucial vote draws near, you begin to worry that you have done the right thing.
Roll two dice.
If the total is nine or greater, go to 27.
If the total is eight or less, go to 32.
15.
Monday night/ Tuesday morning
Ivanovich never gets back to you. But as evening turns into night, De Grieux calls. The two of you work on details through the small hours, ready to draft a statement to be released before the markets open. The missing EUR7bn is back, or at least EUR5bn of it is, released from a variety of emergency budgets and bilateral loans.
Your career has survived another knock. Everyone accepts that Surpyc was an impossible situation. All the officials loudly assert that it doesn’t set a precedent, but the world knows now – when it came to the crunch, Europe blinked.
YOU HAVE WON
16.
Monday morning
Another day, another emergency session of the legislature. You are well rested, but Maynard has been up all night, fielding calls as international leaders step up pressure on the legislators. The failure of the first plan has unnerved markets somewhat, but you only need to win over eight waverers. Your hopes are reasonably high. You turn on the television and wait for the vote to be announced.
Roll two dice.
If the total score is five or greater, go to 29.
If the total score is four or less, go to 6
17.
Monday night/ Tuesday morning
After a brutal late night battle, your package is passed. You ring De Grieux at three in the morning, doing little to improve his temper, but confirming that the troika is prepared to proceed on the basis of EUR7bn raised from a tax on uninsured deposits.
Maynard yawns and heads for the hotel, saying “Well, now we see. The offshore depositors won’t like it, but we’ve got our money and the troika should play fair with us. Nothing to do until tomorrow morning”.
Over breakfast, the two of you rapidly cheer up.
Your Blackberry is still buzzing with angry messages from Alexei Ivanovich, who is calling you every name under the sun. But the financial press generally agrees that the final compromise was the best deal available, albeit after a lot of unnecessary drama. The people of Surpyc were pleasantly surprised to discover that, after all, their deposits were not to be confiscated; public feeling is still not exactly favourable and there are a number of hard cases of ordinary citizens who had the bad luck to have their house sale proceeds sitting in an account over the weekend. But the troika have paid up, and although the end of the tunnel is a long way away, crisis seems to have been averted. The principle that insured deposits are sacrosanct appears to have been strengthened, if anything, by your little adventure.
YOU HAVE WON
18.
Monday morning
Having stayed up all night trying to draft your legislation and build a coalition, you are now in the lap of the gods. Alexei Ivanovich has proved to be surprisingly helpful; all manner of international financiers have called your office expressing support for your “measured” approach, and, somewhat more ominously, asking questions about future tax treaties.
By late afternoon, Maynard is worried. Things have dragged on too late, and there will not be time to revise any plans if this does not pass the legislature first time. “We’re basically hoping that not too many of the coalition are bright enough to realize that this bill is electoral suicide. Let’s hope that they’re … sensitive to the concerns of the offshore lobby”, he informs you.
“Delicately put, Maynard”, you reply.
Roll a dice
If it comes up with a one, go to 21
If it comes up a two or higher, go to 38
19.
Tuesday morning
You and Maynard are sipping glasses of champagne in the airport bar.
“I think our sequencing was just right”, you say as you clink glasses.
“Can’t go at these things like a bull at a gate”, Maynard agrees. “Got to prepare the ground”.
Your Blackberry is rapidly filling up with angry messages from Alexei Ivanovich, who is calling you every name under the sun. But the financial press generally agrees that the final compromise was the best deal available, albeit after a lot of unnecessary drama. The people of Surpyc were pleasantly surprised to discover that, after all, their deposits were not to be confiscated; public feeling is still not exactly favourable and there are a number of hard cases of ordinary citizens who had the bad luck to have their house sale proceeds sitting in an account over the weekend. But the troika have paid up, and although the end of the tunnel is a long way away, crisis seems to have been averted. The principle that insured deposits are sacrosanct appears to have been strengthened, if anything, by your little adventure.
“Cheers”, you say, and drain your glass.
YOU HAVE WON
20.
Monday morning
The markets open but the domestic banks don’t. According to your orders, the bank holiday has been extended to Wednesday, to allow for the printing of a new currency, into which all of the bank deposits and assets are redenominated. All of your external liabilities are in default. The world pauses for breath …
Things go badly. Bank runs take off in Spain, Italy and even France. The ECB holds the line, eventually, but economic recovery has been set back by five years. The lost decade is a reality.
In the context of a recession-bound Europe, Surpyc never stood a chance. The new currency was inflationary, leaving the island plagued by shortages of import commodities, which eventually even undermined the tourist industry. Political instability was rife, with successive short-lived civilian governments alternating with “caretaker” administrations. Under these conditions, the natural resources were never likely to be successfully developed under anything other than kleptocratic terms.
Your career never recovered from the savaging that Maynard gave it in his report. Nobody can understand why you took such a crazy gamble. This was your last assignment.
YOU HAVE LOST
21.
Monday afternoon / Monday night / Tuesday morning
You do your best not to think about the deals that went on, through the afternoon and late into the night. You particularly do your best not to think about what Alexei Ivanovich might have been doing, hanging around the legislature with a mobile phone glued to his ear. But, for better or worse, around three o’clock in the morning, your bill passed. M De Grieux stayed up to watch television at your office, the two of you having come to a grudging accommodation. He was able to confirm the troika passage on the basis of the EUR7bn raised, although the look he gave you as he signed the documents suggested that he did not approve of your methods.
The small depositors of Surpyc were resigned to their fate; it seemed that years of recession and corruption had more or less conditioned them to accept the arbitrary seizure of their property. Importantly, there was no hint of contagion to the rest of Europe. You still worry for the people of Surpyc, but they can make their own destiny now, albeit under circumstances decidedly not of their choosing. Maynard is equally philosophical.
“We didn’t take on the big interests, and we kind of squeezed the little guy. But we had to win this one. I think it was a judgement call; people could criticize us, but we were the ones there. Politics isn’t a game for squeamish people”.
YOU HAVE WON
22.
Sunday night/ Monday morning
De Grieux greets you with surprising warmth. “Well”, he chuckles, “I suppose we need to open up the supposedly non-existent Plan B, then!”. The two of you work on details through the small hours, ready to draft a statement to be released before the markets open. The missing EUR7bn is back, or at least EUR5bn of it is, released from a variety of emergency budgets and bilateral loans.
Your career has survived another knock. Everyone accepts that Surpyc was an impossible situation. All the officials loudly assert that it doesn’t set a precedent, but the world knows now – when it came to the crunch, Europe blinked.
YOU HAVE WON
23.
Sunday afternoon
Maynard puts a call through to De Grieux’s office. It is not good news.
You were prepared for a bit of pushback, but not for the storm of rage occasioned by the suggestion. Bringing outside private companies into the bailout deal is well beyond your remit.
You are quickly left at the airport, with a printout of your e-ticket home, and without your Blackberry. The World Government will continue to handle this crisis, but your role is over.
YOU HAVE LOST
24.
Monday evening / Tuesday morning
The debate winds up early, at around five o’clock and the vote is not even really close. The President’s own party votes for your measure, but none of the opposition do. The evening news presenter is visibly embarrassed at the extent to which the legislature has decided to protect the offshore industry rather than domestic depositors. Maynard is almost physically shrinking away from you as you turn round from the television screen, embarrassed.
You wake up wearily, with a bad head after staying up too late the previous night, smoking cigarettes and strategizing over brandy with Maynard. The morning papers were bad; global markets took the news from Surpyc badly, with the Dow off as much as 260 points at the lows. Obviously you were blamed, and spent most of the afternoon fending off inquiries from your superiors. You protest that “it is hardly my fault that the legislators wouldn’t vote in their people’s interests”, but everyone knows that it was your job to deal with the realities of local politics. And in any case, fault or not, you were the guy at the helm when the ship sailed into the iceberg.
The package was EUR7bn short. This quickly turned into a EUR30bn shortfall, as the banking system collapsed. Contagion was contained, just barely, but Surpyc left the Euro, and the damage done looks like it will take years to repair. You are living in a rented flat, burning through your savings. You are trying to write a screenplay about your experiences but so far nobody wants to look at it.
YOU HAVE LOST
25.
Later, Sunday morning
M. De Grieux is an affable enough European technocrat, but he is unwilling to give an inch. There is no more money forthcoming from the troika, and the ECB is wholly inflexible. As he explains it, the banking system of Surpyc has been living on borrowed time for far too long. His voice trails away half-way through his explanation, however – you shoot a quizzical gaze to Maynard. After the meeting, Maynard explains:
“They’ve left it this long because they wanted to coincide with the bank holiday. They think that the deposit tax is a clever solution. I think they would rather like to use Surpyc as a testing ground; if creditors lose money here and the world doesn’t fall apart, then it sets a precedent which might be rather useful elsewhere.”
It is hard not to take a little bit of offense at being manipulated so much, so you resolve to confront De Grieux over lunch. This proves to be something of a mistake, as it costs you a shirt front covered in crumbs and spittle.
De Grieux is somewhat intimidating personally as he invades your personal space. “The internal politics of the troika are none of your business. You have a job to do and I suggest you do it. Make your budget, and make sure it passes the parliament”.
Maynard smoothes things over, a little bit, and describes the problem. You can set one tax rate on uninsured deposits, and one on uninsured, but the total tax take must be EUR7bn. If you set the rate on insured deposits too high, you are going to create massive popular unrest; on the other hand, the lower the rate on small deposits, the higher the rate on uninsured deposits will have to be. If the rate on the large deposits is too big, you will effectively have closed down the financial services industry, and that too will predictably generate opposition in parliament. De Grieux makes a wholly unpleasant noise as he indicates that he would not be too sorry to see the offshore banks close forever.
Back in your office, Maynard has done some rough figuring on his legal pad. “I think there’s two solutions worth considering”, he says. “Either we levy a charge of 15.7% on the uninsured assets and leave the insured deposits untaxed. Or we keep the tax on uninsured deposits in single digits – say 9% – and tag the small deposits at 6.7%”. What do you think?
“Option 1: only tax the large deposits”. Go to 14
“Option 2: keep the top rate down and make everyone pay at least something”. Go to 37
“There’s always the nuclear option. Let’s take this to the brink of default and see if De Grieux is bluffing”. Go to 43
26.
Tuesday morning
It is not good. The markets have taken Surpyc’s disorderly default very badly. The banking system is in collapse and the ECB has removed support. The island has become the first country to be expelled from the Euro. The immediate consequence of this has been a rapid liquidity crunch across Europe, as it becomes clear that the ECB’s doctrine of “Anything it takes” does not really mean “anything”.
“Pretty obvious who’s going to get the blame for this” Maynard mutters. “We are. He is trying to spare your feelings. He was just the advisor; you were taking the decisions. The failure to get a budget passed is going to end up at your door. You sigh, and dial for an airport taxi. You wonder about going back home and opening a restaurant serving deluxe hamburgers.
YOU HAVE LOST
27.
Sunday evening
The news begins to leak on Twitter about the whip-counts before the debate has even ended. Your measure is going nowhere. Somehow, all the populist legislators are melting away and the news bulletins are full of speeches about the future of the island’s financial services industry.
Alexei Ivanovich calls you up to gloat. “You made a very bad mistake, not talking to me”, he says in clipped tones. “You have no understanding of this island. You don’t just show up here and order people around. There are businesses here, relationships …”
You hang up on him. At this point, you don’t really care about being called unprofessional any more. There’s only one last chance. You signal to Maynard to get M De Grieux’s office on the line.
Roll a dice.
If it comes up six, go to 22
If it comes up any other number, go to 3
28.
“Unbelievable”. Maynard mutters. “Hasn’t learned a thing. OK, disorderly default it is then”.
Roll two dice
If it they up a double one or double six, go to 31
If they come up with any other numbers, go to 20
29.
“YES!” You and Maynard jump up and down like sports fans.
“Well, now we see. The offshore depositors won’t like it, but we’ve got our money and the troika should play fair with us. Nothing to do until tomorrow morning”.
You suggest a celebratory dinner, but Maynard excuses himself, as he is tired.
Roll a dice
If it is a one or two, go to 34
If it is a three or higher, go to 19
30.
Your message has been taken. You are assured that Secretary Lew is taking a direct and personal interest.
Go to 41
31. Monday morning
The markets open but the domestic banks don’t. According to your orders, the bank holiday has been extended to Wednesday, to allow for the printing of a new currency, into which all of the bank deposits and assets are redenominated. All of your external liabilities are in default. The world pauses for breath …
Europe survives. The ECB floods the market with liquidity and the banking system holds together. A quick sequence of new policies are agreed, putting together a true fiscal union, faster than anyone had previously believed possible.
Surpyc itself responds well. The capital controls you have instituted hold, and the very rapid currency devaluation quickly attracts investment into the tourism industry, and to develop your natural resources. There are shortages and imports need to be rationed, but the people pull together and a new spirit of trust and democracy animates public life.
The last time you see Maynard, he is shaking his head in disbelief. Nobody pays too much attention to the negative report he wrote about you. His career is still mired in crumpled-collar oblivion, but your star is ascendant. Nothing succeeds like success.
YOU HAVE WON.
32.
Sunday evening
The news begins to leak on Twitter about the whip-counts before the debate has even ended. Your measure has passed. You can see a dozen missed calls from Alexei Ivanovich, but these have long since gone past the point of being productive. He has already accused you directly of unprofessionalism and promised to personally wreck your career. All that you can do now is relax and see what the markets bring.
Roll a dice.
If it comes up one or two, go to 8
If it comes up three or higher, go to 36.
33.
The vote is not even really close. The President’s own party votes for your measure, but none of the opposition do. Maynard is almost physically shrinking away from you as you turn round, embarrassed.
“Always seemed too aggressive to me”, he mutters, hypocritically. “But … we’ve got time for another vote. We can try the other option now, and leave the insured deposits untouched”.
“Plan B it is, then”. Go to 16
“I think we’ve had our shot. Get the plans ready for a default”. Go to 44
34.
Tuesday morning
“Just sheer bad luck”, you mutter, as you and Maynard sip beer at the airport.
“We should have insisted on the troika rethinking”, Maynard replies. “You can’t just go around confiscating deposits like that. We thought we were being clever, just clipping the offshore depositors.”
All around the departure lounge, screens are tuned to financial channels showing the carnage in world markets. The deposit tax in Surpyc fell on nervous markets and has sent European debt spreads out past their highs. Emergency talks are taking place in Frankfurt but at present it looks unlikely that the Euro can be saved. Both Alexei Ivanovich and M De Grieux have sent messages to say that they hold you personally responsible.
“Them’s the breaks”, you mutter to yourself, draining your glass. You wonder about going back to law school.
YOU HAVE LOST
35.
Alexei Ivanovitch makes the appointment quickly and with a minimum of ceremony. He insists, however, that he is not willing to send details by electronic means, or to discuss anything beyond the broadest generalities over a telephone line. As you talk, you can see Maynard’s face screwing up in distaste.
When you get off the line, he explains himself. “I’ve tended to find that situations like this attract an awful lot of chancers and Walter Mitty types. I’d say there’s no better than a one in ten chance this guy is any use at all.”
“I must admit”, you add, glumly, “it’s not very encouraging that he won’t tell us who he’s meant to be representing”.
Roll two dice.
If the sum is eleven or twelve, go to 49
If the sum is ten or less, go to 4
36.
Monday morning
A beautiful cloudless sky greets you, along with the news that Asian markets are up by as much as 3%. The rest of the morning is just as welcome, as you accept the congratulations of Maynard and M De Grieux; the Surpyc affair is generally judged to have been handled as well as it could been. The longer term economic picture is still bleak, but contagion to the rest of Europe has been handled, and the debt path now looks manageable. You head for the airport in triumph, a bottle of local brandy in one fist. Somehow, however, you know that you’ll never shake a slight concern over the rage in Alexei Ivanovich’s voice. Maybe it would be better to get out of this game, look for something in an NGO perhaps.
YOU HAVE WON.
37.
Sunday afternoon
Your bill has been drafted and sent to an emergency session of the legislature.
“Do you think we’re going to get it through?”, you ask Maynard.
“Weeeellll”. He is affecting that languid public school drawl, but you can tell he is as excited as you are. And the furrow between his eyebrows suggests he is not totally approving. “Frankly, I think it’s no better than fifty fifty and potentially a bit worse. It is as controversial as hell to be taking so much from the uninsured depositors. I worry that the financial industry interest groups are not going to be strong enough to protect this legislation from some pretty heavy popular outrage.”
The television screen confirms that this is not going to be an easy ride. Protestors surround both the presidential palace and the legislature. So far, nothing has turned violent though. Maynard turns the sound up, as the television channel switches to the announcement of the vote …
Roll a dice.
If it is a one or two, go to 9
If it is a three or higher, go to 33
38.
Monday afternoon / Monday evening / Tuesday morning
The debate stretches on endlessly, as crowds of demonstrators form outside the legislative building waving placards and accusing the troika of stealing their savings. You, De Grieux and Maynard are beginning to lose patience with each other. It’s clear that the other two men regard your decision to hit small depositors as a clear error of judgement.
Close to midnight, the motion fails. “What were you thinking?”, asks Maynard, plaintively. De Grieux echoes his question, having long since made it clear that the troika package cannot be signed on this basis. You are too tired and ashamed to stay around. Drafting a resignation letter and slipping it under Maynard’s door, you hail a local bus and head for the wilder beaches at the east of the island. Now that the currency is in free-fall, your hard currency savings will last a while, long enough for you to decide what you really want to do with your life.
YOU HAVE LOST.
39.
Tuesday morning
It is not good. Nobody returned your calls The markets have taken Surpyc’s disorderly default very badly. The banking system is in collapse and the ECB has removed support. The island has become the first country to be expelled from the Euro. The immediate consequence of this has been a rapid liquidity crunch across Europe, as it becomes clear that the ECB’s doctrine of “Anything it takes” does not really mean “anything”.
“Pretty obvious who’s going to get the blame for this” Maynard mutters. “We are. He is trying to spare your feelings. He was just the advisor; you were taking the decisions. Nobody understands why you gave up so early, when there was plenty of time for another try at legislation. You sigh, and dial for an airport taxi. You consider starting a blog.
YOU HAVE LOST
40.
Sunday afternoon
“Reckless, in my opinion. You didn’t even try to negotiate. I very much doubt that the depositors will thank you for saving them a ten percent tax by giving them a bankrupt bank and a soft currency asset. I suppose that we can now meet the deposit guarantee fund claims by printing pound notes, but it’s hardly a great start to our new economy. Let’s see how it turns out”. Maynard is scribbling rather agitatedly at something which looks ominously like your assessment form.
Roll two dice.
If you get a double four, double five or double six, go to 31
Otherwise, go to 20
41.
Your call is taken. You are reassured that President Bernanke is taking a direct and personal interest in this case.
Go to 30
42.
The fear is palpable in De Grieux’s voice.
“My god, you are a cold fish”, he says. You smile, and flip him onto speakerphone. “I don’t understand how anyone can behave like that. Do you realize that there is an existential crisis for the Euro here?”
You decide to continue to play it cool. “Don’t bring me problems”, you tell him. “Bring me a solution”. You can see that Maynard is gaining respect for you.
Two hours later, De Grieux has revealed his “plan B”, and the two of you are drafting a press release. With a mixture of further lending, bilateral contributions and a small amount of presumption on the good nature of the ECB, the crisis is postponed, if not averted, and the banks can open on Tuesday.
You head for the airport and the next plane home. You may have made a lifelong enemy or two, but you’ve done your reputation nothing but good. Anyone can bully a little island – it takes a real operator to bully a continent.
YOU HAVE WON
43.
Sunday afternoon
“I am not a fan of madman strategies”, Maynard remonstrates.
“I am”, you reply, feet up on the desk. You can sense that you are driving Maynard crazy and rather enjoy it.
“At least, I am not in favour of madman strategies when applied to our own side”, he pleads.
“Who said De Grieux is on our side? Our side is for a sensible outcome to the crisis and as little contagion to global markets as possible”, you reply. “De Grieux represents the troika. As far as I’m concerned, he’s the enemy. Do it. Let’s play poker”.
Roll two dice:
If the sum is ten, eleven or twelve, go to 13.
If the sum is nine or less, go to 45
44.
Monday morning and afternoon
“You might be right”, Maynard sighs. Suddenly, he is looking very old. “This legislature is not going to agree that the situation is serious. Let’s put in a call to the guys with the money, and tell them that this chance is done. At least we’ve left them time to call their principals”.
You send him home to rest. Then you call the offices of M. De Grieux and Alexei Ivanovich, and have a long conversation with each. Then you wait.
Roll a dice
If it lands on a one or two, go to 15
If it lands on a three or higher, go to 39
45.
Sunday night/ Monday morning
It is less than an hour before the phone starts ringing in response to your ultimatum. De Grieux is incensed and wastes few words in telling you that you have made a bad mistake. He instructs you not to waste time contacting the troika office any more. There is nothing to do but default and let the chips fall where they may. And the chips fall pretty much everywhere.
The markets take Surpyc’s disorderly default very badly. The banking system is in collapse and the ECB has removed support. The island has become the first country to be expelled from the Euro. The immediate consequence of this has been a rapid liquidity crunch across Europe, as it becomes clear that the ECB’s doctrine of “Anything it takes” does not really mean “anything”.
“Everybody blames you”, Maynard says, as the two of you drive to the airport. “Nobody can understand why you went out of your way to annoy the only people who could help you”. The two of you stand at the departures terminal together, before what you know will be your last handshake. Maynard has some parting words.
“I’m going to need you to give me that Blackberry back”
YOU HAVE LOST
46.
Monday morning / afternoon
Having stayed up all night trying to draft your legislation and build a coalition, you are now in the lap of the gods. Alexei Ivanovich has proved to be more of an irritation than you had believed possible, not only bombarding you with calls himself, but bringing down a horde of Russians who want to lobby you against the decision to hit large offshore depositors. Before long, your official Blackberry is practically useless as a communication device.
By late afternoon, Maynard is worried. Things have dragged on too late, and there will not be time to revise any plans if this does not pass the legislature first time. “We’re basically hoping that not too many of the coalition are … sensitive to the interests of the offshore lobby”, he informs you.
“Delicately put, Maynard”, you reply.
Roll a dice
If it comes up with a one or two, go to 17
If it comes up a three or higher, go to 24
47.
Tuesday morning
The demonstrations continued through most of Monday and you felt it prudent not to leave your hotel, but Tuesday morning came and went with something of a whimper. The banks were packed with angry customers, and the wire transfers sent something like EUR5bn of deposits offshore at the open of business, but the ECB was as good as its word and the majority of offshore deposits stayed put. Alexei Ivanovich sent you an email congratulating you on your handling and asking you to stay in touch.
The small depositors of Surpyc were resigned to their fate; it seemed that years of recession and corruption had more or less conditioned them to accept the arbitrary seizure of their property. Importantly, there was no hint of contagion to the rest of Europe. You still worry for the people of Surpyc, but they can make their own destiny now, albeit under circumstances decidedly not of their choosing. Maynard is equally philosophical.
“You can’t solve every problem all in one go”, he muses. “I think we took a lousy hand and played it pretty well, all considered. With a little bit of luck”.
You share a taxi to the airport. You’re beginning to like each other.
YOU HAVE WON
48.
It is De Grieux.
“I am flabbergasted.”, he says. “You have done nothing. You have wasted all the time that you had here. I was waiting to hear your proposal, and you have done nothing. You have not even advanced a proposal to the legislature. There is nothing I can do now. This is all your fault. I hope you’re proud of yourself.” He hangs up.
“I don’t think I can add much to that”, says Maynard. He starts packing up the office. When you wake up in the morning, you are alone in the hotel, and the ATM in the lobby is showing an out of order message. The riot gas has already started to blow around the streets.
YOU HAVE LOST.
49.
Sunday morning
Alexei Ivanovich’s office is well-appointed and clearly long established in the central business district. The mystery of his “organization” is solved as soon as he hands over a business card; he represents one of the world’s largest natural resources companies, with a long standing interest in Surpyc and with, unquestionably, the financial resources to finance the transaction he is proposing. But there are problems with price. Moscow are only willing to come up with EUR5bn, and their deal has some conditionality too, which he would be overjoyed to discuss. Maynard draws you to one side.
“We’re taking a gamble here. This is a quid pro quo. If we take this guy’s money, we’re not going to be able to do a deposit tax of any kind. So we’ll have a package totaling EUR15bn, instead of EUR10bn. Do we think we can finesse that with the troika?”
If you answer “No”, then politely break off negotiations and go to 25
If you answer “Let’s give it a try”, then roll a dice.
If it comes up even, go to 12
If it comes up odd, go to 23
{ 152 comments }
Asteele 03.19.13 at 1:08 am
17. But then again I got lucky.
Purple Platypus 03.19.13 at 1:23 am
Okay, first of all, “dice” is plural. The singular is “die”. You never “roll a dice” any more than you “bake a cakes” or “saw a geese”.
Josh G. 03.19.13 at 1:30 am
I can’t believe that this story is getting so little attention internationally. It should be front-page news in every newspaper in the world: “European Union abolishes deposit insurance, expropriates small savers.” How can this situation possibly not lead to bank runs throughout Mediterranean Europe?
I know it probably wouldn’t do much good, but personally if I were a member of Parliament in Cyprus, I would round up some of my angry constituents and provide them free transportation to Germany, along with crowbars, pitchforks, baseball bats, and instructions to start wrecking stuff.
david 03.19.13 at 1:32 am
Hahaha, 30/41.
Charlie 03.19.13 at 1:37 am
I enjoyed this, but I can’t help but feel like most of the ending options are basically “Cyprus has defaulted. Roll to see whether or not that turns out well.”
Jo 03.19.13 at 1:45 am
@Purple Platypus:
dice 1a : die 1 (from Merriam Webster) One is a dice or a die, two are dice. Please check facts before peeving.
Charrua 03.19.13 at 2:06 am
Last time, I commented that it made little sense to see the decision making process in this way and that the EU could probably keep kicking the can as long as they wanted if they managed to keep the banking system functioning and depositors satisfied (for some reason, that’s the area that usually triggers the collapse).
It seems that they are determined to test this.
P O'Neill 03.19.13 at 2:08 am
I lost both by “reasonable” Troika strategy leading to 8 and then peeking at other variants that again seemed “reasonable”.
One nitpick or maybe more than a nitpick. Node 10 refers to the ECB as extending or not extending Emergency Liquidity Assistance. That’s not quite right. ELA is extended by the national central bank (by definition — it’s against collateral that the ECB won’t accept). The ECB has to mobilize a vote of its board to block any national central bank’s ELA. That tilts the odds a little towards more aggressive banking support strategies at the national level e.g using ELA to buy more time to figure out who exactly who want to burn and how.
Rich Puchalsky 03.19.13 at 2:30 am
What makes this such a fantasy is the instant punishment that the protagonist gets for failure. In the actual world, people reliably grind countries into the economic dirt for year after year with no bad outcome for them at all. The piece begins with Maynard saying “This situation has landed on our desks precisely because everyone with enough clout to wash their hands of it has done so,” but really it’s turtles all the way down.
Frank 03.19.13 at 2:34 am
I know it is just supposed to be a funny, but I am dismayed at the grandiosity. You like to imagine yourselves as the one world government but you are in for a rude awakening. One phrase of your little adventure struck me as truer than you knew; “crisis seems to have been averted” I would add a ‘for now’ to that though. No matter where you end up in your little adventure any solutions will only be temporary at best. No matter what you do there will be a new crisis. Because your profession and industry are out of control. There will be a new crisis, and if you weather that one another.
shah8 03.19.13 at 4:00 am
Well, the dice hasn’t really finished rolling in the real world. I mean, they going to get the votes for this plan at all?
bad Jim 03.19.13 at 5:54 am
Surely, if this is to be at all realistic, there ought to be an outcome in which dealing with Alexei Ivanovich results somehow in your financial independence.
Marcos 03.19.13 at 5:56 am
Shouldn’t 49 go back to 7 rather than 25?
I’ve pushing towards the dark side.
All in all, fantastic excercise.
Wonder about those probabilities though…
JamesP 03.19.13 at 6:04 am
@Rich Puchalsky, I was just thinking exactly that. Once you’ve made it past a certain level of the financial-development complex, you’re pretty much immune to failure in terms of results on the ground; careers end because of internal-political blunders, not trifles like ruining people’s lives. Clearly the Secret One-World Government is a lot tougher on staff than the World Bank, the EU, or the IMF.
LG 03.19.13 at 8:53 am
31 on the first roll!! Get in!!!!
Vasilis 03.19.13 at 9:07 am
It seems 30-41 form a never ending loop. Is that on purpose? Also, what’s the difference between 7 and 25 and why do they point to differently numbered options that are substantively the same?
Neville Morley 03.19.13 at 9:08 am
Another possible minor glitch: from 46, a lucky throw wins the vote in parliament at 17 with kudos for protecting the little people and soaking the oligarchs; an unlucky throw loses the vote in parliament at 24 with furious criticism for protecting the offshore finance industry at the expense of domestic savers. I didn’t think my policy was that incoherent…
Random Lurker 03.19.13 at 9:15 am
Outcome 20:
“The new currency was inflationary, leaving the island plagued by shortages of import commodities, which eventually even undermined the tourist industry.”
How can an inflationary currency lead to shortages of import goods? I think that the causation is usually the reverse, i.e. a shortage of import goods causes the inflation.
otto 03.19.13 at 10:10 am
Fun!
William Burns 03.19.13 at 11:31 am
Considering that the proximity of Cyprus and its marriage industry are essential to Israel’s posturing as a secular country, they really ought to kick in something.
Phil (a different one) 03.19.13 at 12:28 pm
@Purple Platypus: The prescriptivists lost the argument a long, long time ago. Get over it & join the program: dice is both singular and plural in modern usage, whatever the dictionaries say.
I do enjoy these “what would you do” posts, although I also wonder if there’s an underlying assumption of good faith on the part of the participants in the options offered that may not always be the case!
Barry 03.19.13 at 12:39 pm
Josh G @3:
“I know it probably wouldn’t do much good, but personally if I were a member of Parliament in Cyprus, I would round up some of my angry constituents and provide them free transportation to Germany, along with crowbars, pitchforks, baseball bats, and instructions to start wrecking stuff.”
Sounds good to me.
Glen Tomkins 03.19.13 at 12:47 pm
Why is a liquidity crunch failure?
I’m all with Andrew Mellon, up to a point. A whole lot of capital needs to be liquidated. By failing to have top marginal income tax rates somewhere north of 95% (and having the income tax cover all sorts of income), world govts allowed zillions in capital to accumulate that is never going to be used either to actually capitalize anything, or in consumption of goods and services. That accumulation has to be liqidated somehow. It naturally gathers into bubbles, that naturally burst. Let them.
Instead of engaging in the vain attempt to put Humpty Dumpty back together again, govt should confine itself to keeping the necessary destruction of this fake wealth from destroying the real economy. The best way to do that is to not allow wealth to accumulate beyond the need to keep up demand or capitalize new production. But failing that, govt needs to preside over the bonfire of this wealth it failed to keep from accumulating, in ways that keep nearby houses from catching on fire.
The liquidation of excess capital can be quite safe and orderly if only govts act to resolve failing banks in a way that makes whole only counterparties, such as pension funds and small depositors, whose money is actually going to be used to keep up demand. Everybody else’s money is allowed to burn off.
Liquidate capital! Liquidate the banks! I have a somewhat shorter list than Andrew Mellon, but he had the right idea.
Glen Tomkins 03.19.13 at 12:55 pm
@3
Why go all the way to Germany? Your mob just has to get their own govt to withdraw from the Euro and repudiate all foreign-held debt in its banking system.
Barry 03.19.13 at 1:35 pm
Rich Puchalsky 03.19.13 at 2:30 am
” What makes this such a fantasy is the instant punishment that the protagonist gets for failure. In the actual world, people reliably grind countries into the economic dirt for year after year with no bad outcome for them at all. The piece begins with Maynard saying “This situation has landed on our desks precisely because everyone with enough clout to wash their hands of it has done so,†but really it’s turtles all the way down.”
You’re assuming that grinding countries into the dirt is failure, rather than *the* goal.
Scott P. 03.19.13 at 1:38 pm
“@Purple Platypus: The prescriptivists lost the argument a long, long time ago. Get over it & join the program: dice is both singular and plural in modern usage, whatever the dictionaries say.”
I’m a game designer, and in every single game I’ve ever seen, “die” is the singular. I have literally never heard “dice” used as the singular.
Douglas Knight 03.19.13 at 1:38 pm
“funky html way”
Barry 03.19.13 at 1:39 pm
Glen Tomkins 03.19.13 at 12:55 pm
@3
” Why go all the way to Germany? Your mob just has to get their own govt to withdraw from the Euro and repudiate all foreign-held debt in its banking system.”
Justice?
MPAVictoria 03.19.13 at 1:43 pm
“I can’t believe that this story is getting so little attention internationally. It should be front-page news in every newspaper in the world: “European Union abolishes deposit insurance, expropriates small savers.†How can this situation possibly not lead to bank runs throughout Mediterranean Europe?”
This, this this bloody this. The idea that you can just steal 7 percent of the life savings of small depositors, savings that are supposed to be insured, is insane. If it goes through people will go back to stashing their savings under their mattresses.
Rich Puchalsky 03.19.13 at 2:04 pm
JamesP: “Once you’ve made it past a certain level of the financial-development complex, you’re pretty much immune to failure in terms of results on the ground; careers end because of internal-political blunders, not trifles like ruining people’s lives. ”
True, but is there actually any penalty for failure if you’re below that level? Maynard also says: ”
“Pretty obvious who’s going to get the blame for this†Maynard mutters. “We are. He is trying to spare your feelings. He was just the advisor; you were taking the decisions. ”
So the choose-your-own-adventure has a class of people too important to get any personal penalty, and not important enough to get any personal penalty, and all that seems true. But in reality the class of people in between seems to be a null set.
Mike Adamson 03.19.13 at 2:14 pm
I’ll have to lively up my screenplay with teenage vampires.
Purple Platypus 03.19.13 at 2:46 pm
@17: Descriptivism doesn’t mean anything goes. You still have to accurately describe the actual usage of well-informed, relevantly educated speakers. I don’t think you’ve done that. Unlike Scott P, I have seen singular “dice” a lot, but mostly on Web sites by people making lots of what even a descriptivist would admit are other grammatical and usage errors. I don’t think I’ve ever seen it in a professional publication by someone well-informed about games and game design.
Barry 03.19.13 at 2:55 pm
“I can’t believe that this story is getting so little attention internationally. It should be front-page news in every newspaper in the world: “European Union abolishes deposit insurance, expropriates small savers.†How can this situation possibly not lead to bank runs throughout Mediterranean Europe?â€
Somebody pointed out that for Russian Mafia types, this is a 10% money laundering fee. Just cost of doing business[1]. For everybody else, it’s a 7% hit on their savings, *on top* of everything else going on in the economy.
And, as has been pointed out, the EU has now violated the basic principle of deposit insurance. The only question from now on is how big of a hit ordinary depositors will take.
Barry 03.19.13 at 2:56 pm
[1] I know that if anybody here cost these people 10%, we’d be killed as a lesson to others; I’m referring to the actions of large governments/quasi-governments.
Craig 03.19.13 at 3:13 pm
These posts are the silver lining of the whole Eurozone crisis.
But I do think we deserve a bit of a post-mortem on the Greek choose-your-own-adventure.
Looking back, what decision path would you say most closely approximates the way history has played out since you wrote the scenario? And how well do Maynard’s conclusions there line up with reality?
Coulter 03.19.13 at 5:06 pm
“†Why go all the way to Germany? Your mob just has to get their own govt to withdraw from the Euro and repudiate all foreign-held debt in its banking system.—
Yeah – they have an economically strong partner right there on the island – Turkey. I’m sure Turkey would make the small depositors whole and it would resolve a number of geo-political issues within the EU – may be this is a bigger conspiracy than you dreamed…
Phil (as above) 03.19.13 at 5:08 pm
PurplePlatypus@32. Has this thread been moderated? Because I can’t work out whether you’re responding to me or not…
ScotP@26. Game designers are not exactly a representative sample of english speakers :)
There’s possibly an AmE vs. BrE usage split here too: http://separatedbyacommonlanguage.blogspot.co.uk/2006/09/die-and-dice.html
Oh, and I “Won”, but only by taking insane risks and being lucky. I’m not sure what that says about the situation in which we find ourselves though because I don’t particularly like the idea of relying on luck to survive!
JW Mason 03.19.13 at 5:40 pm
These posts are great and fun and educational. But I can’t shake this nagging feeling that their implicit message is that, since the preferences of various powerful actors must be treated as objective constraints, seeming policy disasters in fact represent the best of all possible worlds.
JW Mason 03.19.13 at 5:46 pm
I also note that 13 is glossed “Europe blinked,” which does not sound so great, for Europe. But a better summary might be, “the ECB behaved like any other functional central bank, acting as lendr of last resort to prevent banking crises and ensure that deposit insurance is honored.” If Surpyc were a state or city in the US, ending at 13 wouldn’t even be a question, it would be automatic. And no one would describe the difference between banking regulation today and in the early 1930s as being that now it’s more likely that “Washington blinks.”
Barry 03.19.13 at 6:45 pm
“I also note that 13 is glossed “Europe blinked,†which does not sound so great, for Europe. But a better summary might be, “the ECB behaved like any other functional central bank, acting as lendr of last resort to prevent banking crises and ensure that deposit insurance is honored.†If Surpyc were a state or city in the US, ending at 13 wouldn’t even be a question, it would be automatic. And no one would describe the difference between banking regulation today and in the early 1930s as being that now it’s more likely that “Washington blinks.—
In other words, Krugman’s correct about the Euro (it monetarily ties together a fiscally-disunited system).
WF 03.19.13 at 7:23 pm
In addition to the dice issue, Ivanovich is a Sebian surname. (It’s also a Russian patronymic, but you wouldn’t use a patronymic the way you’re using “Ivanovich”).
JW Mason 03.19.13 at 7:25 pm
In other words, Krugman’s correct about the Euro (it monetarily ties together a fiscally-disunited system).
Right. This post could be seen as a response to Krugman and others who think this was a terrible solution. But rather than actually make the case against Krugman, and show why this is actually good policy, the post instead starts from the premise that something like it was inevitable and then invites you to imagine yourself forced to deal with it.
It’s sort of the financial-crisis equivalent of dealing with rape by advising women not to wear short skirts or go out by themselves. “Yes it might seem unfair but you have to be realistic…”
Colin Danby 03.19.13 at 7:29 pm
… and nobody thought through bank examination properly in advance, or to be more precise, putting in place a Europe-wide system of bank examination was institutionally and politically unfeasible, and this obvious problem did not slow down the rush toward a single currency.
Daniel 03.19.13 at 7:35 pm
41. It is indeed a patronymic, but iirc Dostoesvsky never gives the actual surname of the protagonist of “The Gambler” (in which Mr Astley and the Marquis De Grieux also appear)
Daniel 03.19.13 at 7:37 pm
It’s sort of the financial-crisis equivalent of dealing with rape by advising women not to wear short skirts
Completely unnecessary. Turn it in, please. Or the comments-banning equivalent of an equally unpleasant crime will happen to you.
Daniel 03.19.13 at 7:38 pm
ps: any more comments from “people who are knowledgable about game design” and I am quite capable of going back in and editing all plural references to “dices”. I would do it without batting an eyelid.
Billikin 03.19.13 at 8:00 pm
Glen Tomkins: Liquidate capital! Liquidate the banks! I have a somewhat shorter list than Andrew Mellon, but he had the right idea.”
;)
Chris Mealy 03.19.13 at 8:01 pm
Were the bondholders and shareholders in the Cypriot banks already wiped out 100%? Or did they go after the depositors first?
shah8 03.19.13 at 8:08 pm
Bondholders were not liquidated. The paru passu trail for Argentina was an object lesson to anyone else who even thinks about it.
JW Mason 03.19.13 at 8:08 pm
@45- OK, poor choice of metaphor, I apologize.
I still think the effect of this post is, by focusing attention on one set of choices, to make another set of choices invisible. Why is Mr Astley’s the best perspective from which to view the situation? Why are we invited to make the right decisions for Cyprus given the Troika’s actions, as opposed to asking whether the Troika is making the right decisions?
Daniel 03.19.13 at 8:09 pm
Shareholders and junior bondholders gone. Senior bondholders were left out of the original deal as they were de minimis (when you’ve got huge excess offshore deposits, you don’t issue bonds), but it was later realised this was a mistake and they got wiped in the deal that the parliament just rejected
JW Mason 03.19.13 at 8:12 pm
Were the bondholders and shareholders in the Cypriot banks already wiped out 100%?
Apparently Cyprus banks don’t have any bondholders, at this point. According to the FT, Laiki has only E100 million of senior unsecured debt, out of E30 billion in liabilities.
WF 03.19.13 at 8:58 pm
It is indeed a patronymic, but iirc Dostoesvsky never gives the actual surname of the protagonist of “The Gambler†(in which Mr Astley and the Marquis De Grieux also appear
Oh.
(Still, Russians don’t sign emails with [name] [patronymic], and you wouldn’t refer to people just by their patronymic in formal contexts)
Gareth Rees 03.19.13 at 9:22 pm
The OED has citations for singular dice going back to the 15th century so I think Daniel is vindicated. For example
1474 Caxton tr. Game & Playe of Chesse (1883) iii. viii. 152 He..caste .iii. dyse, And on eche dyse was a syse.
(sice being the number 6 marked on a dice.)
shah8 03.19.13 at 9:29 pm
Wow, that was a fast state of affairs wrt to senior bondholders.
Chris Mealy 03.19.13 at 9:43 pm
Thanks. If everybody else is wiped out 100%, 6.7% tax (or equity purchase, whatever) doesn’t seem so bad, if it means the difference between having a banking system and not. Yes, I see everything through a reciprocity frame, so what.
david 03.19.13 at 10:11 pm
so, to pull some threads together:
the dice is loaded.
djr 03.19.13 at 10:49 pm
Having decided that we need to acquire €7B from someone in Surpyc, we seemed to pick on holders of bank accounts without further discussion, rather than considering (say) a tax on homeowners, income, wealth, etc. Is that because there’s nobody else to tax, or just because that’s the easiest chunk of money to grab hold of in a hurry?
Phil 03.19.13 at 11:00 pm
Sorry if I kicked off a die/dice flame war. It was contributing to something of a derail for which mea culpa: please accept my apologies.
(I see Cyprus has just said “No!”. Is there a fudge in the works for them to agree to tomorrow I wonder?)
Daniel 03.19.13 at 11:18 pm
Is that because there’s nobody else to tax, or just because that’s the easiest chunk of money to grab hold of in a hurry?
Yup, it also kind of (or at least it would if they did it properly) respects the idea of a “bail-in”, in as much as the large >100k deposits are doing the work that bondholders would do in a normal bank’s liability structure
The Raven 03.19.13 at 11:27 pm
Great post–thanks!
I was struck, a few minutes ago, by the way that, in fact, US banks were bailed out with US middle class revenue. What Cyprus has proposed is more blatant, but is it really harder, financially, than the destruction of the equity of so many homeowners?
shah8 03.19.13 at 11:39 pm
Well, that’s really the problem with this proposal, from the standpoint of more rightwing, business friendly viewpoints. It makes it just completely crystal clear that the system is rigged. Given that gambling, for all intents an purposes, is a primary activity of the large financial system, a belief that the house isn’t cheating is an essential part of the trust network.
Financial repression with ultra low interest rates and no ability to grab profits outside of where the political-economic nexus wishes you to get (housing, 401k) is getting reamed with petroleum jelly. Totally bareback, here.
DVA 03.20.13 at 12:06 am
Interesting! Thanks.
Suggestion for future CYOA-style posts like this: you should make the section numbers anchor tags so that we can click “go to X” and be taken there instead of risking accidental spoilers on our scroll down to it.
Nathanael 03.20.13 at 1:25 am
Your percentages are wrong. Of course.
Why? Because the questions are all questions of psychology. Ask someone who’s studied mass psychology which sorts of behavior create the bank runs and which don’t.
Nathanael 03.20.13 at 1:29 am
One of the key points not understood here is that the more mistakes you make early — trying to deal with the Troika (who are demanding useless austerity), trying to deal with the Russians (who are demanding God knows what), announcing plans which screw small depositors, etc. — the more mistakes you make early on, the nastier the crash is afterwards.
We learned this from Iceland. Default on the foreign and large depositors immediately, pay out the guaranteed deposits and only the guaranteed deposits, and you have a *chance*. Dick around, and even if you eventually propose the same program, you *don’t* — it’s too late, you’ve lost credibility.
Accordingly, the “Leave the euro — default NOW” option should have extremely high odds of success, but only if done on day ONE. #28 should succeed about 75% of the time.
Greg 03.20.13 at 1:49 am
Nathaniel: on day zero, perhaps.
The Cyprus affair has ruined the plans of anyone who was planning to do this over Easter (Orthodox or Catholic), though. Maybe that was the larger game being played here.
Radu Marin 03.20.13 at 6:34 am
It took only 10 minutes to win. I’m wondering why they need so long for a obvious win-win solution. Just pick 10-25-14-32-36 and never bid on Russian mob’s assets.
dandraka 03.20.13 at 7:26 am
Although I’m pretty sure everybody here is watching the news : CY MPs have said a big no, at finmin has gone to Russia for money.
I guess this takes us to 49 ?
@Greg the Orthodox easter is usually (though not always) on a different date that the Catholic. Typically they’re one week apart, but this year it’s more, it’s on the 5th of May.
Peter Smith 03.20.13 at 8:04 am
Interesting. Now they are trying the Russian Mafia – “Accept a 15% levy or lose the lot”.
Best of luck with that!
Frank 03.20.13 at 8:14 am
I’m glad to echo Barry in #40
“I also note that 13 is glossed “Europe blinked,†which does not sound so great, for Europe. But a better summary might be, “the ECB behaved like any other functional central bank, acting as lendr of last resort to prevent banking crises and ensure that deposit insurance is honored.†If Surpyc were a state or city in the US, ending at 13 wouldn’t even be a question, it would be automatic. And no one would describe the difference between banking regulation today and in the early 1930s as being that now it’s more likely that “Washington blinks.â€â€
Why is it that everyone has to pay for the sins of the Bankers except for the Bankers?
bad Jim 03.20.13 at 8:57 am
With respect to the Russian use of name and patronymic: I’ve been led to believe it used to be customary. Pyotr Ilich, Vladimir Ilich, Yosef Vissarionovich are instantly recognizable. Yet no one refers to Shostakovich or Prokofiev that way, perhaps because Dmitri Dmitriyevich and Sergei Sergeyevich sound like stuttering.
JW Mason 03.20.13 at 1:37 pm
I think I was wrong to say 13 is the obvious “right” answer. It is equivalent to where we generally end up in the US, tho. But 36 might be preferable.
According to the FT, it was the Cyprus government, and not the Eutope side, that insisted on keeping the hit to uninsured deposits under 10 percent. This supports the theory that the real constraint here was preserving Cyprus’s offshore banking industry – a consideration not mentioned in the OP. On the other hand, it appears that the IMF favored getting the full amount from uninsured deposits, making talk of a unified “Troika” a bit misleading here. But maybe that would have been unneeded detail.
Also, in terms of excluded alternatives, one group that has been held harmless here are holders of Cyprus’s sovereign bonds. These are supposedly in large part hedge funds who bought them at a deep discount and will get big capital gains if the depositors do end up footing the bill.
rf 03.20.13 at 1:59 pm
If only the EU had public servants of the quality of Tim Geithner and Ben Bernanke, not these Goddamn mediocrities.
Worman 03.20.13 at 2:10 pm
@23 Glen Tompkins
You only say that because you probably don’t have much capital. I have a fair bit, and I have earned it, not through the housing bubble, not through leverage, but through hard work. I’m not the war monger type, but I suspect there will be a lot of people willing to go to more extreme lengths than I to protect their capital. It’s a basic human reaction. I also suspect the path you recommend would lead to a lot of human misery. And I don’t mean misery in the sense that some people in the UK are struggling to afford more than one television.
rf 03.20.13 at 2:21 pm
Say you hired a plumber to unblock a sink and this was the timeline of events:
Year 1 – plumber called to unblock the sink. Sink seems to be working. Pay the plumber
7 months late – Toilet blocked. Probably related to blocked sink. Get the plumber to check. Plumber advises it will be a big job. Complicated. Advises to bring in a portaloo for foreseeable future.
4 months later – Washing machine floods utility room. Plumber comes over with buckets
5 months later – Raw sewage coming out of taps in kitchen. Plumber calls the council as there’s a problem with the mains. Council can’t do anything due to spending cuts. Plumber is going on Safari for a month. Will fix when back
7 months later – Plumber brings over water purifier
4 months later – You recommend plumber to neighbour who is having similar problems. Plumber leaves lighting cigarette beside a stack of newspapers and can of kerosene. House burns down. Fire department are called and proceed to spray raw sewage on fire.
Neighbours house in now a smouldering hill of rubble and human waste. You have a portaloo, semi clean water and an unusable utility room
What would you do? Fire the f**king plumber
Barry 03.20.13 at 5:39 pm
JW Mason: “According to the FT, it was the Cyprus government, and not the Eutope side, that insisted on keeping the hit to uninsured deposits under 10 percent. This supports the theory that the real constraint here was preserving Cyprus’s offshore banking industry – a consideration not mentioned in the OP. On the other hand, it appears that the IMF favored getting the full amount from uninsured deposits, making talk of a unified “Troika†a bit misleading here. But maybe that would have been unneeded detail. ”
This is odd, because if there were an even bigger hit, then the odds of a pan-European bank run (or at least ‘pan-Sourthern-European…’) would skyrocket.
In addition there’d be some massive financial industry problems, I’d guess, because everybody in the whole financial world would have to guess as to which Euro country would have an extended ‘bank holiday’ and ‘buy-in’. Nobody would want to park funds in a large number of banks, nor do any business which wasn’t cash-and-carry.
And, of course, Cyprus would take an immediate and massive economic hit, from people losing a hefty chunk of their life savings, and pulling the remaining money out of their banks.
Do you think that the ECB/EU authorities and IMF are deliberately trying to crash the system right now?
Pat 03.20.13 at 7:54 pm
Yeah, ditto Nathanael in wondering why Iceland’s experience doesn’t figure more into the percentages. It seems there remains an awful lot of capital available for countries that are willing to force haircuts on their old creditors in order to make a clean start with new creditors. (With U.S. rates so low, this really shouldn’t be a surprise.)
mrearl 03.20.13 at 8:29 pm
Got me at 24, but the given odds don’t reflect sufficient cynicism about politicians.
shah8 03.20.13 at 8:48 pm
As all the news about this seeps in, and as I read more about the history and geopolitics of Cyprus, I think the focus on dice is highly apropos. The wall of bullshit obscures pretty much everything out there, and the sheer unpredictable arbitrariness of the past and the anticipated future makes any attempts at prognostication worse than rolling a die.
Barry 03.21.13 at 12:27 am
Pat
” Yeah, ditto Nathanael in wondering why Iceland’s experience doesn’t figure more into the percentages. It seems there remains an awful lot of capital available for countries that are willing to force haircuts on their old creditors in order to make a clean start with new creditors. (With U.S. rates so low, this really shouldn’t be a surprise.)”
ISTR reading that when countries default on their foreign debts, they have no problem borrowing money. Apparently creditors figure that the next default will happen a long time in the future.
Barry 03.21.13 at 12:36 am
I keep wondering about this, because as far as I can tell for Spain and Ireland the current system is to shrink the economy while the ‘bailouts’ go back to the Big Boys. I’m sure that the local (sorta) big boys are getting their cuts, but I’m surprised that they haven’t been turfed out.
rf 03.21.13 at 1:11 am
Iceland spent 20-25% of GDP on their banks, and there is rarely a clean break with creditors.
http://www.economonitor.com/blog/2012/12/state-costs-of-the-2008-icelandic-financial-collapse/
The Icelandic option is also unique to their specific situation (i would imagine)
Iceland are also still trying for Euro membership (akaik)
Glen Tomkins 03.21.13 at 4:01 am
@77,
Modern industrial processes are so productive, and contemporary govt in the developed world has been so captured by wealth interests, that there is a huge excess of wealth allowed to accumulate at the top with no rational outlet for its use. As a result, no half-way plausible “investment” opportunity will long go unfilled. In a world in which you could find buyers so avid to lap up securitized toenail clippings that the market value of those instruments, if they were marketed by houses with the right cachet, would soon be bid up to exceed that of world GDP by a factor of 10, a little thing like recent repudiation of debt isn’t going to keep foreign capital out of Cyprus for long. The Cypriots could force all their foreign creditors to take a 100% haircut, then round up as many of them as they could get their hands on for public beheadings, and it would still take no more than a week before the surviving banksters would be pushing more cash on them.
That cash literally has no better place to go, and it’s mostly in the hands of people who imagine they deserve some unsustainably high return for something that technological advances and their capture of tax policy has allowed to become more common than dirt. No rational, actual investment, no actual capitalization of business enterprises, can meet anywhere near the volume of demand for such a high expected RoI, so opaque non-rational “investments” are conjured up in the sleep of reason, and shepherded along the path to their eventual bubble burst. Investing in a recently defaulted Cyprus would be among the less adventurous opportunities out there.
If the wealthy had any common sense, they would realize that supply and demand applies to capital as well. The current supply far exceeds the demand, so capital isn’t worth anything. We have low inflation for the price of goods and services, but the price of capital has bottomed out. The holders of capital need to do what the Dutch merchants did in the face of a tulip glut, what dairy farmer do when there’s too much milk, and just start dumping the excess. Liquidate capital! (Send me some if if you can’t find some more creative way to dispose of it. I promise to use whatever you send me to buy stuff. I won’t hoard it to set up as your competitor capitalist.) It’s the only way to make capital worth anything again. But please, stage the bonfire under conditions that avoid burning up the underlying economy that produces goods and services. Keep throwing that capital at bubbles, and yes, you will get rid of it, but you risk harming the real economy on which we all depend.
Niall McAuley 03.21.13 at 9:28 am
I don’t understand the fascination with the Iceland model when compared to Ireland. A massive currency devaluation destroys saved wealth in the same way as the Cypriot bank raid would have done, but even more so.
Economists seem to prefer the devaluation method because it can be done without Joe Public realizing what’s going on and objecting, whereas doing it through pay cuts, spending cuts and tax rises is “impossible”, since no public would be stoiocal (or stupid) enough to allow it.
But if it turns out that the Irish public is stoical/stupid enough to allow the adjustment to happen through cuts while staying in the Euro and not setting fire to everyone’s saved cash, well, good, right?
Barry 03.21.13 at 12:14 pm
Except that what’s actually happening is that the Irish economy shrinks, impoverishing most of the Irish people, while their debt (or their debt-to-GDP ratio) doesn’t get better.
They are not muddling ‘through’ anything, just sinking into the mud.
Glen Tomkins 03.21.13 at 12:54 pm
@84,
Devaluation would only destroy the purchasing power of savings on the world market. Unless Cyprus is heavily dependent on imports for necessities such as food staples, that wouldn’t be a big deal to the small depositors. The large depositors could and should have been more prudent in their investments, and insofar as their losses do not decrease demand within the Cypriot economy, those losses are of no public policy importance anyway. Their excess wealth needed to be liquidated, and good riddance to it. As for the small depositors, even if the food they needed their savings to help pay for did become more expensive, massive devaluation would be a huge boost for exports and tourism. Insofar as the small depositor doesn’t benefit directly from that developement, the social safety net can and should be shored up from that developement to meet their needs.
Worman 03.21.13 at 1:04 pm
“Devaluation would only destroy the purchasing power of savings on the world market. ”
Only?
“Unless Cyprus is heavily dependent on imports for necessities such as food staples, that wouldn’t be a big deal to the small depositors. ”
It would be a huge deal. It would wipe out a persons life savings. Not everyone with savings is extremely wealthy, some of us have a fairly substantial amount of cash saved for the future, not bet on the property market, or bet on shares, or any other bets that you might term “prudent”. I would say a deposit in a bank is a prudent measure. The path you encourage, wipes us out. The savers. The ones who are currently paying for those who made property bets because we get no return on our savings. And you’re happy to wipe out my life savings because, why?
Pete 03.21.13 at 1:08 pm
@Glen: agreed, although I’m coming to the view that it would be good to have something like the railway, internet or biotech bubble that leaves lots of useful infrastructure even if it never pays the expected return. Sort of applies to housing bubbles unless the houses are built in the wrong place.
@Niall McAuley: remember, most of the population don’t have savings. A plan which hits income or cashflow of the bottom 50% is much more inequitable than one which hits assets.
Pete 03.21.13 at 1:10 pm
@Worman: all savings are _also_ a bet, if only that you will be alive to spend them and the world will not have imploded around your ears. As a saver myself I’m still happier with a plan that hits savers than a UK style plan where money that disabled people need to spend on food and heating is cut below subsistence levels.
Mao Cheng Ji 03.21.13 at 1:19 pm
“Unless Cyprus is heavily dependent on imports for necessities such as food staples, that wouldn’t be a big deal to the small depositors.”
But these days, with global division of labor, every country is heavily dependent on imports. Aside from local potatoes and apples, most of your food and basic necessities (or their components) are imported. So prices are going to rise for everybody who buy, say, as much as a roll of toilet paper. So, everyone becomes poorer.
Your best hope, as I see it, is that your labor becomes so cheap that Mercedes-Benz (or some such) will build a big factory in your country. But they’ll only do it if they don’t expect your country to recover for a long time. There seems to be some catch-22 situation here.
Worman 03.21.13 at 1:32 pm
@Pete: I take your point, but Glen sounds as if he is happy with a systematic liquidation of anyone who has accrued wealth, at any point. To me, it doesn’t sound as though he is only talking about Cyprus, or the special situation they’re in, it sounds as though he would prefer it to happen in the UK, right now. The stability we enjoy in the UK will collapse if this is something that is sanctioned. We do enjoy stability, and being poor in the UK is relative. See Zimbabwe style poor.
rf 03.21.13 at 1:33 pm
“remember, most of the population don’t have savings. ”
No but they have debt. Wouldnt they be affected if those loans are fixed to the cpi or currecny index? (which afaict they are)
rf 03.21.13 at 1:39 pm
This is what I was thinking. Number 5 (Iceland gave debt relief)
http://studiotendra.com/2012/12/29/what-is-actually-going-on-in-iceland/
also number 7 on Icesave (they are arguing over interest rates to the UK and Dutch, but wil be paying the 5 billion at least)
I’m not an economist so feel free to correct my interpretation
Glen Tomkins 03.21.13 at 1:45 pm
Worman,
Devaluation of currency is not the same as inflation. A massive devaluation would make your money you have in a savings deposit worth considerably less on the world market, but not on the domestic market of goods and service. So, imported Italien shoes are now beyond you (they give you corns anyway, so good riddance), but your rent doesn’t go up.
Hyperinflation would destroy the value of savings even within the domestic economy, and yes, that would bring undeserved misery on people who don’t deserve it, so I’m not for hyperinflation. I don’t know anyone who is, so you’re pretty much kicking a straw man when you denounce the red revolutionaries you imagine want to reduce your life savings to nothing. Your life savings are infinitely more at risk from contagion secondary to the activities of the banksters playing at bubble-making with the excess wealth of the wealthy, than from any bomb-throwers such as my humble self. It is in your clear self-interest to have that excess wealth burned off harmlessly, or better yet, extracted as taxes before it can accunmulate in dangerously large pools, rather than let it inflate bubbles whose bursting actually does threaten your life savings.
Mao Cheng Ji 03.21.13 at 1:56 pm
“but your rent doesn’t go up”
Most of the locals probably own, and some (perhaps a significant number) of them took foreign-currency loans, because a swiss franc loan had a very attractive interest rate. A devaluation will ruin those.
Trader Joe 03.21.13 at 2:16 pm
Glen @94
Can you think of any major devaluations of the size likely to be involved here – say a minimum of 50% ….that didn’t result in a commesurate level of inflation and/or hyperinflation? Its a darn hard genie to keep in the bottle. Typically the first devaluation is one of several.
There may have been one, but I’m struggling to think of it….Maybe Italy in the early 90s, but I don’t think that devaluation was as large as we might have here.
Mao Cheng Ji 03.21.13 at 2:28 pm
Whoa, it’s even worse than I thought:
http://www.baltictimes.com/news/articles/27860/
“In Hungary and Poland, almost two-thirds of all mortgages were denominated in Swiss francs or euros last September, according to UniCredit Strategic Analysis. In Romania, 94 percent of mortgages were in euros. Baltic homeowners heavily borrowed in foreign currencies as well.”
94% of all mortgages in euro; here devaluation would probably cause some serious riots…
JW Mason 03.21.13 at 3:33 pm
The more I think about it, the more annoyed I am by this post.
First, because by focusing on this limited set of choices, it obscures from view all the earlier choices that got us here. It suggests a vision of the world where financial crises just happen, and the authorities are hard-working servants trying to do what’s best for everyone in a kind of natural disaster. Whereas in fact it’s Maynard and his bosses who created this mess in the first place.
Second, by putting you in the shoes of a national decision-maker, it papers over the fact that the ECB has it entirely inits power to act as lender of last resort without any contribution from depositors or national governments. It is also a choice by the ECB not to do so. By focusing attention on the choices in Nicosia, the post keeps the choices made in Frankfurt offstage and out of view.
Third, even within the frame it sets for itself, it’s completely unhelpful. The specific feature of the Cyprus plan that got the most criticism was the choice not to respect the normal seniority of bank liabilities, but instead impose costs on guaranteed deposits without first wiping out unguaranteed depositors and other creditors. If there’s one part of the plan that looked like a dumb idea, that was it. So how does this post show that it might be the best option out of a bad decision set? It doesn’t. Daniel Davies managed to write over 8,000 words here and literally not a single one about why taxing small deposits might a good idea. Neither when you are offered the choice at 25, nor when you make it at 37, nor anywhere else, does Maynard say a single word in defense or explanation of what the choice that was actually made. In that sense, the whole post is an exercise in misdirection.
It’s like I ask you why you just ran that red light, and you give me 8,000 words — very witty words, to be sure — on whether we should stop for gas now or later, and why driving is better than taking the bus.
John Quiggin 03.21.13 at 3:39 pm
I’ll defend DD on this, since I went straight to the solution of not taxing the guaranteed depositors, and won.
Regardless of the CYOA, reneging on deposit insurance seems to me not only to be self-evidently a lunatic idea, but precisely the opposite kind of lunacy to that I would have expected of the ECB etc.
The fact that there has been no widespread panic elsewhere means nothing. A bailout can’t be organized overnight, and any future bailout talk anywhere in the EU will now precipitate either a bank run or an indefinite bank holiday – disastrous either way.
It seems as if the Troika are now expressing the prejudices of the least informed sections of the Northern European electorate, rather than following any coherent plan.
JW Mason 03.21.13 at 3:44 pm
JQ, I don’t think that’s a defense. As you say,
reneging on deposit insurance seems to me not only to be self-evidently a lunatic idea, but precisely the opposite kind of lunacy to that I would have expected of the ECB etc.
Now what DD says he is doing here is
trying to help people understand how policies get made from the inside, and how something that looks like a dumb idea can often be the best choice out of a bad decision set.
And yet he tells us exactly nothing on what might have caused this dumb — indeed, as you say, lunatic — seeming idea, to be adopted. So at best, the post completely fails in its stated purpose.
JW Mason 03.21.13 at 3:53 pm
Incidentally, it seems pretty clear — at least if the FT’s coverage can be trusted — that the decision to renege on deposit insurance came from the Cyprus side, and was made because taxing the uninsured deposits too heavily would threaten Cypriot banks’ business model as centers for tax avoidance and money laundering. In other words, it was a decision to favor the particular interests of the banking sector over the broader public interest in financial stability. but that’s exactly the kind of *political* factor that this post makes invisible.
Sebastian H 03.21.13 at 4:07 pm
I’m not sure this contradicts what JW Mason is saying but we should be clear that “Cyprus thought of it” isn’t a good defense of the ECB et al.
They were negotiating to loan Cyprus money if Cyprus could come up with some other money. They were doing this to avoid an ugly banking crisis. When Cyprus proposed to have insured deposits get hit, they should have said: our goal is to avoid a bank crisis not precipitate one or make future ones in other countries more likely. Our loans won’t get to you with that proposal either.
The fact that their actual response appears to be: that looks ok, move forward, is really troubling.
Rich Puchalsky 03.21.13 at 4:09 pm
“The more I think about it, the more annoyed I am by this post.
First, because by focusing on this limited set of choices, it obscures from view all the earlier choices that got us here.”
But we sort of went through this a good deal for the first DD choose your own adventure post. These things depict events from a particular point of view — not from the point of view of an elected political leader, or from that of a popular protest leader. They’re done from the point of view of a powerful but essentially mid-level functionary, for whom all of the political constraints are essentially fixed constraints.
I would be more annoyed by that if the actual political leaders in Europe didn’t treat those constraints in the same way, as nothing that they could possibly lead anyone to change. Or if the leaders in America didn’t behave the same way. A piece like this can be annoying since it seems to validate their incompetence and probable hidden motives for not wanting to do anything. But it doesn’t really if you look at it more closely.
JW Mason 03.21.13 at 4:15 pm
Rich P.,
Yes, I realize this is written from that particular point of view. I think it’s worth asking whether adopting that particular point of view is helpful here, but that’s debatable. What’s not debatable is that the post fails to clarify the picture even from its chosen point of view. The biggest single question about the choice made *at the level DD is talking about* is why they tried to renege on deposit insurance. And he says nothing about that.
Rich Puchalsky 03.21.13 at 4:27 pm
“why they tried to renege on deposit insurance”
I assumed that was a constraint of the hidden political masters. The adventure includes this, as part of an official message from the troika:
“We strongly recommend that you consider a one-off tax on deposits, to take advantage of the considerable offshore financial services industry. We would like to discuss this at your earliest convenience.”
and this
“After the meeting, Maynard explains:
“They’ve left it this long because they wanted to coincide with the bank holiday. They think that the deposit tax is a clever solution. I think they would rather like to use Surpyc as a testing ground; if creditors lose money here and the world doesn’t fall apart, then it sets a precedent which might be rather useful elsewhere.—
Followed by more bits about political resistance to just wiping out the uninsured people.
So the message seems to be that if your political leadership sucks, there may not be a technocratic solution that can save you.
Random Lurker 03.21.13 at 4:28 pm
@JW Mason 101
“taxing the uninsured deposits too heavily would threaten Cypriot banks’ business model[…] it was a decision to favor the particular interests of the banking sector over the broader public interest in financial stability.”
How much of Cyprus economy relies on banking? I think a lot. It might well be that in Cyprus, what is good for the banks is good for the nation (at least in the short term).
I agree that the really stupid thing is that the ECB isn’t just printing a lot of € though.
By the way, here in Italy Monti’s government passed a law last year that forced every transaction over very small sums (I think 1000€) to be made through banks, not by cash, allegedly to check tax evasion.
Now some people are wondering if the real purpose of the law wasn’t to force people to keep high saving accounts in the banks.
Nine 03.21.13 at 4:32 pm
Worman@87 – “I would say a deposit in a bank is a prudent measure”
It is only prudent because there’s someone else out there assuming leverage & taking risks – such as speculating on real estate – that the “prudent” often deem stupid. Banks don’t generate interest by magic, current and perennial scandals notwithstanding .
JW Mason 03.21.13 at 4:50 pm
Rich,
You’re right, my wording was too strong. But if the question is, “why did we get policy X,” then saying “well, imagine if you were a mid-level functionary, and your bosses told you to do X. Wouldn’t you have to do X?” isn’t much of an answer.
Random Lurker:
It might well be that in Cyprus, what is good for the banks is good for the nation
I don’t think so. And I think that the insistence that there is no conflict between the interests of the financial sector and the public interest, might be the most pernicious single idea in this whole crisis.
Random Lurker 03.21.13 at 4:56 pm
@JW Mason
In a comment that is apparently in moderation limbo, I cited an estimate that says that the banking sectors provides 45% of Cyprus’s GDP, and that a capital flight could cause a drop of something like -20% of GDP (I don’t repost the link because I fear to be moderated again, however it’s at Yves Smith’s blog).
JW Mason 03.21.13 at 4:57 pm
Besides which, it seems clear that the pressure to tax small deposits did not come from the Troika:
Random Lurker 03.21.13 at 5:01 pm
“there is no conflict between the interests of the financial sector and the public interest”
But the real problem is the interest of the creditors (small savers included), otherwise the ECB could just drop lots of €€ (plural of €) and solve everything. The financial sector in itself is just ancillary, IMHO.
JW Mason 03.21.13 at 5:04 pm
RL-
Yes, there will be costs to ordinary Cypriots if the country loses its status as an offshore banking center. But there will also be costs if their pension funds are handed over to Russian gangsters. And I don’t think the distribution of the two sets of costs is identical.
Rich Puchalsky 03.21.13 at 5:08 pm
“You’re right, my wording was too strong. But if the question is, “why did we get policy X,†then saying “well, imagine if you were a mid-level functionary, and your bosses told you to do X. Wouldn’t you have to do X?†isn’t much of an answer.”
I agree, but there we’re back to the basic limitations of the series. That’s what the answer comes down to. The series is about a functionary worrying about whether or not he’ll keep his job and/or Blackberry, not about a politician worrying about whether he or she will get re-elected.
rf 03.21.13 at 5:28 pm
“Cypriot banks’ business model as centers for tax avoidance and money laundering. “”
Where’s the evidence for this? From what I’ve seen this isn’t the case anymore
Trader Joe 03.21.13 at 5:28 pm
@111 and 112
At this point isn’t the country’s status as an offshore banking center and saving the banks essentially a ship that’s already sailed….Plan A, B and C could only ever work if done quickly.
At this point:
If the ECB doesn’t come in with 17B euros (or whatever the number) Cyprus is looking at some combination of default, taxing depositors, devaluation and exit from the Euro all to be accomplished over a fairly short time – we can be certain its status as a tax haven and money center will only last as long as it takes to get the money out.
If the ECB does come in with the Euros, they better be prepared to 100% support the outflow that will immediately follow. If there’s 90B in the banking system one can be fully certain all of the non-guaranteed depostis will flee to a safer place and a measurable portion of the guaranteed as well. Said differently – 17B was the price tag before the fact – after the fact its a considerably larger number.
rf 03.21.13 at 5:31 pm
On money laundering etc
http://www.ft.com/intl/cms/s/0/8eee4e24-8b0f-11e2-8fcf-00144feabdc0.html#axzz2NjOEo0KD
“Increasing numbers of Israeli, Canadian and UK-owned businesses began to arrive after the government adopted the EU’s current anti-money laundering directive the same year, making the island a more respectable place to do business.â€
Trader Joe 03.21.13 at 5:42 pm
rf
The 30 to 50 billion Euros Russians have deposited in Cyprus isn’t there for the sunny weather…while it may be better than it was – the size of the banking industry didn’t get to be 5x larger than the country’s GDP because they had the best free toasters. Laundering, tax avoidance, lax controls….whatever the purpose, the money’s there.
http://uk.news.yahoo.com/cyprus-much-russias-investment-corrupt-195100383.html
rf 03.21.13 at 5:45 pm
Here’s another take on Russian money
http://trueeconomics.blogspot.co.uk/2013/03/832013-cyprus-russian-bail-in-dilemma.html
According to the Min Fin, as of end of 2012, Cyprus banks deposits remain around EUR70 billion and less than EUR30 billion of these are accounted for by foreign depositors, with Russian deposits standing around EUR15 billion. The problem is that all of the above figures include deposits in Cyprus-regulated pure Russian banks, such as division of VTB, for example, which are not going to be covered by the bailout or the haircuts.
A recent estimate by the Euromoney puts non-domiciled Russian deposits in Cyprus closer to 7-10% of total deposits or EUR5-7 billion.
Confusion aside, it is relatively clear that so-called Russian ‘oligarchs’ funds, while prominent in the overall deposits volumes, are neither the source of the Cypriot problems, nor a source for the sustainable solution to that problem. Even a 50% bail-in of these would not deliver (given the existent EUR100,000 guarantee on deposits, and the fact that large volumes of the Russian money is most likely held in the names of EU-registered entities) Cypriot system to health or even to contribute more than EUR2-2.5 billion to the EUR17-17.5 billion bailout.
Trader Joe 03.21.13 at 5:56 pm
“Confusion aside, it is relatively clear that so-called Russian ‘oligarchs’ funds, while prominent in the overall deposits volumes, are neither the source of the Cypriot problems, nor a source for the sustainable solution to that problem. Even a 50% bail-in of these would not deliver (given the existent EUR100,000 guarantee on deposits, and the fact that large volumes of the Russian money is most likely held in the names of EU-registered entities) Cypriot system to health or even to contribute more than EUR2-2.5 billion to the EUR17-17.5 billion bailout.”
I fully agree
The Russians may choose to help, but its not a problem of their own making and they must weigh protecting the assets of their ‘citizens’ (generously used) against inserting themself into a financial knot that won’t be easily untangled.
rf 03.21.13 at 5:58 pm
Just to be clear..everything underneath the link was from the link (not my own thinking)
dsquared 03.21.13 at 9:43 pm
The more I think about it, the more annoyed I am by this post.
Annoyed?
Not just “it didn’t cover some issues that I think are important”, not “well I disagree with this bit”. Not “I wish that instead of writing something interesting which had an internal structure, you had done a boring leftier-than-thou polemic, rather along the lines of my own godawful unreadable weblog”.
You’re actually “annoyed” that I decided to add to an existing series which is specifically about seeing things from the point of view of the Eurogroup/troika/etc, in order to understand their perspective. You’re actually “annoyed” that I decided to try and add some value, based on the quite deep specialist knowledge I have, rather than join the Avogadro’s number of internet commentators bloviating about their preferred Utopian solutions and castigating anyone who doesn’t agree with their absolute certainty.
Have a bloody word with yourself, will you? Your ideas about the relative obligations of the world to provide you with exactly what you want, versus your own obligation to be polite or pleasant to other people, are very badly calibrated.
Andrew Burday 03.22.13 at 2:14 am
JWM, d^2, speaking as someone who has learned some things from each of you, could you both please try to back off a little on this one? Trying to put together a structured narrative of all the possible outcomes of the Cyprus crisis is really hard. Because it’s really hard, you may have made some unwarranted assumptions about how it can play out. And because it’s really hard, some possibilities that seem reasonable and just in principle may not realistically be in play. Either, or both.
I am obviously assuming that dsquared (121) really is Daniel.
JW Mason 03.22.13 at 2:43 am
Andrew burday, you are right. And I already admitted I was too harsh on this post (tho I think the general thrust of my critique isn’t wrong. )
What I’m really thrilled by? Dsquared’s reference to my “godawful unreadable weblog.” Which implies he’s at least made the effort to read it, which makes it all worthwhile.
JW Mason 03.22.13 at 3:18 am
I should add, I have great respect for dsquared’s specialist knowledge, I follow his stuff quite closely. (In part to better educate my students, haha yeah I know, poor them.) but I continue to believe, there’s a conflict between the interests of capital, commanding heights = owners of financial assets, and the interests of the rest of us.
Glen Tomkins 03.22.13 at 3:22 am
Trader Joe @94,
My understanding is that the alternative to withdrawing from the Euro, which, yes, probably means reversion to a currency that will devalue relative to the Euro, is that Cyprus accepts:
1) assumption of a massive sovereign debt and supervision of its fisc by outsiders who will impose draconian austerity
2) continuation in a currency that will continue to stifle exports and tourism
That alternative seems likely to work worse devastation on even the sort of people Worman is concerned about, small bank depositors, than even an inflationary devaluation of their bank deposits. If these people are still employed, the compensation for their employment is more important to them than their deposits,and the alternative to exit on offer seems likely to devastate their earnings. If they are retirees, the social safety net is presumably more important to their well-being than their deposits, and the alternative to exit practically guarantees systematic devastation of the social safety net.
In general, I wonder about the directness of the relationship between devaluation and inflation. Even if they correlate to a high degree in the recent historical record, given the reluctance of conventional wisdom to countenance elective devaluation as anything but a last resort (and therefore the devaluing nations are already well in the soup before devaluation occurs), and the fact that involunatry massive devaluation would result from such nations already being in the soup, if you tell me that nations that have seen massive devaluation are then beset by inflation, well, I’m sure such nations are beset by all sorts of badness during such intervals, but these other badnesses might have caused both the devaluation and the inflation, rather than devaluation causing inflation.
In this case, Cyprus is pretty clearly in the soup. It may be forced to leave the euro later anyway, even if it tries to comply with forced austerity in the short-term. It will thereby end up with the worst of both worlds, whatever harm exit and devaluation might cause, plus the austerity pounding the pain caucus is howling for. What’s the downside to Cyprus just skipping the beating, and risking exit alone?
derrida derider 03.22.13 at 6:26 am
The point is that whatever happens from here Cyprus is finished as a financial centre anyway – those Russian biznizmen will move every last Euro out just as soon as they can now. Commonsense says you may as well confiscate it from them now if you can.
If random lurker is right that will cost Cyprus 20% of GDP then so much the worse for GDP. Firstly because much of that Gross (very gross, actually) Product is not strictly Domestic in the sense that it accrues to actual Cypriots, and secondly because much of it which is Domestic in that sense accrues to a small elite. The WELFARE costs of that fall in GDP are likely to be far smaller than the welfare costs of trying a massive internal devaluation.
Chaz 03.22.13 at 7:32 am
I liked it. And I like how, just like the last time, the unilateral default option just goes immediately to “You lose” with like a tenth of the exposition and detail that the other routes get. It basically says, “I think that’s a stupid idea so I’m not going to badger you with a bunch of extra steps, because we both know I’m going to make you lose in the end.”
One thing that would have been nice to examine is the other conditions which were attached to the bailout, such as the austerity measures. Does anyone have a good idea of how damaging they will be relative to the deposit confiscation which is getting all the press?
I think the best way to satisfy Daniel’s critics is for him to make a choose your own adventure where you play as Angela Merkel and Italy has begun monetizing its national debt. Or perhaps JWM could make one and then Daniel could go say it sucks.
rf 03.22.13 at 9:50 am
Very reluctantly sticking my oar in here, but to clarify
(1) multiple reports have shown Cyprus is not a hub of money laundering (and has a better recent history on the issue than Germany and Holland) (2) Not all Russians are gangsters (3) Not all Mediterranean people are lazy/feckless/corrupt (4) Cypriot problems have come from investing in Greek debt (5) Russian holdings are less than claimed above
This took me 20 minutes to discover on Google. Can people please stop regurgitating the reactionary narrative and stop trading in lazy stereotypes
“JWM, d^2, speaking as someone who has learned some things from each of youâ€
And now you can add me to that list!
rf 03.22.13 at 10:37 am
“but I continue to believe, there’s a conflict between the interests of capital, commanding heights = owners of financial assets, and the interests of the rest of us.”
Well there is no ‘rest of us’, so show me. Show me exactly what a small country has to do to compete in the global economy, while retaining its purity. Show me what their actual choices are. This isn’t about scoring political points in the US, it’s about enabling people who don’t live in the core countries to actually have a decent standard of life. Most importantly it involves trying to understand why their economies have evolved as they have without moralizing (or making stuff up)
Trader Joe 03.22.13 at 11:50 am
Glen @125
I think we’re in agreement that Cyprus is “in the soup” which is a pretty nimble description of the extent of their problems both internal and external.
I took your inital comments in the context that devaluations didn’t necessarily hurt domestic holders of currency since they continue to primarily buy and sell goods in that currency (i.e. can’t afford Italian shoes, but can pay their rent). My goal was only to point out that economies being linked as they are- that devaluations are routinely married with comparable inflation.
I don’t know whether the linkage is cause-effect or simply the byproduct of an already distressed country taking that one last step to fend off creditors (as you note). Whichever the case – I suspect the price of goods, is going to destroy any savings the policy makers don’t steal and that resultant inflation will stress current earnings which will lead to a lower GDP/standard of living.
They still have the weekend to find a silver bullet, but by all appearances the ship of “saving” Cyprus has already sailed, any solutions will be attempts to minimize collateral damage and produce “wounded” rather than ‘wiped out’ citizens. Europe seems content to take the view that Cyprus’ banking problems are self inflicted and its hard to disagree with that. I can’t see where anyone will be spared harm – its only a matter of degree.
Barry 03.22.13 at 12:32 pm
Glen Tomkins @125:
” My understanding is that the alternative to withdrawing from the Euro, which, yes, probably means reversion to a currency that will devalue relative to the Euro, is that Cyprus accepts:
1) assumption of a massive sovereign debt and supervision of its fisc by outsiders who will impose draconian austerity
2) continuation in a currency that will continue to stifle exports and tourism”
Outsiders who (i) will run the economy strictly as a financial extraction colony, with massive shrinkage of the economy and imiseration of its people as zero cost to the outsiders (actually, a positive cost, since the power of the people will shrink) and (ii) who will almost certainly not improve the debt to GDP ratio, since they don’t care and (iii) have repeatedly proven that they either won’t learn or won’t care.
rf 03.22.13 at 1:00 pm
” My understanding is that the alternative to withdrawing from the Euro”
And what is the reality of leaving the Euro and probably the EU, considering we’re talking about an island of under 1 million in the Eastern Mediterranean with a history of foreign interference and hotly contested internal political disputes (and living memory of domestic coups )?
We want to talk about international oligarchs, Russian gangster and the whole sheebang and imagine these relaities dissapear on leaving the Euro?
jb 03.22.13 at 7:14 pm
rf @128
While I agree with some of what you say, I also have difficulties with some of your assertions
1. If that is the case, please explain to me how the assets of Cyprus’ banking system are several times the GDP. While I can believe the problem is exaggerated, the banking system clearly attracts several people who want to avoid paying taxes, including a non-trivial number of Russians who are involved in some shady deals. It seems to me like you are whitewashing the problem.
2. No one ever said that all Russians are gangsters. However, organized crime is quite powerful in Russia, and many influential people there are involved with it.
rf 03.22.13 at 7:34 pm
Well I’m not a banker/economist etc, but .. my impression is:
Money laundering is irrelevant. It’s a global issue which effects all countries and Cyprus has fully met all EU requirements in relation to it. You can find money laundering and criminality in any economies banking system. (It’s a narrative used to attack Merkel in the German election –‘she’s bailing out money laundering good for nothings’) So the burden of proof is on those who say it was a major cause of the Cypriot bank failures
Russian money in Cypriot banks has been continually overstated (more than tripled in initial reports) So all I’m saying is let’s see evidence of how much Russian money is involved (And how much belongs to gangsters if that’s your thing. I don’t think it’s particularly important either)
Most of the problems as they stand are from regulators not able to cope with an influx of deposits into the main banks over the past decade, and those banks loaning heavily to Greece. (And then losing out on Greek debt restructuring)
Once again, all disclaimers above .. but I’ve had no one dispute any of this, so….
(I think a more humble approach would be that we dont really know now, but the kneejerk reaction shouldnt be to assume things that are probably not true because you want to blow up the Eurozone – see Glen T above)
rf 03.22.13 at 7:40 pm
There are obviously larger systemic issues with the eurozone which I’m not qualified to pontificate on..so I don’t think all this talk of crony capitalists/russian mobsters etc is particularly relevant
Substance McGravitas 03.22.13 at 8:03 pm
I suppose the bright line you can draw between European gangsters and European bankers is…give me a minute…
rf 03.22.13 at 8:05 pm
Also..see here
http://euronomist.blogspot.co.uk/2013/03/cyprus-bail-out-bail-in-and-laundering.html
click through to the Matina Stevis article, and the other posts on the side
rf 03.22.13 at 8:57 pm
“but I’ve had no one dispute any of this, so….”
Although I do accept this might be a result of the Watson Ladd phenomenon..that people aren’t disputing it due to the idiocy of my argument rather than coherency of my thinking
Trader Joe 03.22.13 at 8:57 pm
The news today suggests the picture may have brightened just a little bit. Some Greek banks, which at least currently have access to the various ECB support mechanisms, have agreed to acquire some of their Cypriot counterparts which at least will put a somewhat larger portion of assets under a somewhat better protective umbrella.
If this sounds like two drunks holding each other up as the exit the bar it should (and we’re not talking about the We Are Young anthem either).
Should be an interesting weekend
jb 03.22.13 at 11:08 pm
I can believe that the problem of money laundering has been exaggerated, but to say it has nothing to do with the problem seems wrong. (Although I don’t know much about this, so you could be right).
Additionally, it is quite possible that the EU requirements on money-laundering are too weak.
My impression is that organized crime has a great deal of power and influence in Russia (and Eastern Europe more generally). This was true to some extent in the late Soviet period, but it really took off with the fall of the Soviet Union and the botched transition to a market economy. During the privatization period, many people gained control of state companies through various underhanded and corrupt means, and some of those people were connected to organized crime. Additionally, the collapse of the economy in the 1990’s and the fall in living standards led to a general breakdown in law and order. The government was (and still is) quite corrupt. All of this, of course, helped criminal organizations become more and more powerful. The line between “legitimate businessman” and “gangster” became quite thin. Putin may have reduced this to some extent, but he seems more focused on cracking down on the opposition, and there almost certainly are powerful people in Russia who have relationships with organized crime.This is not due to some inherent villainy on the part of the Russian people, but is largely the product of history. Indeed, had the United States or Britain gone through what Russia has gone through, they would have similar problems.
Given that there are many wealthy Russians with significant assets in Cyprus, and that the line between “gangster” and “legitimate businessman” in Russia remains thin, some of said Russians are probably involved in less-than-savory activities.
This, of course, does not justify the current tax on depositors.
jb 03.22.13 at 11:10 pm
The above is my impression of the situation. Again, it is possible that I am wrong here.
rf 03.23.13 at 12:38 am
Irrelevant to the solution, not *nothing* to do with the problem (though probably very little). The Eurozone should be run to the benefit of all its members, not just the strongest ones. If we’re going to turn this into a morality play, well….and if we’re going to turn it into a battle between two nihilistic ideologies, well..
Anyway I guess I’ll leave it there, but this by Laura Noonan (who reported on Ireland from 2007-11, so has perspective/context etc..in other words sense.. which seems to be so lacking in ‘the blow up the world’ faction) is a good rundown
http://www.reuters.com/article/2013/03/22/us-cyprus-banks-idUSBRE92L0LY20130322
Chaz 03.23.13 at 1:40 am
“1. If that is the case, please explain to me how the assets of Cyprus’ banking system are several times the GDP. While I can believe the problem is exaggerated, the banking system clearly attracts several people who want to avoid paying taxes, including a non-trivial number of Russians who are involved in some shady deals.”
“I can believe that the problem of money laundering has been exaggerated, but to say it has nothing to do with the problem seems wrong.”
The bank insolvencies in Iceland and Ireland were not caused by money laundering. Why do you assume that it is the cause of Cyprus’ insolvencies? The United States, United Kingdom, Spain, and many other countries had massive bank insolvencies too. None of them were due to money laundering. Really, I don’t see how money laundering could cause these sorts of problems; by definition people trying to launder money have money, and it’s very liquid too!
The explanation rf offered, that Cypriot banks were loaded up with Greek bonds and mortgages and Greek deposits, and became insolvent when the Greek gov’t (and surely many Greek homeowners) defaulted, sounds very plausible to me. Greece is far larger than Cyprus, so it alone could explain the enormous pool of deposits. If Iceland can blow up due to its exposure to the UK, then surely a country loaded up with Greek debt can expect trouble as well.
With respect to Russia, the difficulty in drawing the line between businessmen and gangsters means that if you’re going to condemn people for servicing gangsters, then you basically have to insist that they not do business with any Russians at all (or maybe just the wealthy ones and the government?). Are we really going to say that countries may not let their companies do business with Russians, or should be punished for having done so? If so then will we be throwing the entire German government in prison, or just Schroeder?
wkwillis 03.23.13 at 7:54 am
The reason people will loan to a country after they default is that the alternative is to loan to another country before they default.
jb 03.23.13 at 4:17 pm
“Are we really going to say that countries may not let their companies do business with Russians, or should be punished for having done so?”
Well, no. I understand the difficulties involved in doing business with the Russians, and I do not wish to condemn Cyprus for that. I certainly do not see Cyprus as wicked or anything like that.
Also your explanation of what happened in Cyprus makes a great deal of sense.
And I do not support the current German policy towards Cyprus, particularly not the deposit tax.
rf 03.24.13 at 2:25 am
Thank you for articulating that so much better than I could Chaz, and for enabling facts to triumph over nonsense..yay!
rf 03.24.13 at 2:26 am
‘Nonsense’ not directed at you jb
Pete 03.24.13 at 6:13 pm
“The bank insolvencies in Iceland and Ireland were not caused by money laundering.”
While ’caused’ and ‘laundering’ aren’t applicable, ‘contributed to’ and ‘capital sloshing’ I think is. Iceland had a far larger banking sector than it needed for domestic purposes – money in from one set of foreigners chasing high interest rates, lent out to mortgagors in another country. Ireland had gone for low corporate tax and a domestic property bubble.
I’m coming to the view that *completely* unrestricted international movement of capital is both destabilising and contributes to tax avoidance.
Bruce Wilder 03.24.13 at 8:23 pm
If you have accumulated a pile of money of a certain size, there’s not a lot you can do with it, other than employ it in forms of usury and in Ponzi schemes.
Underlying all of this is a basic mis-match in the global economy between production and exchange of value for value, and the flow of cash and financial claims, with the out-sized financial claims of an elite few driving extreme income inequality and an economy of parasitic extraction accelerated by financialization.
I suppose it is basic human nature to be both want to be the bad guys and to identify and blame the “bad guys”. Contra Krugman, economics largely is a morality play, just not one where suffering is redemptive.
I don’t think you have to call rich Russians, gangsters, to recognize that they are benefitting from an extractive resource economy, which generates a lot of surplus cash, which they re-circulate through Cyprus (among other places), and this surplus of cash has driven a lot of foolish lending, because, frankly, there cannot possibly be sufficient positive-sum investment opportunities in a world in which income inequality is maintained at such an extreme tilt (relative to underlying production of valuable goods).
A pathological degree of income inequality drives the accumulation of “wealth” in cash and financial securities, and the accumulation of money seeking financial securities (the “savings glut” driven by income inequality) drives financialization and the creation of more and more financial securities, which, lacking sustainable claims in capital and real property, slosh over into usury and Ponzi schemes, and various attempts to take over the state’s fiscal capacity.
Any sensible reforms will crash much of the world’s accumulated financial “wealth”. Too bad, so sad.
Barry 03.25.13 at 12:02 pm
When people talk about how Cyprus having a large financial system relative to its GDP was a fault, they’re saying more than they know.
Deposits do not have to be 8x GDP for a financial system to be far larger than the government can bail out/stabilize.
This is an argument for restraining the size of financial systems in general. Any highly financialized economy might in general be an economy on the verge of collapse.
Tim Wilkinson 03.25.13 at 11:52 pm
##148-150 I would anticipate robust opposition to any such proposals. The finance lobby’s motto is ‘never say die’.
Trader Joe 03.26.13 at 3:51 pm
@151
That turns out to be partly true…the agreed solution was to kill off Bank Popular (Laiki), keep Bank of Cyprus “alive” and then spawn a zombie bank to devour unguaranteed deposits over 100k euros.
Also watch for the new book – “Enjoying Cyprus on 100 euros a day”, the new daily cash withdrawal limit.
Looks like some concoction of #5 and #17 above were the closest outcomes…at least so far.
Comments on this entry are closed.