Unsustainable Debt Load

A rift has emerged between the eurocracy and the IMF over the pending bailout of Cyprus. The EU's bailout mechanism ESM stipulates that the IMF must agree that a country applying for help will achieve debt sustainability under the proposed bailout plan. The intent behind this stipulation is clear: it allows the eurocracy to point to the IMF's demands when the austerity measures demanded from an aid recipient are deemed too harsh. In addition, the IMF has well-established procedures and trained teams that enable it to exercise a reasonable amount of control over such programs.

The IMF is however not overly happy with being involved in the euro area's bailouts. For one thing, Europe is seen as rich enough to handle these problems on its own. For another, the ironclad determination to keep everyone a member of the euro area is so pronounced that even complete basket cases like Greece keep getting bailed out no matter what.

 

Apparently the IMF fears that Cyprus could become a similar case.

Der Spiegel reports:


“When euro-zone finance ministers meet in Brussels on Monday, a welcome guest will be missing. Christine Lagarde, 57, the French managing director of the International Monetary Fund (IMF), is currently unwilling to discuss giving aid money to ailing euro-zone member Cyprus. For some time now, the Americans in particular have been eyeing the IMF's involvement in Europe with suspicion, causing the Frenchwoman to hit the brakes time and again. "I have no mandate for that" is a statement that the euro-zone finance ministers have heard only too often from Lagarde.

As such, it remains to be seen whether the IMF will ultimately participate in a loan program for Cyprus. A number of countries, Germany first and foremost, have said that IMF participation is crucial. The statutes of the European Stability Mechanism (ESM), the euro zone's €700 billion ($931 billion) permanent backstop fund, stipulate that the IMF must rubber stamp a country's debt sustainability before any cash can flow.

But this time around, the IMF is hesitating. A member of the troika which is currently negotiating the bailout deal with the Cypriot government, the IMF has an entirely different notion as to how the program should look.

In particular, there are differing points of view over whether the Mediterranean island nation will ever be able to repay its debts. According to current forecasts, the Cypriot debt load will grow to 140 percent of its gross domestic product (GDP) by the year 2014. The IMF believes that such a sovereign-debt level is unsustainable over the long term.”

 

(Emphasis added)

Evidently it is indeed doubtful whether Cyprus will ever be able to repay its debts.

 

Bank Recapitalization

Moreover, the IMF thinks that the bailout of the country's banks should be handled separately, by means of an ESM recapitalization. Then the ESM would share the risks of the bank rescue – which would make the sovereign debt problem look commensurately smaller.

The euro-group doesn't want that because the mooted European banking regulator hasn't been established yet. The IMF also insists – rightly – that both junior and senior bondholders and even depositors should bear losses. This however would mean that the Greek 'PSI deal' was not so 'unique' after all, which would create a quandary for the EU.

Keep in mind here that one of the main reasons why the Cypriot banks are insolvent is that they held Greek sovereign debt which they had to write off twice. The money-laundering allegations are also a bone of contention, with the IMF surprisingly concluding that they are largely a load of hooey, something the Northern euro-zone countries apparently don't want to believe.

 

“Another issue has also caused an air of mistrust to creep in between the IMF and a number of member states. Germany, Austria, Finland and the Netherlands don't trust the findings reached by a team of IMF experts last autumn with regard to Cypriot money laundering activities. The experts from Washington came to the conclusion that Cyprus is largely playing by the book and only minor legislative amendments are required.

This doesn't go far enough for the northern countries in the euro zone. They don't just want to know whether Cypriot laws meet international standards — they want to find out whether they are actually applied. Schäuble and his counterparts from the other donor countries intend to put forward an initiative to address these concerns at Monday's Euro Group meeting. They realize that it could take months to answer these questions, but that doesn't deter them.”

 

(emphasis added)

Of course the main concern isn't really 'money laundering' anyway. That is just  a pretext. To be a 'Russian oligarch' is not a crime, per se. The fact that rich Russians seek out overseas havens to deposit some of their money in is mainly a function of political risk perceptions in Russia – there is no reason to assume a nefarious motive.

In reality, the EU centralizers want to put pressure on Cyprus to raise its taxes.  The government of Cyprus meanwhile is living from hand to mouth, by borrowing money from the state-owned electric utility.

 


 

Cyprus financing needs

The size of the putative Cyprus bailout relative to the country's GDP. The problem is that the banks are very large relative to the economy (chart via Der Spiegel).

 


 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How to Survive the Winter
      A Flawless Flock of Scoundrels One of the fringe benefits of living in a country that’s in dire need of a political, financial, and cultural reset, is the twisted amusement that comes with bearing witness to its unraveling.  Day by day we’re greeted with escalating madness.  Indeed, the great fiasco must be taken lightly, so as not to be demoralized by its enormity.   Symphony grotesque in Washington [PT]   Of particular note is the present cast of characters. ...
  • The Strange Behavior of Gold Investors from Monday to Thursday
      Known and Unknown Anomalies Readers are undoubtedly aware of one or another stock market anomaly, such as e.g. the frequently observed weakness in stock markets in the summer months, which the well-known saying “sell in May and go away” refers to. Apart from such widely known anomalies, there are many others though, which most investors have never heard of. These anomalies can be particularly interesting and profitable for investors – and there are several in the precious metals...
  • Business Cycles and Inflation – Part I
      Incrementum Advisory Board Meeting Q4 2017 -  Special Guest Ben Hunt, Author and Editor of Epsilon Theory The quarterly meeting of the Incrementum Fund's Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is...
  • What President Trump and the West Can Learn from China
      Expensive Politics Instead of a demonstration of its overwhelming military might intended to intimidate tiny North Korea and pressure China to lean on its defiant communist neighbor, President Trump and the West should try to learn a few things from China.   President Trump meets President Xi. The POTUS reportedly had a very good time in China. [PT] Photo credit: AP   The President’s trip to the Far East came on the heels of the completion of China’s...
  • Business Cycles and Inflation, Part II
      Early Warning Signals in a Fragile System [ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning] We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 - 24 months were quite large, even if their absolute levels remain...
  • Is Fed Chair Nominee Jay Powell, Count Dracula?
      A Date with Dracula The gray hue of dawn quickly slipped to a bright clear sky as we set out last Saturday morning.  The season’s autumn tinge abounded around us as the distant mountain peaks, and their mighty rifts, grew closer.  The nighttime chill stubbornly lingered in the crisp air.   “Who lives in yonder castle?” Harker asked. “Pardon, Sire?” Up front in the driver's seat it was evidently hard to understand what was said over the racket made by the team of...
  • A Different Powelling - Precious Metals Supply and Demand Report
      New Chief Monetary Bureaucrat Goes from Good to Bad for Silver The prices of the metals ended all but unchanged last week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.   Never drop silver carelessly, since it might land on your toes. If you are at loggerheads with gravity for some reason, only try to handle smaller-sized bars than the ones depicted above. The snapshot to the right shows the governor...
  • Heat Death of the Economic Universe
      Big Crunch or Big Chill Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way.   OT – a little cosmology excursion from your editor: Observations so far suggest that the expansion of the universe is indeed accelerating – the “big crunch”, in...
  • Claudio Grass Interviews Mark Thornton
      Introduction Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens. A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend...
  • Inflation and Gold - Precious Metals Supply and Demand
      Reasons to Buy Gold The price of gold went up $19, and the price of silver 42 cents. The price action occurred on Monday, Wednesday and Friday though so far, only the first two price jumps reversed. We promise to take a look at the intraday action on Friday.   File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the...
  • Precious Metals Supply and Demand
      A Different Vantage Point The prices of the metals were up slightly this week. But in between, there was some exciting price action. Monday morning (as reckoned in Arizona), the prices of the metals spiked up, taking silver from under $16.90 to over $17.25. Then, in a series of waves, the price came back down to within pennies of last Friday’s close. The biggest occurred on Friday.   Silver ended slightly up on the week after a somewhat bigger rally was rudely interrupted...
  • How Uncle Sam Inflates Away Your Life
      Economic Nirvana “Inflation is always and everywhere a monetary phenomenon,” economist and Nobel Prize recipient Milton Friedman once remarked.  He likely meant that inflation is the more rapid increase in the supply of money relative to the output of goods and services which money is traded for.   Famous Monetarist School representative Milton Friedman thought the US should adopt a constitutional amendment limiting monetary inflation to 3% – 5% per year, putting...

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com