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.
“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.”
Evidently it is indeed doubtful whether Cyprus will ever be able to repay its debts.
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.”
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.
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).
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- Insanity, Oddities and Dark Clouds in Credit-Land
Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more. The perfect investment for modern times: interest-free risk! Illuustration by Howard...
- US Economy – Something is not Right
Another Strong Payrolls Report – is it Meaningful? This morning the punters in the casino were cheered up by yet another strong payrolls report, the second in a row. Leaving aside the fact that it will be revised out of all recognition when all is said and done, does it actually mean the economy is strong? Quo vadis, economy? Image credit: Paul Raphaelson As we usually point out at this juncture: apart from the problem that US labor force participation has...
- Investing in Gold in 2016: Global Paradigm Shifts in Politics and Markets
Crumbling Stability In the past few months, we have witnessed a series of defining events in modern political history, with Britain’s vote to exit the EU, (several) terror attacks in France and Germany, as well as the recent attempted military coup in Europe’s backyard, Turkey. Global stability continues to be undermined Uncertainty over Europe’s political stability and the future of the EU keeps growing. These worries are quite valid, as geopolitical...
- Trump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system. This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
- The Great Stock Market Swindle
Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success. Obviously, the first to tap into an unmet consumer demand can unlock massive profits. But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven. Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
- Bank of England QE and the Imaginary “Brexit Shock”
Mark Carney, Wrecking Ball For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame). This is how Mark Carney is seen by...
- Why Americans Get Poorer
Secular Stagnation OUZILLY, France – Both our daughters have now arrived at our place in the French countryside. One brought a grandson, James, now 14 months old. He walks along unsteadily, big blue eyes studying everything around him. Put to sleep by monetary lullaby! This is what children look like approximately five minutes into a rant on the Fed's policy mistakes. It never fails! Photo credit: Jack Weid He adjusted quickly to the change in time zones. And...
- An Old Friend Returns
A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here. Hello, old friend. Professor X and Magneto staring each other down in the plastic...
- The Fabian Society and the Gradual Rise of Statist Socialism
The “Third Way” “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw An emblem of the Fabian Society: a wolf in sheep's clothing The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
- Retail Snails
Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example. Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg We'll make an...
- The Fed’s “Waterloo” Moment
Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here). He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
- Good Money and Bad Money
Confidence Gets a Boost OUZILLY, France – Last week’s U.S. jobs report came in better than expected. Stocks rose to new records. As we laid out recently, a better jobs picture should lead the Fed to raise rates. This should cause canny investors to dump stocks. Canny investors at work (an old, but good one...) Cartoon via Pension Pulse But the stock market paid no attention. It follows logic of its own. Headlines told us that last Friday’s report “boosted...