THE REAL problem is not Cyprus, it is the euro. After a few disturbing
weeks, I would like to wrap up my comments on Cyprus and, hopefully,
turn to other issues going forward. It is astonishing that a €10 billion
bailout can keep the world spellbound for so long. But then again,
while the amount is not staggering, some of the implications are
mind-blowing.
That a small economy can be destroyed over a weekend is
in itself very scary. But Cyprus's fate was basically sealed when the
troika revealed its first version of the bailout package. That the final
outcome turned out to become even worse should not surprise anyone
following the Euro zone's past efforts at saving its project. There is
no coherent line, no apparent co-ordination of statements and the grand
plans bear the impression of having been scribbled on a napkin long
after bedtime. The results are accordingly: poor.
So did Cyprus do
terrible things that made it deserve this gruesome fate? Actually not.
Cyprus had respectable numbers both for growth, public debt and finances
- certainly compared with many other countries in the region. Cyprus
successfully built a strong financial services sector, as the island has
little industry or agriculture to live from. Cyprus has a
well-functioning, English-speaking workforce and has based itself on
British law. So all in all, not a bad place to do business. It made the
most of what they had to offer.
The one thing that went wrong for
Cyprus was its bankers expecting that eurozone politicians could be
trusted to pay back their loans. Investing heavily in Greek paper is not
unusual for a country so intimately related to Greece - and not much
different from what other banks do with their own national (in this case
quasi-national) sovereign debt.
From my own talks in the past with
high-ranking officials in the Cyprus banking sector, it was quite clear
that not insignificant political pressure was placed on at least those
banks operating in Greece to buy the local bonds. The risks of this
concentration were clearly underestimated, but basically, there was a
reliance on the eurozone to support any country getting into serious
trouble, including Greece. If you remember back just a few years, most
people actually believed this was an inherent part of the euro deal,
otherwise there would not have been such a massive convergence in bond
yields.
So I don’t think you can absolve the Cypriot banking sector
from blame altogether, but all the troubles could only have been built
into the system with the eurozone dynamics in place. Otherwise, fewer
foreign investors would have placed money in Cyprus, the risk dynamics
of a free-floating drachma sovereign bond market would have prohibited
such exposures and would have led to a much faster mark-to-market based
risk adjustment. Greece itself would probably not have had to default,
but would instead have relied on competitive devaluations as the country
always did in the past.
Now, instead, the problems grew much bigger
than free capitalistic markets would ever have allowed. Now, therefore,
we have capital controls and withdrawal restrictions and de facto wealth
taxes inside the eurozone, meaning that the concept of the euro can
hardly be said to exist in the same format any more. There are at least
two different ‘euros’: the restricted one in Nicosia and the so far
unrestricted one in the rest of the eurozone. Totally different dynamics
and, I believe, the start of multiple versions of the euro in the
future. Similar measures are likely to be used in similar situations and
already now, people are discussing where the crisis will hit next.
Slovenia? Malta? Other, much bigger problem, countries?
The Financial Times reminded us the other day of Friedrich Hayek's chilling warning about capital controls:
“Nothing
would at first seem to affect private life less than state control of
the dealings in foreign exchange, and most people will regard its
introduction with complete indifference. Yet the experience of most
Continental countries has taught thoughtful people to regard this step
as the decisive advance on the path to totalitarianism and the
suppression of individual liberty. It is, in fact, the complete delivery
of the individual to the tyranny of the state, the final suppression of
all means of escape – not merely for the rich but for everybody.” (The
Road to Serfdom, 1944).
Beware of the new tools that have been
introduced. Capital controls was one. What looked a lot like a broader
wealth tax was another.
I strongly believe that we have witnessed a
game changer in the past few weeks. I think anything and everything can
and must now be expected as the euro crisis worsens and the euro
steamroller moves from one country bailout to the next.
There are
very few limits to what you can do to people in the modern
interpretation of democracy. A version where only majority rule is
required, but where there is no longer a respect for personal negative
rights – as we know them from the American Constitution.
The easiest
target will always be wealthy people, or even just working people and
savers who did the right thing all their lives. As the bloated welfare
states begin to collapse under their irresponsible promises, their
crumbling value systems and their unsustainable demographics, it will be
easy to convince more than 50 percent of voters that confiscating and
stealing other people's money is OK for the greater good. Boston
Consulting Group calculated that 28 percent of ALL private wealth is
needed to meet just existing debts – not future obligations , mind you –
and the money can only come from one place… Your pockets. Beware.
A
lot of things have gone wrong over the past few years, but the seeds
were planted many years ago. In the form of pressure for more people
having the “right” to own their properties, even if they did not fulfill
the traditional mortgage criteria – hence subprime. In the form of
enormous “entitlements” to not just poor, but also middle-class people
in the welfare states – hence ballooning deficits and debt. In the form
of a euro, a grand, political project with no practical foundation –
hence crisis after crisis, with the dominoes stretching far into the
distance.
For sure, a lot of financial institutions took advantage of
the hands they were dealt. They are not without guilt and
responsibility for the current mess. But the real problems lie not in
people trying to take advantage of whatever conditions they operate
under. The real problem lies in the framework that is created by
politicians, preventing free markets to deal with excesses in the way
capitalism always does. Solving crises and exposing poor business models
are part of capitalism, and it is not always pretty – but it is a damn
sight more efficient and quicker than trying to desperately salvage what
is already doomed. And it will never allow problems to grow to the
magnitude that we are now facing.
Cyprus is a very good example of this. The problem is not Cyprus. The problem is the euro.
Lars Seir Christenser is co-founder & CEO of Saxo Bank A/S
No comments:
Post a Comment