Macro Man | Mar 19, 2013 07:23AM ET
TMM continue to be staggered by just how confused the Eurogroup policy response has been, with the Germans et al running away from the deposit levy on small depositors at an Usain Bolt-like pace. Last night's statement in particular smacked of the imperialist European leadership tampering with the evidence. TMM still cannot fathom how the Troika could not see that such a policy move would go down so badly both in Cyprus and internationally - even the German press utterly slated the deal. Another case of the Germans refusing to listen to anyone - TMM have personal experience in dealing with German Finance Ministry officials, to whom the term "arrogant" simply cannot do justice to their intransigence nor their complete inability to understand that there is no magic source of exogenous demand that will fill the gaps left by their nuclear winter-like economic prescriptions.
If the newly-elected Cypriot government were not clearly so inexperienced and naive, TMM could almost imagine that they have played the politics of this blindingly, by supposedly applying the tax to small savers, the Germans have been saddled with the blame. It is hard to imagine the political outrage being so vehement had the tax only applied to uninsured depositors, and no amount of finger pointing or insisting "it wasn't us" is likely to undo this.
But whatever. We are here now, and given the cries from both the Troika & various commentators pointing out that you can't solve a debt crisis without hitting creditors, TMM thought they'd have their own go at formulating a crisis resolution plan for Cyprus.
In the light of the EU using the explicit threat of Euro exit, and seemingly this threat not being a bluff - indeed threatening to cut off ELA access is akin to forcing Cyprus out of the Euro - TMM are going to invoke a strategy that they believe would be advocated by the great Cypriot banks have accessed the ECB's ELA to the tune of about EUR 9.2bn.
So TMM propose the Cypriot Government do the following - they'll have to do it very quickly to avoid the ECB panicking and pulling back the ELA cash lent against dodgy collateral. Once done, the ECB will not be able to do anything about it.
This approach also reduces the extremely negative economic effect that an upfront wealth shock imposes upon consumption, and also will to some degree reduce the ballcrenching tightening of monetary conditions as Cyprus' deposit base flees the country. Many have pointed out that inflation (e.g. in the UK) has the same net effect in terms of imposing costs on creditors, but this is not entirely true: moderate inflation & negative real rates as seen in the UK smooth the deleveraging process so that monetary conditions remain loose and the negative wealth effect is more gradual. The Troika's proposal for Cyprus does the complete opposite as it will ensure extremely tight monetary policy as the money supply evaporates, and provide a large one of hit to consumption via the wealth effect. In TMM's view this will merely result in Cyprus' recession becoming much deeper and its debt level blowing out once more to the point of needing a second bail out programme. Once again, this is the result of the Germans' inability to understand that there is no magical source of exogenous demand.
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