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they say. hello and welcome to cross talk we're all things are considered i'm peter lavelle. baling is this government theft in broad daylight is applying a levy on depositors the answer to this small islands financial woes or is it a means to tax russians using cyprus as a legal tax haven and most importantly can europeans trust their banks any more. do cross talk three for cyprus financial crisis i'm joined by michael burke in london he is an economic consultant in a former senior international economist with citi bank and in washington we cross the shares are grim and she is a professor of international finance and director of the european union research

center a george washington university all right crosstalk rules in fact that means you can jump in anytime you want when you go to washington first you said this is moral hazard this is what's going on in cyprus right now can you explain that please sure sure the you know this is unprecedented what is happening right now in a financial crisis the one the one entity you protect are always a small savers and they're getting hit this time so most the small savers will be hit by a six point seven five percent tax and exchange they'll be given shares of that very bank and if that's not more how is it i don't know what is so you have to give money to a bank that sixty already knew this essentially what's going on it's extraordinary absolutely right and the worst part is that that is and the worst part is that the bondholders the financial institutions that lent money to the banks are not being touched this time but this is all about the germans and the russians actually ok michael where do you come in on this here because we've heard it's moral. extortion

go ahead. i can't disagree that it's extortion what normally happens when a bank fails. is the shareholders lose their money for obvious reasons and then in a legal order the different types of bond holder get burnt and then the case of the european banks it should next be the central bank and the e.c.b. european central bank loses the money it's lent to the cypriot commercial banks under no circumstances should it be the depositors who trusted the banks with good faith with their mom i thought i mean let me out there why is it why were they going with this variant then i mean if it's so unprecedented and it's so politically wrong morally wrong why are they going with it. as number of reasons but for it to be because they can. the whole purpose the whole purpose of the

bailouts in europe but i mean one of the key things about the bailouts in the european union is that it's the countries themselves are not being by all dealt and i think it's really crucial to understand it's the creditors that are being bailed out bondholders to the governments and the people in those countries see none of this money and in fact they have austerity measures loaded on them which makes the economic situation worse in all cases it's about the preservation of some type of shareholder or bond holder or some other type of creditor and in this case the reason that they've been burned is one because no deposits or of any major european country big country has their money in these banks and because they're not going to get hurt by doing so or at least they feel they're not going to get we will we'll wait and see on that one shares i do agree with some interesting analysis i do but

i think i do but i think that there is a lot more going on behind the scenes number one you know the ten billion dollar bailout that i.m.f. and the e.u. is giving cyprus has to be matched by the cyprus government coming up with close to seven billion themselves the problem is they don't have the money and the only way they can get it out is out of their depositors now on the other side of the equation the germans will only agree to this bailout if the russians depositors which is a lot is about thirty billion dollars worth of russian money in those banks they don't get away scot free so there's a little bit of behind the scenes politics happening here in terms of who is getting hit i'm not sure that's michael but it's quite i mean a lot of russians are not how do you about your head michel. not happy but i don't know it's because of deposits in the central bank says up to seventy billion in deposits in cypriot banks seven billion is held by russian nationals that may be not underestimate but certainly nothing more than double that out of seventy

billion now it's quite true that russian entities have loaned money to the. cypriot banks but it's a different matter overwhelmingly the people who are getting burned by this tax on depositors are cypriots. and the notion that. russian oligarchs and so on are being burned by this is really put about in germany in order to justify the very harsh treatment of cypriot savers chair don't you think about that because i mean we should go ahead but i you know i think that there's a there's more money involved here there's there's close to about thirty billion of russian money they're estimating twenty billion losses for russian deposits themselves and remember that it's a range of tax that they are implying anybody with over one hundred thousand euros will be charged close to ten percent there is no other way around this they have to raise the money unfortunately they're going after also the small deposit i don't think just nationalize the banks just nationalize the banks why not. well tell you

what's already happening is all money will be leaving these banks no southern european country is going to have a foreign deposit in there anymore michael what do you think about that maltose the next destination right. well i thought that to go back to your previous question because i don't think it was answered actually. why not just national why not just nationalize the banks that question what was posed but not answered and i think a good reason for that because as i said at the outset the whole purpose of all these bailout is to preserve the shareholders and the bondholders now what should have happened is a bank goes bust because what's happened to cypriot banks the shareholders should be wiped out then the bondholders should be wiped out if that's what's required and then the lending of the cypriot central bank and the european central bank should have taken a hit if that had been done in the correct order the the two central bank entities

would have lost about. seventeen percent of their funds that they've lent to the cypriot commercial banks of course being central banks especially the e.c.b. the in charge of the whole process they can just print now and one of the leading economists who's gone to cyprus to help out with the crisis says in european terms this is a rounding error these are tiny so money so it's not the case at all cyprus had to come up with the money if they wanted to. the european central bank or other european agencies could have easily found this money. choose not to and they're the big beneficiaries that's the key thing german businesses are the biggest beneficiaries in the world of the existence of the euro but unwilling to put their hands in their pockets to ensure survival and with moves like this it's going to send a shockwave through savers through all the so-called peripheral europe in economies

and that can't be good for the preservation of the euro from which german businesses benefit so much tears are going to react to that do you agree or disagree with what we just heard. yeah i mean i agree with almost ninety percent of was just been said i just think that if you believe that careful angela merkel is coming up for elections and this is yet another bailout small as it is and i think michael's absolutely right you know what we really are afraid off no matter how small cypresses is the vibrations into a larger financial markets and we saw that yesterday and we might even see that today and that's the real danger here that they're muddled through in other easy a nonevent a bailout into something much bigger than the chairs out of it is a big event for the people there that's the difference i guess yes. absolutely but you know this is again for the first time we are directly hitting the small savers is that a good idea you know is that a good idea is a dental is that a good idea or you think it's absolutely horrible insane. absolutely

insane michael what do you think. maybe i'm canadian come of the problems ok biggest trust of the bank was their only mistake. shareholder capitalism is supposed to work by you provide as a shareholder you provide the funds to. any company including banks and you allow the management of that company to run it in ultimately your best interests and they get very well rewarded for doing so if they really recklessly lenders the cypriot banks through. your the people or you the shareholders are supposed to be the people that take the losses that's what couple of them is supposed to work your supposed year but also you see. some deposit you're again taking any risks. you should take a risk good news no because the something go ahead jump in. yeah you hit on

something i think one of things that's going to happen out of all of this is the europeans don't have a euro wide f.d.i.c surance for depositors small depositors say about one hundred thousand euro and i think this is what's going to be fast tracked after this event michel you think would be a good idea. because the small might be the problem the problem with insurance agencies like the if we're not the problem but the issue i see an agency like that is they work because you never need them because you can say it was no and in fact all savers know that even if one small bone or even a medium sized bank. goes bust you know your money is safe because if the i.c. exists and therefore all savers in a country like the states don't rush to the exit. the e.u. issued a directive that they would stand behind all depositors for one hundred for the first hundred thousand euros that type of insurance program works like that you

know you don't actually need the money in a pot it works because those obligations are wrong and if you start then to bridge that on a it doesn't really matter how much money you've got in the pot what's to stop so we have a situation where a another country let's not get into who that might be next but if if that country its banks are in trouble and or its government is in trouble how do the savers in that country know that even if that were the existence of an insurance fund the creditors are going to demand that the depositors get burned in the process of buying out the creditors and shareholders they can't know that because the principle is now been established that small savings can be here gerri so i do you think that's fair. look of course it's not fair the bottom line is when the banks open whether it's thursday or next week in cyprus cyprus is going to take a very big hit because of this model they made a mistake between the i.m.f.

and the european union the fact that they made this into such a proposition that is so i'll give the ordinary and so rapidly unfair in any sense i would have to jump in here we're going to go to a short break and after that short break continue or discussion on cyprus. we've received. the news today. these are the images the world has been seeing

from the streets of canada. showing corporations are on the day. sometimes you see a story and it seems so you think you understand it and then you glimpse something else you hear or see some other part of it and realize that everything you. are welcome to the big picture.

is. welcome across the uk we're all things are considered mind you we're discussing the cyprus bailout program. ok we're now joined by matthew bose learn new york he is

a market reporter for business insider thank you for being with us what if i go to new york should we europeans trust banks now after what's happening in cyprus credibility issue. well i think that's a big question right i mean we're you know we're sort of looking for any signs of deposit outflows that sort of thing in other per for countries like spain and italy i don't think we've really seen anything like that yet and i'm not sure that you know given the special case that cyprus is just the banking system the way it's funded with deposits versus liabilities i'm not sure that the rest of europe necessarily has to be worried from this particular incident if that makes sense cheers out if you are a spaniard or an italian would you be worried. not as much and you know like the math you just said that that cyprus is a special case but cyprus is is now in real trouble when the banks open on thursday . so i do think that we will have problems as we go down the line this is just the

beginning cyprus yes absolutely there's no question that when the banks open you're going to see an exodus of money even because people are scared no one's taking a chance what's going to happen the week after because we still have the greek crisis unfolded from one day to the next you didn't know what was going on and so anyone who can will probably take all their money out especially foreign depositors and this is of course going to hurt the cyprus economy and the small depositor in multitude of ways so michael is it fear no more than anything else. well yes sure i mean we focus a little bit on small savers but they're not the only savers just on them you know if you were a bar owner or a taxi driver or something are you going to take a check from someone you going to take a. credit card payment i doubt it. but actually know what going to get is the growth of the cash economy amongst. small shopkeepers and so on but the

really big thing is the large corporations who have deposits the very large deposits often turned over on or on a week to or even daily basis but still maintain large deposits of banks for source of cash payments including payroll payments what are they going to where they can put their money because they're going to get hit. that doesn't apply just to cyprus that applies all across the board if i was a saver. in any of these countries we worried because i wouldn't know i would be certain what happened and to be honest the reassurances that this is unique what has been lost so unique event happened in this course of this crisis and you know what the end of the of that will be unique that becomes routine matthew that's a very interesting routine it's been done the president has been made sure absolutely i think but but there's no question that the cypriot banking system

right just because of its liabilities structure is unique in that sense whether it's unique in that other creditors will be subjected to bail ends down the line in other banking systems that remains to be seen in terms of the liability structure i think it's safe to say that cyprus is a unique case here is that why you see every case different can you explain that. well the impetus of the crisis usually is different in every economy and the macro economic data for every country in terms of the growth rates and the g.d.p. and this size is all different you know cyprus is unique in the sense because the russians are there and this is one of the reasons why the foreign and the foreign minister for from the side of the finance minister from cyprus is landing in moscow right now there is a very big issue don't forget the russians have also given the cypriot government a two point five billion dollar loan which is now trying to be renegotiated and michael you know i mean the russians are not very happy about that they gave

a loan and now they're going to have to take a haircut i think they will probably leave yeah. people talk about unique to entirely entirely unique when iceland went on the iceland had a series of loans from scandinavian countries and from russia. it's not something unique to cyprus and to russia they're very closely intertwined in terms of their banking you know if you started to lift the rug under what's. inside ukraine banking you might find something very similar with a hole just one country with a whole series a whole series of countries so you know this relationship that people want to regard is unique between cyprus and russia is far less so when one delves into. the banking suit systems of other countries unless of course you don't so it will be unique to an in you know we're all unique matthew where do we go from here with the

you're going to go ahead jump in your head. this is not about the loan that the russians have given this is about russian deposits in cypriot banks and the russians actually have gotten pretty lazy about using cyprus as an offshore banking system they should have expanded and sort of moved their assets around a little bit. it's right because it's very convenient a lot of legitimate business is really like that matthew all right michael you want to jump in that just. isn't. actually correct that the level of deposits in the banks is seventy billion euros and the cypriot central bank says the russian deposits are one tenth of the seven billion euros some private sector estimates put it but still it's not the case that the russian deposits from the total deposit. matthew what is the future of the what makes the situ that is what makes the situation unique well does it make the right anybody have to put those dip in the

movies as those deposit at thirty percent for russians ok i've heard the same thing we i guess we're not going to resolve that issue on this program right now matthew where does the euro go now it's going to reform go for the euro because it keeps the currency keep bumping along from crisis to crisis a crisis is this going to come to an end is it any closer to the end it's a good question you know i think one of the other interesting things to consider here is just the e.u.'s willingness to include depositors in this haircut and what that means for other senior creditors down the line right because sort of one of the justifications for this is that it doesn't put as much pressure on the credit worthiness of the sovereign in this case cyprus right so they don't have to backstop this bank bailout with their own credit as much as they would have to if depositors didn't take a haircut so i think if this is a sign that the e.u. is willing to bail in senior creditors more in the future it could be a good thing for the euro area because they need to restructure their debts right

they keep fighting a debt problem with more debt and that hasn't really been working out so far shares on where's the trust level here now because the banks of the institutions are supposed to trust. you can't now and you know you're absolutely right you know and i think the people who are the most afraid in southern europe right now are the small savers and small business owners and the question is you know where do you go and there is nowhere else to go you have to park your money with the bank if you're going to engage in the economy and so this haircut is going to be mandatory i suspect that at some point between now and tomorrow they'll try to ease that burden off the small savers and lower that percentage if not eradicated for the very small savers michael again the same question of trust is it different now. there sure is i mean deposit deposits of senior creditors and bob bailing in

deposits is opened up a world of trouble for themselves and it is just wholly unnecessary if you continue to have the starting point that everything's going to be fine as long as we preserve shareholders and bondholders. are going to carry on with this mess if they're going to say instead of which. capitalism is a rough old game and if you make bad decisions you make losses and you've got to pay the penalty then with the clearing up of those that don't you can start to see the basis for recovery but the economic policies are hopeless as world so that would have to change radically as well ok well matthew that sounds like saving the banking system in the hell with the people. certainly we're seeing that a little bit in cyprus but you know as was said i think you know hopefully they will revise this sort of the distribution of this haircut and take take the burden off of the smaller depositors and make it sort of fairer in that sense right. ok sharon so what is the future of the currency here because it seems to me they have

no idea what they really want to do they're just afraid of collapse and that's not a very good agenda. the problem is this that the europeans have a muddling through for almost three years and finally we saw some light at the end of the tunnel here last november with mario draghi and now they've done it again you know that look at what's going on in europe right now greece is still trying to manage their bailout and they're not doing a good job of it spain's in severe economic crisis in a political scandal there's no government italy this was the wrong time to take a very small amount of bailout money and mess it up and that's exactly what they've done this could have been done very very easily and quietly and contained but the vibrations are going to be felt now michael a not too much michel when you think about in december look like things are getting better i mean. well people keep saying things were getting better but that's only if people think the world is

a. share prices and bond yields the reality is the economic situation has been getting worse yes every euro area economy contract at the end of last year they could track today as a whole and all forecasts are negative for this year so that the actual economic situation continues to deteriorate and listened until there's a radical change of policy that's not going to alter fundamentally the problem of the european union is they want to have a continental sized economy. and a continental sized money and monetary policy while maintaining small national area fiscal policies which can't be done you need big transfers between areas and regions as happens in the united states as happens in countries like russia india china you know even small countries like britain there's a trap there's a transfer the fiscal transfer between regions if you're unwilling to do that then you're always going to have

a central force towards break up of the single currency area germany and germany businesses basically have to decide if they want to carry on with this then you've got to stop paying for it ok i have to jump run out of time fascinating discussion many thanks today to my guests in london new york and in washington and thanks to our viewers for watching us here on t.c.m. next time remember. these. wealthy british style sign some time right.

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