Cyprus Bailout: What to do Now?

Yves here. You will notice that this list of options for Cyprus is very depressing and does not envision Russia riding in to the rescue in a big way. It also treats a 20% fall in GDP as a possibly optimistic base case.

But this comment was first in the list at the Guardian’s Cyprus live blog for Wednesday:

The EZ should have known better than to mess with Islanders.

My Cypriot friends were having a huge party when I phoned them yesterday. They’ve been through a lot. They’ve seen their island carved into two and their friends and relatives go missing. They’ve lost their houses and their fields. But they are a strong society and they’ve learnt to watch out for each other. They are not stupid. They are very frightened of forces they have unleashed. But they have learnt to be independent and they are quietly confident that they can ride whatever storm is coming.

Little Cyprus. Who would have thought it? The Achilles Heel of Europe

By Cross posted with permission


Yesterday, we discussed why we thought the combination of an across-the-board bank levy (regardless of institution health), in absence of restructuring the capital structure of banks was a bad idea and bad precedent.

Today, we will lay out what we think should happen. We recognize that we are working with more limited information than the teams actually negotiating the bailout, but we will give it our best shot.

Our parameters for a proper solution are the following:

1. Respect the $100K deposit insurance limit

2. Preserve moral hazard/fairness to bank creditors. In other words, hit the creditors of the bad banks more aggressively than the creditors of the good banks.

3. Have a solution that is sustainable for Cyprus over the medium-term.

This is actually a more more complicated question than it seems and at the crux of our analysis and our concerns about the initially proposed plan.

(a) For better or for worse, financial services (broadly defined to also include accountants, lawyers and other corporate services firms involved in managing the financial services clients) accounts for 45% of Cyprus GDP. A large % of this comes from serving Russian clients and is the most important industry in Cyprus. With a British Law and British accounting heritage, independent courts and a highly educated population, it is the most natural industry for us, regardless of what the Germans say.

(b) If either the deposit levy is seen as too unfair (and investors leave) or if Russia revokes the double-taxation treaty as punishment for the levy (as threatened today by Medvedev), this sector of the economy would take a huge blow.

We are going to use a completely made up estimate that, over a two year period, this will cost Cyprus a 15% drop in GDP (reduction of the financial sector by 1/3) with another 5% in knock-on effects for a total loss of 20% of GDP. The total could actually be higher, but we can use this as a planning assumption.

(c) This means any scenarios that involve throwing away the Russian business need to be scored with a GDP 20% lower than our current GDP

We also have a few more variables to throw in the mix that have been discussed publicly since yesterday:

1. Nationalization of Cyprus pension funds and forcing them to lend to the government. This is apparently good for about 4B.

2. Issuing loans against future oil and gas revenue.

3. The vastly land rich Church of Cyprus has offered to mortgage its land on behalf of the government, though we are not exactly sure how the mechanics of that would work, nor does anyone have any real estimate of the value of said land.

4. On the Russian front, nothing substantive has emerged. There are constant leaks and denials that one or more private Russian actors would purchase Laiki before and/or after a full and/or partial recapitalization.


Given the above, here is our analysis of several possible scenarios

Scenario A: Government/Troika Track: The Existing Solution +/- some modifications

This seems the most likely approach at this time and what the Cyprus government is discussing with the troika.

1. The troika will lend 10B as in the original plan.

2. Cyprus will then make up the remaining 5.8B through a combination of:

a. Nationalization of pension funds and forcing them to loan money to the government.

b. possibly loans against future oil and gas revenues from the Church of Cyprus and the local population

c. a reduced deposit levy in the 3%-5% range (possibly exempting small accounts).

Initial reports were that the troika rejected this plan because they were afraid that 2(a) and 2(b) would lead to unsustainable debt for Cyprus but surely that is a failure of imagination. These instruments could easily be made subordinate to official lenders or otherwise termed out into the long future at which point they are acting as pseudo-equity for the government.

So we will assume that they can work out the subordination of the local loans.

Our concern about this plan is the following:

(a) Even though the levy is lower than the initial levy, the damage might still be irreversible to Cyprus as a banking center

(b) In which case, the drop in GDP is coming anyway through the loss of its financial services sector, but Cyprus is levered up to 120% of its GDP (as if it had not fallen).

(c) Which means that, within a year or two, Cyprus is looking at a debt-to-GDP in the 150-160% range which is clearly unsustainable and will either lead to Greek-style austerity or another depositor tax (if there are any left at that point).

We believe the initial Troika plan suffers from this risk as well and is thekey risk that needs to be taken very seriously by Cyprus, namely that we lever up to protect the financial services sector, but then lose it anyway.

For us to be supportive of any measure that limits the hit on large foreign depositors, we need to see real evidence that the offshore sector is not fatally wounded, as per our Scenario B below.


We now present three alternative Scenarios B-D for consideration.

Scenario B: Return to Rule of Law / Protect Russia

The basis of this scenario is to preserve the principles of our legal system and to maintain our financial sector.

(1) As it relates to banks:

(a) Shareholders in any of the banks to be bailed out need to be completely wiped out. It is small fries at this stage, but it should happen as a matter of principle

(b) Bondholders should be wiped

(c) Senior management should be replaced and salaries cut bank-wide.

(d) Insured depositors are protected

(e) Uninsured depositors *in the failing institutions* make up the difference. That means that in practice, large account holders in Laiki have the largest haircut, followed by Bank of Cyprus and then Hellenic and the Coops. Other banks that are healthy do not have cuts.

(f) Place a Good Bank-Bad Bank structure in place for Laiki and possibly BoC with a Resolution Corp in charge of unwinding the bad assets

(g) Merge the Good parts of Laiki with BoC – there should be significant operation savings in branches, etc.

(2) The pitch to the offshore sector is the following:

(a) We voted in, the face of the annihilation from Europe, to protect your deposits. Where else do you have that security in the EU?

Malta, Luxembourg, Latvia all have similar EU pressure and risks. Malta has 7x bank assets:GDP and Luxembourg 21x bank assets:GDP and are in the Euro so they are one accident away from also being at the mercy of Germany. Latvia is within the EU, has applied for the Euro and its bank sector controlled by German banks. So, there is nothing really better within the EU and, furthermore, you do not know how they will respond under pressure. Whereas, we are proven – we took on the ECB, the IMF and the EC to deliver for you.

(b) We protected your deposits (the ones in your own, Russian or English, highly-rated institutions). If any serious investor was still in Laiki as of March 2013 given years of downgrades into junk status by the major agencies, then, honestly he or she has only himself to blame.

(c) These are the same rules of the road you will find in any serious jurisdiction — aka there is predictability in creditor precedence and predictability in which banks are risky or not and innocent bystanders are not hurt.

(3) As it relates to the government: Immediate cuts in spending. We need to do this anyway. It is no ‘victory’ to preserve salaries and deficits when the deficit funding is coming at such high cost in sovereign autonomy. For the same reasons, the SGOs should be privatized.

(4) To the degree that any additional funding is needed, use the additional sources from Scenario A (pensions, etc)

This is the theoretically best plan in our mind but for us to to support this plan, we would like to see some sense of real official support from Russia that shows they consider it acceptable and will support Cyprus’s continued role in financial intermediation. This could include:

(a) Even a nominally small loan of 500M-1B euros (just to show commitment to the plan, in exchange for their depositors not being burned)
(b) Re-affirmation of the tax treaty
(c) Positive statements about deepening ties

If this is not achieveable, proceed to Scenario C

Scenario C: Burn the Russians

This would be our modification of Scenario A. If one comes to the conclusion that the offshore business is gone in any case (see recently articles in WSJ, Medvedev’s statements about cancelling the tax treaty, etc), then you might as well burn them hard and reduce your debt burden to a level sustainable by an 20% smaller economy.

By our rough calculation, we think that is an additional 4-5B euros minimum haircut from the non-EU depositors. They might yell and scream, but, hey, they are gone anyway…

In any case, this Scenario C is much better leverage in bringing the Russians along on Scenario B than offering to sell them Laiki.

In this scenario, you still resolve the banks, cut government spending, privatize the SGOs and so on.

Solution D: Self-Bailout (Burn everyone)

This it the model for the ‘patriots’ to follow, if they have the stomach for it. Their patriotic, reflexive approach to date is ‘leave the Euro’ which is moronic and will leave Cyprus with an immediate drop of national wealth in the range of 50-60% as the NCYP (New Cyprus Pound) would have a hard devaluation immediately and no access to the ECB.

If one is willing to take that type of pain in order to achieve independence from foreigners, there are better solutions within the Eurozone as follows:

1. Cram down the sovereign bond-holders. If they don’t accept, hard default on the June refinancing. Even though they are English Law bonds, Cyprus has almost no assets outside Cyprus that we can think of that they can freeze. So let them go to court and play for time. In the meantime, don’t pay them (since, anyway, you don’t have the money to pay them)

2. Cut government spending dramatically in order to run a surplus (Cyprus won’t be borrowing on the international markets any time soon in this model), privatize SGOs, etc.

3. Resolve the insolvent banks as per Scenario B AND burn the offshore depositors as in Scenario C

4. Supplement with nationalization of pensions and Church of Cyprus support as needed.

5. At this point, you have no official creditors, can control your own policy and you hold out until the oil/gas comes online

6. As it relates to the ECB, request ongoing support with the solvent banks, including the Good Bank, as per ECB rules.

We don’t recommend this path. But if things start going astray and the alternative is Euro exit, in our opinion, this is better. And theoretically the Northern countries should be pleased that we are not asking for any of their money and glad that we are not setting a ‘leave the Euro precedent’.

It is disappointing that these are the options on the table as none of them are ideal. In our opinion, Scenario B should have been worked out behind closed doors and would have been a very reasonable solution, if the Troika wasn’t so intent on intimidating Cyprus into a solution and (for reasons not known to me) insulting Russia.

At this point, it is mostly a judgement call of ‘is the offshore business beyond recovery under any model?’ If not, then we should do Scenario B to save it. If it is, we should be hard-minded and do Scenario C and at least leave Cyprus in a survivable position.

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  1. Claudius

    Given those choices alone; I’d choose ‘B’ and hope that ‘B4.a’ is, as a just reward, larger.

  2. Chris Engel

    At this point nobody cares because the markets don’t show any kind of concern whatsoever.

    Draghi’s words from years ago are the only thing saving this situation, he’s said he’ll do anything to protect it, and ELA is there to back him up.

    I think Twitterverse and bloggers got too caught up in the hype and it’s turned out to be a big dud. No serious contagion concerns and theoretically/operationally the ECB can easily plug the holes if it wants.

    The real story here is still the ticking social timebomb of Spain and the hopelessness of Greece.

    1. Yves Smith Post author

      You seem to have undue faith in Mr. Market to judge real economy/real world outcomes accurately. The housing market was clearly a bubble by 2005, lending was toxic by 2006, and subprime was on its last legs by end of 2006, with a brief revival for a couple of months in early 2007. How long did it take investors to sober up? Months after that.

      The market is riding on a tide of central bank generated liquidity. The official were also pushing all the liquidity buttons they had in 2008 and they didn’t work then.

      The officialdom is taking its reading on the impact of policy actions from market reactions, when they are actively manipulating those same markets. That’s like driving a car using a projection of where you want to go under ideal conditions in the windshield rather than looking at the road.

      The fact that the markets don’t fall over immediately does not mean this is not a disastrous course of action underway. You seem ignorant of the fact that there was serious but slow deposit drain out of Portugal and Spain, and this represented a serious existential threat to the Eurozone. That was halted by the OMT, even though the OMT was a complete headfake (no new powers/programs, just impressive bluster and repositioning of exiting programs).

      Any sane businessperson (the stickiest type of large depositor) in a Portuguese or Spanish bank should regard this as a wake-up call, and some probably will.

      1. jake chase

        You state, “for better or for worse, financial services (broadly defined to also include accountants, lawyers and other corporate services firms involved in managing the financial services clients) accounts for 45% of Cyprus GDP”

        Could you break this down among: capital flight, tax evasion, and money laundering? I seriously doubt financial services in Cyprus involves much of anything else.

        1. from Mexico

          Well so the Gestapo would have us believe. It is, after all, quite necessary to demonize one’s victims.

          All this ground was covered in yesterday’s posts on Cyprus. Your allegations are what are called verisilitudes: they have just enough truth to make them to seem plausible, at least to people who are prejudiced.

          1. jake chase

            Verisilitudes? All this was covered yesterday? Are you doing PR for the ultrarich, now?

            Do you know about tax havens? Hot money? Come on, Mexico, this is no time to switch sides.

            Just move your dough to Switzerland or the Caymans like everybody else. I believe the Turks and Caicos are still rather nice.

          2. from Mexico

            And I see where Yves covers this ground again, and in even more detail than yesterday, in her other post today on Cyprus.

        2. Yves Smith Post author

          Please read my other post on Cyprus today. It looks like you’ve fallen for what appears to be a concerted anti-Cyprus PR campaign. Cyprus (the Greek part) is built on the Singapore model: a trade/transit hub with a highly educated citizenry. It has, like Singapore, decent court system that operates on UK law. Any responsible party that wanted to invest in Russia would do so through a Cyprus co. and elect English law. Even the FT pointed out that 5 major M&A deals were being screwed up by the bank holiday.

          Shorter: Cyprus is a hell of a lot cleaner than Russia, and no different than other tax havens, which include Wyoming limited liability cos. Delaware cos., Luxembourg, the isle of Man, and the Caymans (used by absolutely every hedge and PE fund of any size to avoid double taxation, which is the big reason + the courts for using Cyprus to invest in Russia!)

      2. Nathanael

        The problems with the world economy were clear in 1923, and yet the Great Crash didn’t occur until 1929. For a historical reference point to *how long bubbles can last*.

  3. The Dork of Cork.

    The ECB has now become the primary political agent within Europe.
    It has just threatened to shut down the Cypriot banking system.

    Under the Euros structure it seems they have full fiat (political) power.
    Is the banking serfdom circle complete ?

    1. Jose

      The ECB threat is a threat to effectively expel Cyprus from the eurozone.

      A possibility not allowed under the European Treaties – yet the ECB threatens to do it, all the same.

      This ultimatum, coming right after a decision to hit depositors under the supposedly guaranteed 100,000 euro mark, says a lot about the present state of the rule of law within the eurozone.

      1. The Dork of Cork.

        The banks were given full fiat control in the market state eurozone.

        A even more extreme level of power that they had under the Westphalian system of banking control.

        What else are they to do but KILL KILL KILL.

        Its a bit like a fox who enters a chicken coup ……because the chickens are not wild the fight & flight instinct is no longer a factor.
        The fox instinct is however just as powerful as ever.

        He will kill all of the chickens , one by one until nothing remains.

        1. from Mexico

          @ The Dork of Cork

          In case you missed it from yesterday’s links, the “Why Neoliberals Pretend Private Debt Doesn’t Matter and Public ‘Debt’ Does” article linked to the following video documentary:

          In a Land of Plenty

          The tagline runs: “The story of unemployment in New Zealand” and In A Land of Plenty is an exploration of just that; it takes as its starting point the consensus from The Depression onwards that Godzone economic policy should focus on achieving full employment, and explores how this was radically shifted by the 1984 Labour government. Director Alister Barry’s perspective is clear, as he trains a humanist lens on ‘Rogernomics’ to argue for the policy’s negative effects on society, “as a new poverty-stricken underclass developed”.

          The unelected and “independent” New Zealand central bank was the sicario (assasin) which the transnational capitalist class hired to carry out the hit on New Zealand labor. The reason is clear: by operating through a central bank proxy, the transnational capitlaist class can claim plausible deniability. The Wizard of Oz captured the hoped-for discovery of this reality by ordinary people in this famous scene:

          But the same pattern of central bank malfeasance has been repeated over and over again, whether in Europe, the US or New Zealand, and the common people never seem to catch on. This is so even though it is almost impossible to come to any other conclusion than that central banks or created for one purpose and one purpose only: to carry out a global jihad on labor. Or as you put it: “KILL, KILL, KILL!”

          This certainly was the case in the United States, as Christian Parenti explains:

          Regardless of the exact etiology of the [corporate] profit slump, one thing is for sure, the solution was, as we shall see, to attack labor. Losses by capital, regardless of their origin, can always be recuperated by diminishing labor’s share of output…

          The crisis of the seventies was finally dealt with in 1979 when Carter appointed Paul Volcker as Chairman of the Federal Reserve; it was the opening salvo of a “new class war.” Late in 1979 Volcker dramatically tightened the money supply by boosting interest rates, thus cutting borrowing power and buying power, and diminishing economic activity in general…

          In the eyes of Paul Volcker this was a good thing. For the economic stagnation and low profits of the seventies to be vanquished the American people would have to learn to work harder for less; Reagan’s plan was to cut taxes on the rich, gut welfare, and attack labor. As Volcker told the New York Times: “The standard of living of the average American has to decline… I don’t think you can escape that.”

          In 1981 as the recession was reaching new depths and many in Congress were calling for relief, Volcker again explained the utility of his artificial economic disaster: “in an economy like ours with wages and salaries accounting for two-thirds of all costs, sustaining progress [in price reduction] will need to be reflected in moderation of growth of nominal wages. The general indexes of worker compensation still show relatively little improvement, and prices of many services with high labor content cntinue to show high rates of increase.” The chairman’s goal was labor discipline…

          Before the 1980-82 cold-bath recession, wage freezes and pay cuts in unionized industries had been almost non-existent. Since 1964, and from World War II on, wages had been rising more or less consistently. In 1980 not a single union contract negotiation had ended in a pay freeze or cut. By 1982, 44 percent of new contracts conceded wage freezes or outright cuts. Meanwhile the official unemployment rate, always an under-estimate, reached 10 percent. This was Reagan’s monetarist hammer falling on the middle class expectations of organized labor and, by extension, all workers.

          – CHRISTIAN PARENTI, Lockdown America: Police and Prisons in the Age of Crisis

          1. from Mexico

            Another pattern that emerges is that it’s always Labor, the Democrats, or the socialists that the transnational capitalist class coopts in order to serve as its hit man.

            Sure, the Tories may come in and finish off the slaughter, but it’s always the traditional defenders of labor that initally open the door.

        2. Banger

          These crises are not strictly “economic” (economics is sub category of politics) at all . It is, as you imply, the flowering of the new world imperial system more or les neo-feudal in structure. But the nation state system is still in play though clearly fading in many places it will be interesting to see how Cyprus reacts.

  4. ArkansasAngie

    The problem with scenario B is it upholds the rule of law and burns the elite the hardest. That’s a precedent that “they” don’t want to happen. While Cyprus won’t really hurt “them”, doing this in Spain et al would.

  5. Aussie F

    “leave the Euro’ which is moronic and will leave Cyprus with an immediate drop of national wealth in the range of 50-60%”

    Would that be the 50-60% that’s currently generated by the financial sector’s various shell games? Just how many corporate lawyers, tax accountants, coke dealers and Botox clinics can any reasonable society sustain?

    I think Cyprus has three choices:

    1. Offshore boutique for the Russian Mafia – luxury condos for retired oligarchs, development of military infrastructure for Russia, money laundering for the Baltic region, the CIA eventually running around in ushanka hats and Russian uniforms blowing up primary schools, etc.

    2. The Euro route – Slow death at the hands of the Troika, locked into a fiscal and political straight-jacket with no capacity left to restructure the economy in a healthy direction.

    3. National independence. Leave the EURO, impose capital controls, devalue and build a sustainable economy. Take the hit now and become a light unto the nations. The Euro’s likely finished anyway, and the glory days are over rentiers and their professional helots.

    1. jake chase

      Mexico will take 3 for $600, Alex. Ooops, wrong again!

      Does 1 involve a change in the status quo?

  6. LucyLulu

    This begs the (rhetorical) question of why every country that has fallen into this same position of an insolvent banking sector hasn’t chosen (1) and (2) of Scenario B. These policies would also have preserved the principles of the US legal system and surely that of Greece, Spain, etc.

    The basis of this scenario is to preserve the principles of our legal system and to maintain our financial sector.

    Cyprus will still suffer from some capital flight in the short term but if their banking sector gets back on solid footing, my guess is that Cypriot banks will enjoy a depositor confidence level not shared by their EU counterparts.

    1. Moneta

      We’ve gone through a cycle of globalization and dying nationalism. Most countries are being led by money printers as the GS tentacles are still everywhere.

      Our world leaders, in their 40-60s have spend their entire careers in this frame of mind. They believe in the power of the printing machine plus that’s what they know how to do.

      But their blunders will create uprisings which will lead to coups or new leaders. Nationalism will probably resurface… new ideologies will surface but it will take time.

      And until then, we will be stuck with our one trick ponies.

      1. from Mexico

        It is necessary, however, to capture the hypocisy with which fiat money has been used. When it comes to using fiat money to subsidize or bail out the plutocracy, there are no limits. However, when it comes to deploying fiat money (or a lack thereof) in order to assasinate labor or small business, it’s austerity all the way.

        1. jake chase

          Exactement! That is why fiat money is the road to serfdom. No matter how you guys slice and dice the older Hayek for personal failings, that damn book was exactly right.

          Better read it again, and Henry George, too.

          1. from Mexico

            @ jake chase

            There you go again with the Hayek sycophancy.

            Which just opens the door to remind people once again what Hayek said when he traipsed down to Chile to throw his enthusiastic and unbridled support behind the brutal dictatorship of Agusto Pinochet: “My personal preference leans toward a liberal dictatorship rather than toward a democratic government devoid of liberalism.”

            Then, as Carlos Fuentes notes in The Buried Mirror, “In a savage action,” the partisans of Allende, who had been democratically elected by the people of Chile, “were rounded up, gathered in a stadium, and murdered in masse. Others were sent to concentration camps, and still others were exiled and sometimes murdered abroad.”

            Way to go jake! You really know how to pick the winners.

          2. jake chase

            Let’s see: the book was 1944; Chile was 1973? So, you reject the book because the writer turned out to be a creep?

            If that’s all you got, it ain’t much of a verisilitude.

          3. Nathanael

            Jake: there’s no difference between fiat money and gold-based money, except that with gold-based money the gold mining companies control the money.

            So if fiat money is the ‘road to serfdom’, then gold-based money is also the ‘road to serfdom’. In fact, during the decline of the Roman Enpire, which led to ACTUAL serfdom, gold-based money was used and was a major tool in pushing people into debt servitude and converting them to serfs.

            Hayek was a blithering idiot. Gold-based money is a faster road to serfdom than fiat money.

        2. jake chase


          I do not advocate gold based money, but I do advocate monetary discipline. Anything else immiserates savers, forces everyone into speculation. The gold exchange standard (1946-71) functioned reasonably well, until Johnson refused to raise taxes to finance the Viet Nam War. Of course, the war was idiotic, but financing it by borrowing compounded the felony. Nixon completed the destruction by conspiring with the Saudis to quadruple the price of oil. Had the US not floated the dollar, the French would have emptied Fort Knox (or the FRB of NY, I’m not sure where they hoard the stuff).

          I don’t identify Hayek with gold. I don’t believe The Road to Serfdom mentions it. The essential point is that governmental planning insures that the worst people rise to the top. You see the problem repeated over and over: Regulation is captured by the regulated and turned on its head. The same people who rail against crony capitalism only want the politicians to be unchained so they can create jobs by printing more money. What do they think the politicians will do with this monetary power? Suddenly turn statesmanlike?

          1. from Mexico

            jake chase says:

            The essential point [of Hayek] is that governmental planning insures that the worst people rise to the top. You see the problem repeated over and over: Regulation is captured by the regulated and turned on its head. The same people who rail against crony capitalism only want the politicians to be unchained…

            Well Hayek certainly didn’t have any problem with governmental planning, or any other action of the state as draconian and dictatorial as it might be, when it came to Pinochet.

            Of course Pinochet wasn’t your run of the mill crony capitalist, but the crony capitalist par excellence.

            The only logical conclusion one can draw from this is that in Hayek’s eyes, when governmental planning is in the service of crony capitalism, it’s just hunky dory.

  7. skippy

    GAAP Accounting in the real world vs…

    Skip to 5:30

    Skippy… econned jargon – personal fav: pay attention boy… I’m cutting you ain’t bleeding… @4:00

    PS. Needing a new port soon… as airports can’t touch this..

    Kirov Admiral Ushakov December 30, 1980 In Autumn 2012, Dmitry Rogozin, vice-premier of Russian Government in charge of defense industry, replied to an inquiry about the fate of the ship. “Cruiser Kirov, now Admiral Ushakov, is returned to the Navy. Modernization project for the ship is in planning stages.[12]

    Frunze Admiral Lazarev October 31, 1984 Should the modernization of Ushakov go ahead, logic dictates that Lazarev will also be repaired as it is a younger ship and has a significantly smaller breakdown history.

    Kalinin Admiral Nakhimov December 30, 1988 Choosing the modernization project, from 2013 to 2017, repairs and modernization. Will join the Northern Fleet.

    Yuri Andropov Pyotr Velikiy April 9, 1998 Active[13] (Ops in Atlantic and Indian Oceans and Mediterranean Sea 2010)

    Now why did the US Navy recommission and refit those old WWII battleships… oh yeah!

  8. RueTheDay

    The problem here is the same problem we has seen over and over since 2007 across the entire world.

    1. There are losses in the system.
    2. No one wants to take the losses – not the lenders, not the bondholders, not the shareholders, not the central bank, not the taxpayers, no one.
    3. Yet, there are losses in the system.

    1. jake chase

      They aren’t losses until you take them. Here’s the plan- keep the bailouts going until asset inflation validates all the debt.

      The problem is wages. They have to increase but the elite is determined to undermine them. This means the debtors will be liquidated before the inflation can validate the debts. The only winners will be speculators.

      Sort of reminds you of what Hamilton did with the Revolutionary War debt. Federalize it and give all the profits to speculating insiders.

      Nothing can stop this process except people in the streets. Too bad they’re all watching the March Madness!

      1. RueTheDay

        “They aren’t losses until you take them.”

        That was Japan’s thinking circa 1990. 23 years later, they still haven’t recovered fully.

        Of course, the alternative, which is to liquidate, is even worse, and would almost certainly lead to a second Great Depression.

        There are no easy or reliable solutions for mopping up after a debt-fueled asset price bubble collapses. We need to stop bubbles from inflating too far from the beginning, through a combination of size limits, leverage limits, and Glass-Steagall style firewalls between the different parts of the financial system. I’m not very optimistic though.

        1. Nathanael

          “There are no easy or reliable solutions for mopping up after a debt-fueled asset price bubble collapses.”

          Print money and give it to poor people.

          Also, too, you have to prevent the banks from committing outright fraud, and arrest the people who do, but that should go without saying.

          1. allcoppedout

            These should be givens Nathanael. My sense of all this is we are off on a red herring trail. I suspect the world will turn from ‘clever explanations’ soon – but we do have a history of falling for the same old cons over and over.

  9. Moneta

    If your country has little resources and does not produce added value products, good luck.

    We are witnessing the birth of a new cycle of colonialism.

    Right now these devastated countries are still being led by neo-liberals but as anger rises, it won’t stay this way.

  10. Moneta

    One country will go the Chavez way, which on will it be?

    All we need is one to see the domino effect.

    1. from Mexico

      If one is going to defy the US/NATO juggernaut, I think the Chavez example would be about the worst possible route to follow.

      If one wants to look for a successful model of the best way to defy US hegemony, I would look to Luiz Inácio Lula da Silva for guidance.

      Dilma Rousseff, following in the footsteps of Silva, doesn’t seem to be getting off to a bad start either.

        1. from Mexico

          With Iceland it is not that clear-cut that it defied the US/NATO juggernaut.

          With Chávez, Lula da Silva, Morales, Kirchner, Correa and Mujica, there’s not much doubt that they want to be outside the US’s hallowed security state’s “sphere of influence.”

          1. Nathanael

            It’s worth nothing that South American, Central American, and Carribean countries have what you might call *a history* with US meddling, one dating back to roughly 1800, and have good reason to want to keep the US OUT.

            Countries in most other parts of the world don’t have a history of US meddling extending back nearly as long; or at least not as continuous a history of meddling. Therefore it is hard to get their leaders to recognize how pernicious the US is. In the Americas, it’s *easy* to get the leaders to recognize this.

        2. sd

          What most do not understand is Iceland did not actually resolve its problems. it is slowly paying off the bad banks debts. The capital controls are causing internal inflation as tourist dollars enter but do not leave.

          The next election is in April and the political parties responsible for the deregulation that caused the crisis are returning to power. In other words, it’s 2007 in Iceland right now.

          Oh. And the parliament scuttled the new constitution that the nation overwhelmingly endorsed by vote.

          Iceland is due to crash sometime this fall.

  11. allcoppedout

    Your plan makes good sense Yves – but the world is painfully short on good sense. I go for it entirely – but suspect unknown unknowns are really at work. It’s what I’d like to see happen. I’m left making conspiratorial sense precisely because this kind of good plan hasn’t been happening.

    The people playing with the hot money barely seem touched in any of the scandal/analysis presented so well here for a number of years. I mean touched in the sense of having to pay up for failures, incompetence, criminality and holding the parcel when the music stops. It’s all been like watching a poker tournament (I don’t do this level of boring) and then finding you have the bill for all the bets made as a tax payer.

    If you or I were gauche enough to plan to strip ordinary people of deposits I guess we’d not be daft enough to announce the plan in advance (quiet weekend meeting, vote and Monday morning hit)? My own preference would be to let loose the cops after an EU prop was in place.

    The whole Cyprus thing reeks of an attempt to induce volatility by undisclosed positions. Do we know who ‘is short on Cyprus’ and contagion candidates?

    I intend no detraction on your plan. I’d fully support such if in any position to do anything. It’s the best damage limitation I’ve seen.

    1. Yves Smith Post author

      Not my plans. This post is from, but I would not have posted them if I did not think they had merit.

  12. Kim

    A) and C) are not solutions: if GDP goes down deficits are going to go up and more lending is needed. B) looks to have the same problem.

  13. Lexington

    Personally I don’t see the carrot of air or naval bases in Cyprus as being a major inducement for Russia, and probably not in Cyprus’ own interest either.

    First of all a glance at the map will show that flights from southern Russia to Cyprus would entail politically problematic overflight of Iran, Iraq and /or (most especially) Turkey – the last a member of NATO.

    Second, Russia presently has neither the means or, as far as I can see, the appetite for the kind of strategic force projection that is the cornerstone of American military planning (in fact I can’t help but wondering whether there isn’t a bit of psychological projection going into these assumptions…)

    Also, allowing in Russian forces would blackball Cyprus’ hopes for closer ties to NATO and strain its welcome in the EU – and in spite of the current difficulties I see no reason to believe that the current Cypriot government is ready to contemplate cutting those ties unless forced to do so by force majeure like a meltdown of the banking sector.

    Finally, it probably isn’t in Cyprus’ own interest to allow thousands of foreign troops into a country which is politically fractured, militarily feeble, and relatively isolated both geographically and strategically. That would give Russia a lot of leverage to cause mischief in the country’s internal affairs, should Moscow be inclined to use it.

  14. TC

    1). Remain in the EMU
    2). Form a Cypriot National Bank issuing credit in currency pegged to the euro.
    3). Reorganize Cypriot banks’ euro assets and liabilities and recapitalize in the euro-pegged sovereign currency.
    4). Direct the Cypriot National Bank to buy up domestic debt securities solely dedicated to productive investment on the island.
    5). Learn how to say “F*ck You!” in German.

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