Krugman’s Bad Math on Cyprus

Paul Krugman, in a post earlier today, Cyprus: The Sum of All FUBAR, acts as if he has figured out what is the real problem with Cyprus. The only problem is his math is all wrong, and a better analysis undermines his major assertions.

You know something is amiss when a discussion of “what ails Cyprus” fails to mention the fact that domestic banks, particularly #2 bank Laiki, the epicenter of the crisis, is heavily exposed to Greece. The crisis in Cyprus is to a large degree a knock-on from the implosion of the Greek economy.

Krugman starts by claiming that domestic deposits are 500% of GDP and merely based on “asking around” has determined the culprit is a real estate bubble:

I’ve done some asking around, and cleared up something that was puzzling me. Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. So we should think of Cypriot deposits as mainly coming from non-Cypriots, attracted by that business model.

It might have helped if Krugman had bothered getting real data on Cyprus, particularly since, as we pointed out, there appears to be an anti-Cyprus PR campaign underway.

This is the data from the Central Bank of Cyprus as of January 2013, see tab T-1 of the spreadsheet (hat tip Ledra Capital):

Domestic Residents: €42.789 billion

Non-Domestic EU Residents: €4.748 billion

Non-Domestic Non-EU Residents €20.882 billion

Total Deposits: €68.420 billion

The Cyprus economy is (was is probably more accurate at this juncture) just under €20 billion, so domestic deposits are well under half the 500% GDP level that Krugman asserts, more on the order of 240% of GDP.

Domestic housing loans are €12.6 billion or about 60% of GDP. By contrast, in the US, residential mortgages (including on multifamily units) are about $10.8 trillion versus a GDP of $15.8 trillion, or 68% of GDP, so Cyprus does not seem all that out of line, particularly when you consider that is has a very large retiree population (as in mortgages are supported by past savings, not current earnings which are included in GDP).

Ledra provides some insight into what those not-as-big-as-Krugman-thought domestic deposits are about:

Sure, some of the deposits are actually foreign depositors in the guise of domestic corps, but note that of all domestic depositors, 26,290M is domestic households so 16,056M makes up all domestic financial and non-financial corporations in Cyprus and given that Cyprus does have a real economy, a good chunk of that is true domestic corporations. The balance is govermental deposits, fwiw.

Also, keep in mind that there are 60,000 British retirees in Cyprus and 40,000 Russians living in Cyprus (the latter, generally wealthy, as it has become a preferred location for rich businessmen to safely raise their families) and their savings will not necessarily correlate with GDP.

So this is an itty bitty country with some rich and moderately rich residents distorting the numbers.

As for the size of the banking sector relative to GDP, Krugman seems scandalized that the banking sector is so large relative to its economy. Yes, this is a risky model, and Cyprus made the mistake of being overly dependent on one huge client, Russia. But Cyprus is hardly alone in being a financial center with banks that are a big multiple of GDP. Luxembourg is the really extreme case here, with a banking sector at over 20x GDP. England’s banking sector is 6x GDP. Swiss banks were 6.8x GDP in 2010 (Switzerland has forced much higher equity requirements on its banks, so its balance sheets have shrunk since then). Singapore also has an outsized banking sector. But let us remember that the EU has also set out to trash the Cyprus banking sector pretty much overnight with the deposit garnishing threat. It is important to recognize that while a restructuring was necessary, the severity of the crisis and the degree of damage that will be inflicted on the economy was not.

This is not to underplay Cyprus’s problems. But it would help to depict them accurately.

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  1. Martin

    “But Cyprus is hardly alone in being a financial center with banks that are a big multiple of GDP.”

    And so what? Because other people made the same mistake as Cyprus we should bail out Cyprus? No, neither Luxembourg nor Cyprus nor UK nor Switzerland deserve a bailout.

    They got the higher mean consumption, so they should live with the higher variance.

    1. Yves Smith Post author

      You really are missing the point. Did you not get the memo that if the EU forces Cyprus out of the Eurozone, which is a not-trivial possibility, that a slow-motion currency run will almost certainly resume in the periphery countries? It was already underway but the OMT managed to stop it. So cavalierly tanking Cyprus has the potential to blow back to the rest of the Eurozone in a bad way, although with a slow motion run, it will take a while for the impact to be seen.

      And you also miss that most of the business going through Cyprus is legitimate investment dollars going to Russia and using Cyprus for legal reasons (English law courts) and rich retirees living in Cyprus. The bank that is failing was bought by Gulf investors and they invested heavily in Greece.

      The Cypriots didn’t get high running household debt up the way the US did and dump it on the rest of the world. They’ve not inflated a monster domestic real estate bubble like the Irish or gone on a domestic Ponzi scheme like the Icelanders. Your ire is really misplaced.

      1. Lune


        At issue here isn’t how their banks got into a mess. Quite frankly, I don’t see a moral distinction between excess consumption, asset bubbles, Ponzi schemes, etc. vs deliberately making yourself a destination for tax and legal system arbitrageurs. (Why should Russian investors & businesses have the option of litigating according to British law when Russian citizens do not? Especially when that implies that Russian citizens are losing the ability to set and enforce business law?)

        Regardless, the issue is that now that their banks are underwater, who is going to bail them out, and how? I fully agree that the ECB is being stupid in their dealings with Cyprus because it *will* blowback to other countries and cause a bank run. But just because the ECB is being stupid doesn’t mean Cyprus is somehow a blameless victim. Heck, even if they are a blameless victim, it doesn’t mean we are automatically obligated to help.

        It’s not just a devious PR campaign to ask why Europe (or Russia, or the IMF) should get involved to clean up yet another bank mess in yet another country caused by yet another overgrown banking sector that made yet another poor investment decision.

        FWIW, I think the ECB should help Cyprus pay its deposit insurance claims, perhaps extend coverage to 250k to cover small businesses, then let Cyprus deal with the rest of the mess. This will stop the immediate risk to Europe of bank runs in the periphery. Whether they should provide further assistance should be based purely on whether it serves European interests to do so e.g. if they wish to prevent closer ties between Cyprus and Russia, or prevent Cyprus from leaving the Euro, then maybe provide enough money to avoid either of those things from happening.

        1. sidelarge

          “It’s not just a devious PR campaign to ask why Europe (or Russia, or the IMF) should get involved to clean up yet another bank mess in yet another country caused by yet another overgrown banking sector that made yet another poor investment decision.”

          That would be a rational argument if we didn’t have this damn thing called the currency union. That’s the answer to your “why” question. The same answer to “Why does California have to contribute to saving the profligate banking sector in Nevada?”

          Everything boils down to the absence of a banking union in the euro zone, and the big countries’ refusal to have it in any meaningful way.

          If you don’t like it, you ought to scrap the whole thing.

        2. Yves Smith Post author

          To continue sidelarge’s point, why didn’t the US cut off that profligate island with an overlarge banking sector that made bad investment decisions called Manhattan during the crisis?

          1. fresno dan

            “…why didn’t the US cut off that profligate island with an overlarge banking sector that made bad investment decisions called Manhattan during the crisis?”

            the US government is bought, run, and controlled by bankers?

          2. Lune

            Actually, most of the rest of us in the hinterlands would have preferred to cut off the banking sector in Manhattan (note: I don’t mean the actual inhabitants of Manhattan) and let it face the consequences of capitalism red in tooth and claw that they so glorify. I believe letters written to Congress during the TARP debate were running 100:1 against the bailout. And it actually did fail until people like our current President whipped the vote in service of their banking masters.

            I understand that as heinous as a banking sector may be, some form of banking is necessary for an economy to function. But any bailout should have as its prime goal saving the overall economy from sinking along with the banks. I think you can accomplish that by the ECB paying out deposit insurance claims, perhaps extending insurance to 250k. This would cover probably 95% of individuals and local businesses.

            I make a distinction between Cyprus and say Greece because in Cyprus the economy, govt finances, etc. were generally doing okay. It’s the banks that tanked. Greece is the opposite: the banks were okay until the govt essentially ran out of money. I’d argue that Europe has more obligation to Greeks to help bail out its soveriegn debt mess than it does to Cypriot banks to bail out their mess. Because in Cyprus if you can firewall the banks, the rest of the economy will do okay. In Greece, it’s the rest of the economy that’s precisely the problem and so requires a more aggressive intervention.

            It’s the difference between bailing out state govts in the U.S. (I would argue for much higher stimulus amounts given directly to states to provide vital services and deal with the costs of a sour economy) and bailing out banks (I’d argue let them go bankrupt and protect the depositors).

            As for being in a currency union, they chose to enter it without a fiscal union. It was a mistake before, and a mistake now. They should leave (as should Greece and probably a few others). Or Europe should reorganize the Eurozone into a fiscal union. But simply throwing money into a structure that was doomed to fail from the begining is not really a recipe for long term success and stability.

      2. Martin

        I do not think the ire is misplaced. If you compare the GDP per Capita of Cyprus, Turkey and Greece (arguably similar countries) over time
        then you see that the counterfactual consumption growth path of Cyprus is much lower. Cyprus was much richer the last few years because of banking and now they get the downside from regulatory arbitrage.

        In reverse order:
        Legal Business: That’s ok, I do not question the business model of Cyprus. I don’t care. But it was banking, and banking has a larger variance, due to crisis, bank runs, defaulting sovereins…..

        Currency runs: The ECB is able and willing to stop any currency run – that’s the upside if you are able to print money. The worst thing that could happen is that the Euro looses value compared to other currencies what would be a stimulus program for the whole Eurozone.

        But thank you for replying, I think this blog has a healthy & interesting discussion.

      3. jake chase

        How can you know that “most of the business going through Cyprus is legitimate investment dollars going to Russia and using Cyprus for legal reasons (English law courts) and rich retirees living in Cyprus?”

        Legitimate investment dollars going to Russia? Damn near the whole country is owned by less than 100 people thanks to Jeff Sachs and his pals.

        I am not suggesting singling out Cyprus in the corruption sweepstakes, but you ought to be more careful about such generalizations.

        1. Yves Smith Post author

          America has more income inequality than Russia. So again, your ire is misplaced. The World Bank (hardly an anti-American organization) gave the US a markedly higher (as in worse) Gini coefficient than Russia as of a few years ago, and US income inequality has worsened appreciably since then (all the income gains since 2009 went to the top 1%, the rest of the population in total is worse off).

          See here:

          You really don’t want to see that the US is more unequal than Russia, or that tax avoidance by Russian corps is no different than what big US multinationals do all the time. These attacks on Cyprus are simply hypocritical.

          As for that most of the $ going through Cyprus is for major corporate transactions. A few large deals account for the bulk of $ movements through Cyprus to Russia.

      4. ignim brites

        Maybe the real point though is to compell Italy and Spain to leave the Euro. The Italian elections after all did change the political scene considerably.

  2. The Dork of Cork.

    look , they have a excuse to extract real resources towards the core.
    Thats really enough is it not ?

    The EU and Euro pushes resources upwards ……..thats what interest bearing money does.
    But of course the EU is on the extreme end of the various banking fiefdoms.
    Its political might is in open view rather then the pretend sov countries of the US & UK.
    On that level at least it is refreshing.

  3. harry

    Usually I am a great believer in the “cock-up” theory of history. But this smacks of careful planning in ways you have already highlighted. So Yves, imagine your analysis is right. Is there any circumstance in which the Germans might actually want to engineer a slow mo bank failure in the periphery?

    Its like that nasty little man said, you shouldnt let a good crisis go to waste!

    1. Synopticist

      I dunno, I would maybe still go with cock up. Or at least the “priority of domestic politics”.
      Merkel couldn’t be seen to bail-out another southern miscreant, especially as the biggest beneficiaries would be russian dodgy types. They weren’t expecting resistance.

      1. KnotRP

        In what way does the elite’s arrangement (vastly different economic potential amongst nations bound by a common currency unsupported by central taxation) make the average wage slave citizen a miscreant? What exactly did the average Cypriot do, to deserve any of this unaccountable vitriol?

        If you want to go after criminals, go after criminals in court. You can borrow the US DOJ, SEC, OCC, and others…they are quite at their leisure.

      2. from Mexico

        Another southern miscreant?

        The biggest beneficiaries would be russian dodgy types?

        What is it, Synopticist? Do you believe that somehow, as if by magic, if you broadcast your falsehoods and irrational prejudices enough times, it’s going to make them come true?

        1. Synopticist

          Did you miss the bit about the “priority of domestic politics” and the mention of Merkel? None of the leaders of Northern Europe want to be seen throwing more taxpayers money at weaker Southern states.

          And if you can direct me to some comments by Greeks and/or Cypriots which acknowledge their problems are mostly caused by their own elites, and their society’s general complicity with them, rather than by foreigners, then I’ll become a little less cynical.

          1. fouad sayegh

            This finger-pointing business makes me sick. The Greek elites along with the rest of the Greeks could do whatever they want,as far as I am concerned. The point here is why are they a part of the EU when they shouldn’t be. In the final analysis, the whole European unity push has been an ill-conceived entreprise and should never have gone beyond the free-trade zone stage at the time it did.

  4. The Dork of Cork.

    Germany is just one of their favoured base of operations.

    Are these guys really Germans from those cold dark forests , or are they Romans ?

    I hate to say this but the entire sequence of events was very predictable.

    Countries do not really exist ,perhaps they never have.
    They are merely part of global banking operations.

  5. ltr

    Krugman began by laughing at the Cypriots and Russians while evidently knowing nothing about the problems, now at least Krugman is asking about but Yves has written a terrific post.

    1. Phil Perspective

      Krgthulu has quoted Yves before, so maybe by tomorrow he’ll post a correction or update. He’s admitted before when he’s gotten something wrong, or new information has changed his thinking. Hopefully this will be one of those cases. Hell, maybe Yves can email him.

  6. Milton Arbogast

    Underlying it all: € = swastika.

    The Germans thought they had conquered Europe with the € and have come up against the Eastern Front one more time.

    What possible motivation, I repeat, what possible motivation could there have been to “tax” small depositors other than to wring the last centime out of the Russians to help with the Greek bailout? What possible motivation?

    € = swastika.

  7. Hugh

    From the troika point of view, the choices for Cyprus are to enact the bank deposit levy or be forced out of the eurozone. It’s a simple power play for them, and they aren’t looking at the larger consequences.

    The other side of this is that if the bank deposit levy is enacted, there will be slow runs on banks throughout the periphery, and if Cyprus is forced out of the eurozone, then this sets a precedent for other countries leaving.

    The best course still appears to be telling the troika to go hang themsevles and resolve Laiki, burning its equity holders, bondholders, and unsecured depositors in roughly that order.

    1. carol

      Please, don’t repeat the communication mistake of the midnight eurogroup meeting.

      Do not call it a deposit levy, but call it a temporary (2 years) stop of very high interest payment (5+ %, instead of 1.6% in northern europe).

      1. Yves Smith Post author

        I checked deposit rates. They are just over 4%, not over 5%. And deposits serve as transaction balances. You have no idea how long depositors had fund in the Cyprus banking system.

        1. Bandolero

          “They are just over 4%”
          But that doesn’t invalidate the argument. Had the banks paid a safe 1,6% as it is common in northern Europe, they could have bought save papers instead of Greek trash. Or, if the banks bought risky papers anway, they could have accumulated billions as safeguar against worse times.

          70 bn deposits * 2,4% interest difference * 5 Years = more money than Cyprus needs now.

          1. Stelios Theoharidis

            Their deposit versus loan rates are at the link below. So it appears on the net the beneficiaries of high deposit rates (minimum of 2 years for your info Yves) were the very wealthy. The average Cypriot probably had debts as well with high rates (home loans >5% to pay off.


            If the banks fail the net loss will be to the wealthy individuals with large bank deposits. Certainly retirees with large deposits at Cypriot banks lured in by their high interest rates will take a hit. For those amongst us that think that these retirees may be wealthy, that is a bit speculative. One should certainly have more than 100K EUR available for retirement. Of course they never should have kept it in just one bank on an island, although they may have because of the interest rates.

            A percentage based claw back that is not progressive most certainly would harm the average Cypriot to the benefit of those with larger deposits. Although the banks could certainly suggest that they were going to claw back the calculated interest over a standard percentage on deposits to all depositers over X period. Their ability to do that legally is very questionnable.

            I think the ECB and the Germans don’t want a public relations disaster on their hands for bailing out a bunch of Russian depositors. That was the clear reason for the levy on depositors.

            However, I wonder whether there is a bit of kabuki theatre going on here between the Cypriot Government and their European Counterparts. The Europeans propose a harsh across the board levy on depositors, the Cypriots counter with a prosposal that is less burdensome on their average citizens, so both look like they are looking out for their respective demographics. There is politics involved here of course.

  8. Paula Garten

    There are some traps here for both sides of this issue. Suppose the IMF were trying to bait the Russians into a bailout to protect their own Oligarchs and the Russians decided to do just that. The Russians could ask for “other collateral” and strengthen their own position in Cyprus or the other side is the Russians could bait the IMF into an unsecured bailout because the IMF would have to do the bailout just to protect their place in the Bankster scheme. Either way the Cypriots get bailed out to my way of thinking.

  9. craazyman

    I can’t remember which PIRATES OF THE CARRIBEAN it was, but Johnny Depp’s character Captain Jack Sparrow was taking a verbal beating from somebody, berated with all the horrible things said about him all over the seven seas, and he smiled with a black-mascara-eyed self-satisfaction and said in his pirate’s brogue, “But they’re talking about me.” I wonder if Krugman ever feels that way. :) He must be the most-talked-about-man-in-the-world, or close to it!

    1. mac

      As long as folks talk about krugman he is a valuable commodity, his books writing etc draws controversy so it increases readership and advertising income and Krugman makes money. He has only opinions that stir the pot!!

      1. Synopticist

        Krugman is a useful corrective for the gaggle of Freshwater Freidmanites whom generally monopolise economic debate in the US.
        And at least he calls out the fake “centrist” Fix the Debt plutocrat backed, Very Serious People style BS.

  10. psoomah

    Reminds me of Obama. A lot of dumbfounded reactions to what is being done and little looking behind the curtain to see WHY it is being done.

    What is the larger picture being served here and for whose benefit?

    1. Lambert Strether

      I can’t help but think that what happened is what was meant to happen: Putting the idea that any deposit can be levied at any time on the table.

      Kleptocracy in almost pure form, eh?

      1. Doug Terpstra

        Indeed. The “dumbfounded reactions” are pretense. No need to look behind the curtain either when Obama, the ECB, “Fed” and bankster members are already behind the curtain, the real perps pulling levers. This is about consolidating power.

        1. Mick

          Indeed, just look at New Zealand’s alternative to deposit guarantees. Open Bank Resolution commits depositors to confiscation without needing a nose bleed inducing crisis to smooth the path. This principle has obviously been on someone’s mind for quite some time.

  11. Kokuanani

    Yves, have you commented directly on Krugman’s column? Comments are usually open for a while over there, and I’d bet there’s a pretty good chance he’d read them.

  12. Brick

    I agree. there is a lot of anti-Cypriot propaganda especially in the German news media, where a news anchorman tells the news about the Cypriot parliament by saying: “This sounds like madness and suicide.” German straight evening news.

    Kind of wierd that no one is talking about the elefant in the room, though. Today the Bundesbank published numbers about the median net household wealth. Germany comes in last compared to Italy, France, Spain. And not just by a bit. Italy’s number is 3 times higher.
    Some German anty-Cypriot propaganda is also tackled there.

  13. steve from virginia

    The Cypriots are being robbed, very important to blame the victim. First it was ‘Russian money-laundering’. Now it is excess banking system liabilities. What will the excuse be tomorrow?

    How are depositor liabilities a problem if it is your assets that are impaired? Shouldn’t the problems on the asset side be addressed first? Cypriot assets are a problem caused by the ECB and their self-created mess in Greece. This is more blaming the victim: Singapore has very high banking system liabilities in the form of deposits. Nobody is calling to give depositors there the shiv.

    Bank deposits are Cyprus’ sole collateral for ECB loans. What is underway is basically a margin call. The question — aside from why target your own collateral — is why act now? What’s the rush?

    Cypriot banks have been troubled for years, nothing has changed … certainly there is nothing to these banks that required an settlement at once, on demand! The loans needed to keep these banks functioning are a rounding error to the ECB income-expense ledger. Wouldn’t it make more sense to take the needed time and come up with an equitable plan?

    Along the same lines, all of this furor is over accounting entities/bookkeeping entries. Funds to ‘support’ Cypriot banks are nothing other than shifting ledger entries in ECB books. Under the circumstances what matters is that the collateral — deposits — remain in the euro system it does not matter who ‘owns’ them! As per Bagehot, what is excluded from the calculations is the small amounts of currency needed by the banks for day-to-day operations. This is where the ‘Certificate of Deposit’ idea came from: there was never a sign before last Friday that the small depositors were going to take their money out of the bank(s). The large depositors were exiting … for the reason that the ECB has appeared to be making leveraged loans there being no effective lender of last resort as a consequence.

    Now, the ECB appears to prove there is an anti-lender of last resort! A system balance problem occurs only when collateral exits the euro system as a whole … or if the eurozone malfunctions. Cyprus is a micro-version of ‘Target 2’ and its liability hazards: the issue of internal system balances does not matter as long as the funds do not migrate out of the system itself.

    What does Troika do? Create incentive for euros to be exchanged for other currencies and for liabilities to migrate toward the ECB! And Germany, too! Sacre Blew!

    Meanwhile, it’s quiet across the Eurozone. Everyone is working out methods to shift their deposits to banks in Switzerland or Norway … or US or UK. Capital controls? We’ll all see if they work, if they do it is the end of the euro.

    All this is blowback from the Italian election. Troika’s policies were repudiated by the Italian voters and like spoiled children they wanted to whack back. Draghi miscalculated on the Greek cramdown and he’s done the same thing in Cyprus. The euro is indeed doomed and there are ‘other’ reasons why but the precipitate cause is Draghi.

    He should be draghied through the mud along with his reputation.

  14. David Petraitis

    Didn’t know where to post this rather long comment on things the past few days has me thinking of so I post it here and at my blog:
    There have been many occasions over the past few years where I thought (and many others thought) that this could break the bank again, and put us firmly back into a financial crisis like 2008. To clear my head I thought about what I look for in the news to keep me on my toes about the potential for severe negative short term scenarios. Let me posit a few main thinking points about the current ongoing slow-mo crisis.

    1. We all expect there to be a moment in the future when we see a repeat of the crisis events of 2008.
    2. We don’t know precisely what will set it off – it may be economic political events in e.g. the current rage – Cyprus… or Greece, or even China; it might be an epidemic, another earthquake or something we cannot foresee. That is the nature of Black Swans.
    3. At least one of the causes will be an attempt to seize collateral of some type by a big bank against a smaller bank. Yves Smith has made the argument that at least on proximate cause of the Financial Crisis of 2008 was the seizure of collateral by JP Morgan from Lehman Bros. This froze the inter-bank flows of capital as no one was willing to lend on a short term to any other player for any collateral.
    4. The consequences are likely to be the freezing of capital for a longer period than the last time around; the contagion will likely be wider and deeper.
    5. Elites in the political sphere are doing nothing to put in firewalls and prudent regulation to forestall a meltdown. To the contrary the political policy agenda is being driven by elites in the FIRE sector.
    6. Financial elites are vying for position, trying to be first served in a collateral grab scenario.
    7. The financial assets not based on collateral will need to be written down to zero. “Loans that cannot be repaid wil not be repaid.” As a corollary all “real” assets will become more valuable and be – a likely scenario- targeted to be seized by foreclosure, bankruptcy and other means of liquidation. This seizure will proceed to the benefit of elite players at the detriment of the people in general, and the less sophisticated financial players (who are known as marks, zeros, Muppets…)
    8. While some financial elites will do well, most will not; most of the population will not either. This leads to political change in democracies, rise in social unrest, demonstrations, strikes, political violence. That will in its turn raise to call for forceful state response. To the point that in some states it may turn out revolutionary when the soldiers realize that they are citizens and should perhaps think twice about doing the dirty work of the elite.
    9. These things are not causal in a strict temporal order, e.g. social unrest may flare in some places before assets freeze.
    10. Political parties who are associated with creating the mess will be pushed out of office in democracies. Demagogues may ascend to power, like Hitler did in the 1930’s. I expect to see a rise in nationalistic, racist, xenophobic rhetoric – if not clear policies in that direction.

    Keep watching the signs of the times. Comments welcome.

    1. kievite

      “This leads to political change in democracies, rise in social unrest, demonstrations, strikes, political violence.”

      IMHO this is a wishful thinking. I think on the countrary, the current technology allow elite to keep people subservient like never in human history. Looks how they dealt with “Occupy Wall street” protest.

      Moreover to call current regimes “democracies” is way too big of a stretch. They all are oligarchies.
      While some financial elites will do well, most will not; most of the population will not either.

      Is not this a standard way by which modern societies operate ?

      Political parties who are associated with creating the mess will be pushed out of office in democracies

      With a two party system as implemented in the USA (aka polyarchy, see Wikipedia) such a possibility looks pretty unrealistic. Polyarchies such as the one that exists in the USA prevent majority of its citizens (outside tiny elite) from participating in its national elections by preselecting candidates for which people can vote.

      1. Thorstein

        In the old Soviet Union, the Party would nominate one candidate, and you could vote for your choice. In the U.S., the party nominates two candidates, and you can vote for your choice.

        1. Minor Heretic

          Slight correction: In the U.S., the small group of people and corporations who are able to donate thousands of dollars each to primary campaigns choose the two candidates. Then we get to choose between the tool with the smiley face and the tool with the frowny face.

  15. kievite


    “Create incentive for euros to be exchanged for other currencies and for liabilities to migrate toward the ECB! And Germany, too! Sacre Blew!”

    Exactly. The proposed solution looks both cruel (small depositors are hurt) and shortsighted (attraction of Cyprus for xUSSR businesses will never be the same).

    But those who are living in a glass house (which international monetary system definitely is) should not throw stones.

    So now Cyprus is FUBAR not matter what Monday solution look like. But it started chain reaction as all holders of foreign accounts from the xUSSR area are asking themselves a simple question: “Which country is next? Spain?”.

    So in reality “troika” might well generate a bank run and hit on euro, as some money will be repatriated ASAP because risks equation now dramatically changed and internal problems for xUSSR depositors look now far less serious then the possibility of outright confiscation by “friendly EU bankers”. And I agree with you that the USA might be an indirect beneficiary of this move from euro to other currencies.

    You are also right that Cyprus problem was provoked by EU dealings with Greece. So it is victim of EU policy, not only its own mistakes.

    If this was an attempt to press Russia into the game of saving EU banks, I think the result is far from expected. First of all treating Russians as criminals that is so popular in Western press already creates some incentives to revenge whatever the costs.

    It also looks like Krugman tries to cover way to big for him area as a result make blunders and questionable judgments (which actually is typical for all his career starting with his misguided attack of John K. Galbraith, which he currently most probably regrets).
    Balkans, Eastern Europe and xUSSR space are very complex area and without full time involvement it is very easy to start imitating George W Bush. Hiring a Princeton student to do some fact checking and research could do him a lot of good ;-). But his judgment in such cases are suspect for another more fundamental reason, despite pretending being a democrat he is and always was more like “just another, nicer flavour of neoliberals”.

  16. Jane R

    Time to call in the guy the Guardian calls the Fairy Godmother of Finance Ministers in Distress, Lee Buchheit:

    Here’s Buchheit’s prescription for fixing Cyprus’s banking/sovereign debt crisis, the same one he used to help Latin American countries in the 1980s and Asia in the 1990s renegotiate their debts.

    Will the Cypriots and Eurozone negotiators heed his advice? That depends on whether they can swallow their pride and stomach being seen as in the same boat as those emerging market economies that couldn’t pay their bills.

  17. Bob

    The article mentions that there are small nations with a much higher ratio of deposits to GDP than Cyprus. Fair enough.

    But is makes you wonder what happens if Switzerland or Singapore ever go bust.

    1. Yves Smith Post author

      Agreed, bank regulators in banking centers need to be tough on supervision. But going after one banking center in isolation is not going to solve anything. The tax haven business done out of Cyprus will just move somewhere else.

  18. Ruben

    In this case, the otherwise justified hatred directed to the banking industry blinds Krugman and Martin to the underlying dynamics that is playing out in Cyprus, which is the fundamental incompetence and immorality of disrecpecting the 100K euro deposit insurance and the interests of an important partner (Russia) via the imposition of a tax on innocent bystanders by EU leaders, especially Herr Schauble.

    It is a multilayer clusterfuck, you got to see through layers and layers of governmental stupidity and posturing to get the whole picture and reach a balanced opinion.

    By the way, according to the Spanish El Pais there is a Plan B that is now short 1B of reaching the 5.8B EU demanded participation by Cyprus and that does not involve confiscation of deposits but a swap of good and bad assets between the two biggest banks (making Laiki a bad bank) and assets such as the Church’s wealth and pension savings.

  19. Ken Ward

    In a post that appeared three or four months ago, Yves Smith described Krugman’s attitude towards Republicans and Democrats as ‘Manichean’. This is inaccurate. Krugman is totally opposed to Republicans, but his attitude towards Democrats is not a mirror image of that, in other words, he doesn’t express total support for Democrats. What he does is rather to cover up for them, excuse their collusion with Republicans,praise them occasionally and issue exhortations in their direction from time to time. Far more interesting than his attitude towards Republicans and Democrats is his attitude towards himself, of which the main characteristics are his seemingly desperate need to point out to readers how often he has been right and his extreme reluctance to acknowledge his errors, however few they may have been. I can’t help feeling sorry for such a talented person for whom self-vindication is apparently so crucial.

    1. Minor Heretic

      Krugman seems frustrated with 98% of everybody in politics, and he is correct to be so. I get the impression that he hasn’t totally written off the Democrats, and so is trying to maintain some kind of polite relationship and attempting to push them towards sanity.

      His repeated “I was right” statements appear to me to be less about ego and more about getting people to take advice based on performance rather than past/present failure plus “correct” ideology.

      I have some mechanical aptitude, and periodically I end up watching as a friend who is mechanically clueless tinkers with something on the road to ruining it and/or injuring themselves. I have to restrain myself to avoid snatching it away from them and saying something regrettable (though true). I think Krugman finds himself in the same position in terms of being rude to the Dems.

  20. Casteelk

    Krugman never reads and does his homework anymore. He is a sociopath who actually thinks his “gifts” for economics is somehow part of his genetic makeup and doesn’t really have to do any work, since he has been graced with natural born talents. Sadly, this is a true representation of pretty much all the players in this mess. including Bernanke and every leader that has some title.

  21. Lafayette


    YS: The crisis in Cyprus is to a large degree a knock-on from the implosion of the Greek economy.

    That fact is well known to all and sundry.

    Which is why the ECB sees Cyprus as a surrogate for Greece. Let the Cypriots tax below the 100K-€ threshold and Greece does it too … and why not Spain? Why not Italy? Why not France?

    Just where do you stop the contagion as regards the EZ Deposit Insurance rule, which is shown here. Note how all EZ-nations have a 100K-€ limit. What does the limit mean?

    It means that below 100K-€ is a No Trespass zone for governments who do not know how to manage aptly their finances. Thus opens a legal issue. Aren’t those deposits taxed a “loss” and therefore the ECB is responsible for their replacement?

    That argument could be made in a court of law if, as a result, the added taxation reduces a bank’s reserves (which are already insufficient) and the bank then declares itself bankrupt – meaning the deposit-insurance becomes due. Why open that Pandora’s Box of litigation across the EZ?

    So this is an itty bitty country with some rich and moderately rich residents distorting the numbers.

    Agreed, but a rule is a rule. They are made to be bent, but not broken. And it is very understandable why the ECB does not want any government touching deposits (aka “savings”) below the threshold. Because if allowed, that sets a EZ precedent that is certainly not advisable other countries follow.


    Frankly, as an inhabitant of France, I kinda-sorta like that No Trespass warning, especially with a Socialist government that seeks to tax everything that budges.

  22. bold'un

    The main problem in Cyprus seems to have been control fraud at Laiki Bank. Greek shareholders controled it and folded in Greek Banking operations. In that way Greek management could tell the Greek authorities that it was a Cypriot Bank and then pull the wool over the Cypriot authorities about what was really going on in the Greek subsidiary.
    Part of the loss was a write down of EUR 2 Bil on “safe” Greek Government bonds (loss exacerbated by the ECB and IMF excluding themselves from the write-down) and the same loss again on private Greek clients (possibly related to the bank’s management) who borrowed to ‘catch falling knives’ on Greek equities and business.

    Surely if the Euro area is about allowing smaller countries access to a greater market, and if smaller countries are unlikely to have many scaleable industrial enterprises, then it should be possible for then to have Euro-sized financial services businesses. The big Banking error in Cyprus was that they did not persuade their clients to move their deposits into money market funds…

    1. Lafayette

      he big Banking error in Cyprus was that they did not persuade their clients to move their deposits into money market funds…


      Agreed, but let’s not forget that had Brussels been more attentive in auditing Central Banks of all the EZ, then this manipulation would have been discovered and dissolved.

      Cyprus is the scapegoat for a lax oversight authority, both at the Commission in Brussels and the ECB. But who knows what the latter knows (or knew) about the complicity between the Cypriot and Greek banks … and when did they know it?

      It’s a shame, Cyprus is a country I know well for having done business there. The people are ever so nice.

      They deserve better than what is happening. But, they should have known better when electing their officials. (Ditto Greece.) Many Cypriots understood the myriad links between Cyprus and Greece at both the political, religious and bank levels – the place is an island and like in a small village … people talk.

  23. Arun

    Krugman says “assets of 8 times GDP”, not deposits.

    In Nov 2011, Cyprus bank assets were 8.5 times GDP.

    The big commercial banks had direct domestic loans of 166 per cent of GDP.

    The cooperative credit institutions had loans of about 60% of GDP.
    Subsidiary branches of foreign banks had loans of about 80% of GDP.

  24. Gail

    To attract these capitalist pig, tax evading, cheating and corrupt foreign depositors, Cyprus offered ridiculously high interest rates. To pay the rates, they had to invest in risky assets like Greek government bonds. This had to end badly. We can only hope for a silver lining of sorts when the scum bags who greedily gobbled up Russia are be wiped out. One can only wish for a similar fate in the Cayman Islands – Mitt the Sh*t be warned. Finally, the best thing for Cyprus is to get the EU to help them return to their own currency. Iceland basically stiffed all its stupid foreign banking investors and its citizens are now doing just fine. It is a wonderful Nordic Welfare State and would be swamped with emigres if it weren’t so close to the Arctic Circle.

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