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.
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.