Dear community members,
Cyprus crisis is a very interesting case and gives many indications
about the rules which are driving the new Financial System that will
emerge as a consequence of the current Systemic Crisis.
- Responsibility of the depositors. From now one, deposits can
suffer significant write-offs, and consequently, evaluating the
solvency of a Bank is not the responsibility of investors but also
savers.
- Increasing the pressure on Banks for improve transparency and
increase their solvency ratios. 1 year ago, we discussed that
Governments and Banks executives are playing a prisoners dilemma game,
for forcing the banks to increase their transparency and solvency
ratios. Fear of depositors to lose their savings is a good driver for
“putting the banks executives on track”. Those banks which don’t prove
their solvency are on risk of losing clients very quickly.
http://blogs.sap.com/banking/2012/03/16/banks-governments-and-prisoners-dilemma/
- The Role of Capital Controls in the new Financial System.
Most of the technical and political explanations I’ve read in the last
days about the Capital controls in the Cyprus crisis describe the
measure as a hard, temporary restriction for preventing panic and
Banking Run.
http://www.ft.com/cms/s/0/9901f6ce-96f2-11e2-a77c-00144feabdc0.html#axzz2POftrxWU
In my opinion there’s something more important than preventing a
Banking Run in Cyprus; Capital Controls are going to play a key
role in the regulatory framework of the future Financial System.
I strongly recommend the article of Dr. Paul Krugman (2008 Nobel Prize
in Economics) about this particular matter.
http://www.nytimes.com/2013/03/25/opinion/krugman-hot-money-blues.html?_r=0
Professor Krugman justifies Capital Controls as a good prevention of
speculative bubbles and he couldn’t be more right.
On the other hand, Dr. Krugman is a great advocate of sovereign
currency policies and strong critic of the Eurozone construction
failures.
When Dr. Krugman, as many other reputed economists, blame the Euro
(currency) as the responsible of the Financial Crisis in Europe, they
mention that integrating in the same currency area, economies with
different GDP structures tend to generate bubbles in those economies
with lower productivity. Again, absolutely true, in common currency
areas prices tend to align, but that’s not necessarily the case for
productivities.
If the different economies have different currencies, low productivity
economies can recover their productivity by currency devaluation, but
if they’re tied to a single currency (EURO), they cannot.
Consequently, how can those low productivity economies increase their
productivity?
The answer is internal devaluation, and that’s exactly the role that
Capital Controls are going to play.
Today, we don’t have a single Euro anymore. We cannot pretend that a
Euro in Frankfurt has the same value than a Euro in Nicosia, when the
Euro in Germany is much more liquid than the Euro in Cyprus. They have
the same Nominal Value but the Euro in Cyprus is suffering a hair-cut
in its value as a consequence of its illiquidity.
This is “the facto” the currency devaluation that will increase Cyprus
economy productivity.
In the meantime Cyprus population is going to be severely
impoverished; but nobody said that maintaining high standards of living, was the exit strategy of this Systemic Crisis.
The exit strategy of this Systemic Crisis is Efficient Capital Management, and that’s why capital controls are going to be implemented in Cyprus, and other places.
Looking forward to read your opinions.
K. Regards,
Ferran.
Cyprus crisis is a very interesting case and gives many indications
about the rules which are driving the new Financial System that will
emerge as a consequence of the current Systemic Crisis.
- Responsibility of the depositors. From now one, deposits can
suffer significant write-offs, and consequently, evaluating the
solvency of a Bank is not the responsibility of investors but also
savers.
- Increasing the pressure on Banks for improve transparency and
increase their solvency ratios. 1 year ago, we discussed that
Governments and Banks executives are playing a prisoners dilemma game,
for forcing the banks to increase their transparency and solvency
ratios. Fear of depositors to lose their savings is a good driver for
“putting the banks executives on track”. Those banks which don’t prove
their solvency are on risk of losing clients very quickly.
http://blogs.sap.com/banking/2012/03/16/banks-governments-and-prisoners-dilemma/
- The Role of Capital Controls in the new Financial System.
Most of the technical and political explanations I’ve read in the last
days about the Capital controls in the Cyprus crisis describe the
measure as a hard, temporary restriction for preventing panic and
Banking Run.
http://www.ft.com/cms/s/0/9901f6ce-96f2-11e2-a77c-00144feabdc0.html#axzz2POftrxWU
In my opinion there’s something more important than preventing a
Banking Run in Cyprus; Capital Controls are going to play a key
role in the regulatory framework of the future Financial System.
I strongly recommend the article of Dr. Paul Krugman (2008 Nobel Prize
in Economics) about this particular matter.
http://www.nytimes.com/2013/03/25/opinion/krugman-hot-money-blues.html?_r=0
Professor Krugman justifies Capital Controls as a good prevention of
speculative bubbles and he couldn’t be more right.
On the other hand, Dr. Krugman is a great advocate of sovereign
currency policies and strong critic of the Eurozone construction
failures.
When Dr. Krugman, as many other reputed economists, blame the Euro
(currency) as the responsible of the Financial Crisis in Europe, they
mention that integrating in the same currency area, economies with
different GDP structures tend to generate bubbles in those economies
with lower productivity. Again, absolutely true, in common currency
areas prices tend to align, but that’s not necessarily the case for
productivities.
If the different economies have different currencies, low productivity
economies can recover their productivity by currency devaluation, but
if they’re tied to a single currency (EURO), they cannot.
Consequently, how can those low productivity economies increase their
productivity?
The answer is internal devaluation, and that’s exactly the role that
Capital Controls are going to play.
Today, we don’t have a single Euro anymore. We cannot pretend that a
Euro in Frankfurt has the same value than a Euro in Nicosia, when the
Euro in Germany is much more liquid than the Euro in Cyprus. They have
the same Nominal Value but the Euro in Cyprus is suffering a hair-cut
in its value as a consequence of its illiquidity.
This is “the facto” the currency devaluation that will increase Cyprus
economy productivity.
In the meantime Cyprus population is going to be severely
impoverished; but nobody said that maintaining high standards of living, was the exit strategy of this Systemic Crisis.
The exit strategy of this Systemic Crisis is Efficient Capital Management, and that’s why capital controls are going to be implemented in Cyprus, and other places.
Looking forward to read your opinions.
K. Regards,
Ferran.
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