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Thoughts from the Frontline

“This Country Is Different”

June 30, 2013

Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.

– John Mills, "On Credit Cycles and the Origin of Commercial Panics," 1867

Hyman Minsky developed an economics of financial instability, of instability bred by stability itself…. Minsky's approach, very different from Godley's, is conceptual rather than statistical. A key virtue is that it puts finance at the center of economic analysis, analytically inseparable from what is sometimes called real economic activity, for the simple reason that capitalistic economies are run by banks.

To grasp what Minsky is about, it seems to me, is to go immediately beyond the coarse notion of the 'Minsky moment,' a concept which implies falsely that there are also non-Minsky moments. It is to recognize that the financial system is both necessary and dangerous, that strict financial regulation is both indispensable and imperfect.

– James Galbraith, 5th annual Dijon conference on post-Keynesian economics, Copenhagen, May 2011

I find myself finishing this letter on an island off the coast of Croatia, on the backside of the middle of nowhere. But it is the perfect place to contemplate my recent experience in Cyprus. Through the efforts of your fellow readers, I was able to meet a wide variety of people and have some in-depth discussions on the crisis that has enveloped Cyprus. And while the details are different, of course, there is a pattern to the weave, so to speak, that calls to mind various aspects of the crisis that began in 2008. And perhaps that pattern will give us a glimpse of what else may be coming our way.

You must first realize that Cyprus is a very small country, some 800,000 people. Among the leadership, everyone knows everyone. There is much to admire, as we will see. But Cyprus has had a gut-wrenching crisis, proportionately more dire than any in other European countries recently; and precedents are being established here for how future problems will be dealt with in the Eurozone and elsewhere.

To start a two-day marathon of meetings, I sat down Tuesday morning with two brothers, Symeon and Andreas Matsis. Symeon was until a few weeks ago a board member of the Bank of Cyprus, the largest bank on the island and now the focus of the financial crisis. He made his career in the governmental sector, where he was the general manager of the Planning Bureau of the Ministry of Finance. Andreas Matsis is a local businessman who until a few weeks ago sat on the board of the Central Bank of Cyprus. He is a successful entrepreneur who was also until recently the president of one of the local chambers of commerce. They are both in their early 70s, soft-spoken and totally engaging and forthcoming. Our one-hour meeting stretched to two hours.

Symeon carried a copy of This Time Is Different by Rogoff and Reinhart. It was dog-eared and full of notes. "I am reading it so I can try to understand what happened to us. The more I read the more I understand that they were describing Cyprus. And we did think that 'This country is different.' Which is why the crisis has been such a shock to our local culture."

And such a shock. The next evening, I dined with a group of families, eating the local version of Greek cuisine, course after course after course. While they were all severely financially distressed, to a person they believed that Cyprus would come back, and they offered reasons why one should still do business is Cyprus. They were not sure what they would do, as their livelihoods were in danger, yet they faced the future with the strong resolve to figure it out. "Our parents lost everything in 1974 (when Turkey invaded the north portion of the island) and then came here and built a good new life. We can do this."

One of the women at dinner was a charming lady who had retired in January after a career at the Bank of Cyprus. Note this was less than three months before the crisis in mid-March. She had her entire pension and life savings in the Bank of Cyprus, which she totally trusted. And now it looks like she will lose at least 60% of those savings. It could have been worse. She could have been at Laiki Bank. There the losses may be 100%.

The country has instituted capital controls, and she has access to only about 10% of her savings. At some point she will get all the remaining money but cannot move it out of the country until the capital controls are released.

"If you could get it today, would you leave it in the bank?" I asked.

She looked down and said quietly, "No, I would have to move it. I have children that will need that money for going to college abroad and then for help in buying homes. I can't take the risk that the money will not be there."

She pointed to one of the unique and positive features of Cyprus. Until recently, there was no university on the island. Everyone went abroad to college, typically then staying on in the country where they were educated and getting work experience before returning with skills and contacts. Cyprus is a country of accountants and lawyers, engineers, and other professionals.

The Bank of Cyprus made about 40% of the loans extended to businesses in Cyprus. It is now out of business itself. There are some solvent banks with available funds, but they can't make loans, because if capital controls are lifted, it is likely that a significant number of Cypriots would, like the lady mentioned above, move their money. There's no question that money will fly out of the country if trust is not first restored. But with no available bank financing, in addition to capital controls, businesses are closing up left and right. Unemployment, which was basically unknown before, now stands at 15% and is likely to go to 20%. If there is no functioning banking system for new loans, that makes doing business very difficult; and buying and selling property, outside of the cash market, is at a standstill.

But which will arrive first? Trust and a new beginning or capital flight and a long nightmare? It is a chicken and egg sort of problem with no easy answer, and one which I will attempt to bring some thought to later.

"This Country Is Different"

But to in order to delve further into this conversation about Cyprus, we are first going to return to France. Last week I wrote from France, where I suggested that France was on its way to becoming the next Greece. I got a very impassioned letter from a French citizen who made the case that France is not Greece. "As a Frenchman I am more than used to…

Discuss This


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Jacques Hennessy

July 3, 2013, 1:54 a.m.

1 samll comment about France. France was the country where the original bust owing to fiat money happened. In the early Eighteenth century, a brilliant financier, John Law, approached Philippe d’Orleans, then regent of France with a clever scheme. To make it very simple he proposed to back government loans with shares of the Missisipi company which had the exclusive right to anything good that came from Louisiana.  He invented everything, stock promotions, public relations, warrants, options, bent directors, false press releases, etc etc.  The regent was only too happy to back this as it made life much easier than trying to reduce state spending. All went merrily , with new millionaires every day, until the Regent turned up at the bank, swapped his shares and notes for gold and….....  The description of the misery and draconian regulations that followed has also a very familiar look.  try this book;=“john+law”+biography   Thrilling and terrifying.  But really, once you have read it, the sense of ‘deja vu all over again’ is overwhelming.
    As this happened again during the revolution (assignats) and once more in the 30s, 40s and 50s ( more slow motion, but basically the same ( borrow and destroy savers assets through inflation) I very much doubt France will step back. Add to that the example of Germany across the river in the 20s and politicians can’t learn?  It wont’ happen now.

  About the Cyprus banking non rescue.  As there is nothing to expect from bankers( have you seen the latest recorded phone conversations between Bankers from Anglo Irish) or politicians, maybe it is not such a bad call after all. If depositors can not be sure of getting their money back, they will be a sight more careful about who they trust it with, and bank employees whose only justification is to punt with their clients money will have less toys and less scope for disaster.
  Of course, this is only true if the proper chain of pain is respected:  Shareholders, bonholders, unsecures creditors, depositors. This does not seem to have been the case in Cyprus, details have not been forthcoming.

  KKee-p up the good work.

Jack Gardner

July 2, 2013, 10:27 p.m.

It is curious that so many people can think that their country is different economically and not subject to the causes that bankrupt other countries.  This newsletter gives examples of how the leaders and experts of countries can focus on aspects that allow them to imagine that they are unique.  But I think that the fundamental reason is that, historically, politicians and economic theorists do not understand how wealth is created. 

In spite of their talk of “growing” the economy, they basically see wealth as stagnant, to be traded, looted, conquered, confiscated, taxed, and spent.  They do not grasp that the value of any currency, even gold coins, is worthless if there is too little productivity and transportation of goods to be purchased.  (It is productivity (of the appropriate goods in an ever changing environment) that is fundamental wealth.)

Further, they think that productivity can be promoted by offering money, tax incentives, appealing to duty, central planning, and other inducements.  They do not grasp that substantial productivity is the result individual initiative pursuing individual goals, which are constantly shifting.  More money is desirable only if it can be used to further personal goals, finding desired products to purchase, and securing the life sought. 

Nations are impoverished to the extent that they restrict individual freedom, no matter what else they try.  (Of course, the leaders live like kings in any case.)  Keynesians and other such macroeconomists do not grasp the significance of individuals.  So, ignoring messy microeconomic activity, they see macro reasons which seem to make each country economically different.  (Never understanding what goes wrong.  Probably evil speculators, policies too weak, not enough political control, businesses focused on profit rather than collectivist duties, etc.)

July 2, 2013, 1:33 a.m.

  One of the great economic problems is limiting the three major classes of debt, personal, business and government.  I will suggest an ancient solution to the first.  In the only system of Law ever devised to protect poor people, instead of rich, the Law of Moses, there was a time limit on personal debt, seven years.  At the end of seven years all personal debts would be forgiven.  This would end much unnecessary spending and make the banks more cautious lenders.  Obviously, it would create some problems.  People would try to take advantage of the system like they do now, however the advantage to the society as a whole of keeping debt in check, moderating the ups and downs of consumer spending, getting poor persons out of the debt cycle would provide more benefits than problems. 
  Let me note that one of the reasons I believe the Law of Moses was given by God is because the legal system protects the poor and middle class.

July 2, 2013, 12:01 a.m.

Hola John,

“The more you think you are different the more you are the same”

My Wife and I enjoy enjoy your hard work John .. thank you.
We are New Zealanders just a little older than you and for the last ten years we have based ourselves in the circus of Buenos Aires and we travel for a little more than half the year ... right now we are on St Martin (Fr) and thoroughly enjoying ourselves.
To ward off starvation, we are intraday Traders.
If you have a moment when you are at 38,000 ft, do drop us an email
and we can exchange notes.

kind regards
Dena e Ian

July 1, 2013, 9:48 a.m.


It seems there are at least three simple views for an individual’s (“hedge”) purchase of gold. (1) It can be used as money. (2) It can help offset inflation. (3) It may, may serve as an asset class, with probable upside. I’m sure whatever the case, gold is uncertain as tulips or federal reserve notes. We want something we can trust. Something enough of us may believe in, may give us the opportunity to tread water civilly. Alas, we move forward always with uncertainty, yet hoping for a return to a collective sense that there is some thing we can all agree to believe in. I’m not sure we will or what period of time before we do. Meanwhile, we muddle on with what we have.

David Pileggi

Brian McMorris 46364174

July 1, 2013, 9:05 a.m.

“a small chance” of meeting its revised budget target of 3.7% of GDP this year and will have to cut back on spending. Furthermore, they added that the extended deadline of 2015 to reduce debt to GDP to 3.0% would require France making a “big effort”...

I am sure what was meant here is in respect to “budget deficit” not debt.  The French government budget deficit was most recently -4.8% in 2012 on a 2.1T Euro GDP.  The French national debt is already near 100% of GDP (89.9% estimated in 2012 according to American CIA), no where near 3.7%.  As for the French government budget expenditures as a percent of France GDP, it is closer to 50% (around 1.1T Euros in 2013), which is unsustainable long term for any country.

Michael Gorback

July 1, 2013, 6:47 a.m.

You should be ashamed of your obsequious treatment of the Matsis brothers. Those two were neck-deep in the corruption and mismanagement that led to the collapse and you treat them like wise old sages.

They were “forthcoming”, eh? What did they say when you asked them about how their bank forgave millions of euros of loans to businesses, unions, and politicians?

They were both on the board of the Bank of Cyprus while this went on.

I’d really like to hear their “forthcoming” comments about that. They were either morons asleep at the switch or they knew about and condoned what was going on. Which is it?