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Fri Mar 22, 2013, 08:02 PM

Spin Alert! Slate's Matthew Yglesias Gets It All Wrong on Cyprus ( William K. Black )

March 22, 2013

Slate’s Matthew Yglesias writes columns about economics and finance. Yglesias has been writing about Cyprus, and my critiques of the policies he has been proposing are the subject of this column.

Here's the short background on Cyprus: The country is in a crisis and the EU is willing to bail out its collapsing banks only if Cyprus raises revenues. The EU is unwilling to make the banks’ sophisticated creditors – the bondholders – take any losses. The EU wanted the banks’ least sophisticated creditors – the depositors – to take losses, even if their deposits were small enough to be within the deposit insurance limit. The reality, which the EU wishes to obscure by calling its proposal a tax, is that that the EU was insisting that depositors no longer be fully protected from loss by government deposit insurance. The EU demand was made shortly after the EU and Cyprus’ government pledged that depositors under the insurance limit would suffer no losses.

Cyprus’ government’s duplicity was prompted by its close ties to Russian oligarchs who deposit the funds they loot from Russia in the failing Cypriot banks. Cyprus’ plan, therefore, imposed a hefty (6.6%) loss on (smaller) insured depositors in order to keep the percentage loss on huge depositors well in excess of the 100,000 euro insurance limit under 10 percent.

The plan was terrible for Cyprus, terrible for insured depositors, and very dangerous to banks in the European periphery (because it could spark large withdrawals of insured and non-insured deposits from such banks). The plan was also a political failure that enraged most Cypriots into opposing the deal. Yglesias’ response to the plan was a March 18, 2013 column praising it: “Two Cheers for the Cyprus Bailout.”

The part that Yglesias liked best about the plan was causing depositors – including the fully insured smaller depositors – losses. The single worst aspect of a terrible plan is what Yglesias cheered. In fairness to Yglesias, he wrote that the losses imposed on the largest depositors should have been larger and the losses on the insured depositors smaller. He did not, however, call for Cyprus and the EU not to breach their promises not to force losses on the insured depositors. His position was that the magnitude of the betrayal of insured depositors be reduced (“It’s perhaps not possible to entirely spare middle-class savers, but they can be cut a much better deal than this.”) Yglesias’ one sentence summary of his position reads: “The plan to punish Cypriot bank depositors is hideously unfair, but it contains the germ of a great idea.”

in full: http://www.alternet.org/economy/spin-alert-slates-matthew-yglesias-gets-it-all-wrong-cyprus?paging=off

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