terça-feira, março 10, 2015

Can this currency be saved ? Look to Iceland and to Cyprus

Resultado de imagem para iceland flagWhile the Eurogroup creditors continue in denial,  it would be useful to review the lessons from Icelande as outlined in an interesting article.  Splitting banks not into good bank /bad bank but rather into domestic bank/foreign bank, and to impose capital controls.

The two biggest threats to the EURO are
(1)  the persistent divergence in the trade balances among the Eurozone partners which lack balance-of-payments adjustment mechanisms and
(2) the co-mingling of risk among local and cross border depositors no longer distinguished by the currency of denomination.

When the corner shopkeeper faces the same risks in his  local bank deposits as do the speculative investors from the other side of the continent who move millions at the speed of a click, we are on very thin ice indeed.

Leave it to Iceland, to see the danger and to do what urgently needs to be done elsewhere.
If the Single Currency is to be  saved.

"Here is a lesson from Iceland. In October 2008 the Icelandic government acted on a bank run by forcing the dysfunctional banks, by then lacking liquidity, into receivership, splitting their operation in two. Instead of the classic split into a good bank/bad bank the domestic operations were consolidated in a New bank with the foreign operations left in the estate of the Old failed bank; in effect a split into a good domestic bank and a bad foreign one. Some weeks later, capital controls were put in place, forcing investors to stay put and shoulder the risk.
An aside on the Icelandic capital controls: they came into being with full support of the International Monetary Fund, IMF because the foreign currency reserves were not enough to meet demand. This is a very different situation from Cyprus where capital controls were put in place for the banks to hold on to deposits, as would be the case if capital controls were used in Greece.

Cyprus - In recovery, but deep scars remain  
In retrospect, it is clear that European leaders, international creditors and bank regulators could have done more to limit the economic upheaval caused by seizing portions of depositors’ money above the level of 100,000 euros covered by deposit insurance, a threshold equivalent to roughly $105,000 at the current exchange rate. 
Source: "