Okay, so Russia sending
troops into Ukraine’s Crimean Peninsula did unsettle world markets. At least it
did on Monday.
Like a diver
plummeting off a cliff, markets in various parts of the world lost value last
Monday as investors responded to the possibility of war between Ukraine and
Russia. The New York Times said it
like this:
“The escalating
crisis in Ukraine created turmoil in global markets on Monday, hitting stocks
from Wall Street to Ukraine and causing a spike in oil and natural gas prices
that could reach into consumers’ wallets. But despite fears that the conflict
between Russia and the West over Ukraine could shift into a military
confrontation, analysts said there was little risk of global financial
contagion or of major blowback to Western economies.
Perhaps that was
the reason markets generally did so well during the rest of the week. That and
the fact Russian President Vladimir Putin seemed to pause for a breath and,
possibly, a reconsideration of strategy after the Russian stock market lost
about $58 billion on Monday. (That’s more than the cost of the Sochi winter games.)
There were other economic consequences, too. A rapid decline in the value of
the ruble led to a sharp rise in short-term Russian interest rates, and the
Russian central bank was compelled to spend about $12 billion defending the
country’s currency.
Meanwhile, back
in the United States, the bull market celebrated its fifth birthday. During the
last five years, the value of investors' holdings in U.S. stocks has increased
by about $16 trillion, according to Wilshire Associates as reported in Barron’s. As if that weren’t remarkable
enough, last week the Federal Reserve reported the net worth of U.S. households
rose by nearly $3 trillion during the last quarter of 2013. It’s enough to make
you wonder whether the cost of quantitative easing, which expanded the Federal
Reserve’s by more than $3 trillion, was worth it.
where are they
now? Remember
that island in the Mediterranean that was in turmoil about a year ago and
turned to the European Union (EU) for a bailout? The situation in Cyprus was a bit confounding
because the country was growing relatively robustly and had a small budget
deficit. The issue was the country’s banks which were bigger than its domestic
economy. Cyprus had about 8 trillion euros in deposits and only 4.5 trillion euros
of annual government revenues, according to BCA Research cited in The Economist. Since bank deposit
guarantees are only as good as the country providing them, Cyprus needed some
help.
Eurozone leaders
responded to the Cypriot bailout request with demands for austerity and reforms
– pretty much the same thing they’d been requesting from other bailout
recipients – but a ‘bail-in’ also was part of the package. What is a bail-in? The EU required debt holders and uninsured
depositors help absorb bank losses and fork up new capital. Although the idea
was initially rejected by the Cypriot parliament, the government capitulated
relatively quickly. The Economist
described it like this:
“At first, a raid
on insured [bank] deposits was envisaged, though ultimately they were spared
and the main victims were uninsured depositors – a decision made easier by the
fact that many of them were Russians. But getting creditors both to absorb losses
and to recapitalize the country’s biggest bank (which also had to absorb the
second-biggest and even more comprehensively bust bank) is not proving to be a
great success.”
How
unsuccessful has it been? The Cypriot economy contracted by about 5 percent in
2013 and is expected to continue to wither this year. Unemployment in the
country is at 17 percent.
There
are several lessons that can be learned from events in Cyprus, according to The Economist: 1) It’s important to have
a state-backed ‘bad’ bank where bad loans can be held and dealt with over the
long term; 2) Forcing uninsured depositors to take a hit helped protect
taxpayers, but it also damaged public confidence in banks; and 3) Fiscal policy
makers need pragmatic and flexible solutions because every banking crisis is
different.
Weekly Focus – Think
About It
“If
your actions inspire others to dream more, learn more, do more, and become
more, you are a leader.
--John Quincy Adams, Sixth
President of the United States
No comments:
Post a Comment