"Kee" Points with Jim Kee, Ph.D.

Europe: Stocks are off a bit today as details of a Cyprus deal get fleshed out. Cyprus’ financial system originally got into trouble because of losses from Greek government bonds, the so-called “haircut” from last year’s Eurozone-led restructuring of Greek debt (Wall Street Journal). The effects were magnified for Cyprus because the financial system there is a disproportionately large share of GDP. Massive bank failures in Cypress would bankrupt the government of Cyprus if it tried to bail the banks out. That’s why the EU’s bailout deal, passed late last night, has among its aims a shrinking of the financial sector there. Long story short, the Eurozone increasingly wants private investors and depositors in European banks, rather than taxpayers, to bear the costs of risky bank lending practices that don’t pan out. That seems to be the desire in Europe going forward for dealing with banking crises beyond Cyprus. “Near-term tough, long-term healthy” is how many view that policy (Financial Times).

 

Reading the actual Eurogroup document (“Eurogroup Statement on Cyprus”), the goal is to downsize the financial sector until it reaches the EU average by 2018. Deposits below EUR 100,000 will be safeguarded (guaranteed), “in accordance with EU principles.” And it “looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution.” Isn’t that interesting language?

 

Growth prospects for Europe are still pretty grim, and one reason for that, according to Nobel economist Robert Mundell, is that Europe allowed the Euro to strengthen too much: “It’s just mindboggling that they could allow the exchange rate to appreciate,” said Mundell (Bloomberg). He argued that the Euro’s advance was a “devastating thing to happen” for the weaker Euro-area economies, and that Europe should consider its own form of asset purchases (which would tend to weaken the exchange rate or[RH1]  Euro). He suggests that if the Euro drops again, the European Central Bank should keep it there, which would do “wonders to help revive European economies.” I mention this because Robert Mundell is probably one of the most credible international economists that actually has some influence, so his urging can be somewhat predictive of future policies.

 

The most interesting thing I saw last week: A little capitulation on Fed Chairman Ben Bernanke and the Federal Reserve by the very visible TV analyst Larry Kudlow: “I confess that he (Bernanke) may have the monetary-stability story more right that I originally thought…If gold remains soft, and King Dollar steady, perhaps the former Princeton professor deserves a little more credit. He may have gotten that story right” (National Review).