Involving: Cypriot defiance, bearing the brunt of the tax anyway, the slow but gradual privatisation of China’s railways, debt burdens the size of familiar countries, and how the decline of the Rand is almost but not quite the same as the Cyprus levy.

Good morning

A note: I’m on wedding attendance duty for the rest of the week – so no more news until Monday. But I’ve revisited the Amateur Investor series, and written something on Equity for tomorrow. And then Friday is all about Socialism. Enjoy!

The headlines:

  1. Cyprus says no.

    Link: so now what?

    Not a single vote in favour of the depositors’ tax, even after there was a last minute adjustment to exempt deposits of less than 20,000 euros.

    Which leaves everyone going: “and now?”

    The banks still need to be bailed out. As a regretful-of-the-vote-outcome German Finance Minister points out:

    “The ECB has made it clear that without a reform programme for Cyprus the aid can’t continue. Someone has to explain this to the Cypriots and I think there’s a danger that they won’t be able to open the banks again at all.” ~ Wolfgang Schauble

    Which would be a whole lot worse – because after all, an insolvent bank is a 100% depositors’ tax.

    The Troika have really shafted the Cypriots this time. Because for sure, if the banks do open tomorrow, there will be a massive outflow of depositor funds. If I were Russian, I’d be taking that money out as soon as they let me click “send” on the ETF. The only funds left will be the ones in long fixed term deposits – who are much more likely to be held by local Cypriots than anyone foreign. And if the banks fold once they lose their capital, then it’s a bewailed farewell to anything left.

    So actually – Cyprus is going to get all the pain of the depositors’ tax without actually paying the tax. And at least the tax would have gotten them aid.

    If I were Cyprus, I’d be immediately instituting limits on capital flows. It’s crisis time.

    PS: yesterday I was talking about the lack of difference between a depositor tax and a currency devaluation. If you’re interested in that argument – this opinion piece is worth a read.

  2. China’s railways.

    Link: the next step spins out.

    So China Railway Corp. is the semi-privatised company that will now run China’s railways. They’ve taken over the government railway bonds, and are in the process of taking over operations.

    The regulation of the Railways will still fall under the Ministry of Transport.

    I kind of like this idea of a gradual privatisation. Here’s a quote from a Moody’s analyst:

    “Previously creditors legally had recourse to the ministry. While investors suspect that there will be very strong support from the government for China Railway Corp., they no longer have a direct claim on the government like they used to.”

    Of course – they’ll need to have government support. The total liabilities they just took on are larger than the GDP of Denmark.

  3. The black-out of the Rand.

    Link: also a wipe-out.

    The Rand is continuing to weaken on concerns that Eskom, South Africa’s power utility, is going to resort to rolling electricity blackouts.

    The Rand was trading at around R9.2 to the dollar yesterday. A year ago, it was trading at about R7.6. That’s a devaluation of 21%. And/or a depositors’ tax of 21% on South Africans holding Rand deposits.

    Okay – that’s not quite true. You can only talk about a 21% tax if the currency devaluation has caused an equal move in prices (inflation) – but the inflationary impact of an exchange rate devaluation is always diluted by local trade.

    That is: the price level of an economy is determined by demand (both domestic demand and foreign demand for exports) and supply (of both local and imported goods); whereas the exchange rate is determined by foreign trade (imports and exports) and foreign speculation. Which partially explains why this currency devaluation has not translated into sudden inflationary spikes.

    But the other reason is that there is a time-lag. Key products like fuel are priced in dollars – and those increasing costs will eventually push up inflation over time.

    So the “tax” is yet to be fully determined.

That’s all for now.

Have a good day.