Financial crisis

What lies ahead for Cyprus and the eurozone?
After a failed bailout plan that involved taxing the deposits of small savers, Cyprus is now the epicentre of the eurozone crisis. Lawmakers are now seeking an alternative before Monday, when the European Central Bank will cut emergency liquidity to Cyprus’s foundering banks. Kerin Hope, Greece and Cyprus correspondent; Peter Spiegel, Brussels bureau chief; and Patrick Jenkins, banking editor, join Ben Hall to discuss what’s happened and what lies ahead.

By Gideon Rachman
European leaders must surely know that they are taking a big risk with Cyprus. The danger is obvious. Now that everybody with money in Cypriot banks is being forced to take a hit, nervous depositors elsewhere in Europe might notice that a dangerous precedent has been set. Rather than run even a small risk of an unwanted financial “haircut” in the future, the customers of Greek, Spanish, Portuguese or Italian banks might choose to get their money out now. If that starts to happen, the euro crisis will be back on again – with a vengeance.

By Gideon Rachman

Some months ago, I was discussing the euro crisis with a high-ranking US diplomat. “It’s back to the 1930s, isn’t it?” said my companion with a mixture of gloom and relish. “The extremists are on the rise.”

Politicians the world over have huffed and puffed about excessive pay at banks since 2008. While remuneration curbs were put in place, nothing fundamentally challenged bank operations, or their ultimate flexibility to reward staff. The European Parliament has bucked that trend with the mother of all bonus clampdowns. Here are five key questions on the cap: how it works, how you can avoid it, whether it will really pass and what it means for Britain and the City.

1. How is the cap calculated and applied?

The bonus text runs to just half a side of A4. The core measure is a mandatory 1:1 ratio on fixed/variable pay is applied to all EU banks and subsidiaries around the world, as well as non-EU banks operating in Europe. This ratio can rise to 2:1 with a 66 per cent shareholder vote, with a quorum of more than 50 per cent. If turnout is lower, the majority must be 75 per cent. Up to a quarter of the variable pay can be paid in long term instruments (deferred for more than five years), which track the health of a bank and can be clawed back. The value is discounted at a rate set by the European Banking Authority, which must take account of inflation and risk. Some details still need to be fleshed out. But MEPs predicted that even with the discount the maximum ratio would be closer to 2:1 than 3:1.

2. Are there any loopholes?

There are always loopholes. The question is whether it would make a material difference and allow banks to operate relatively unscathed. The obvious one is just raising fixed pay, but it has obvious shortcomings. The incentives for long term pay within the cap will likely be aggressively used. But even with the most banker-friendly discount rate calculation the ratio will not move much above 3:1. Other points of vulnerability could be the definition of fixed pay: could some of that effectively be a bonus? How the rules apply outside the EU and to non-EU institutions will also be important in determining whether bankers can be shuffled around the world to avoid the restrictions. Finally there is talk of some banks taking legal action against the provisions, but there will surely be a public relations downside to that.

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By Gideon Rachman

A rare beast has reappeared in Europe. In recent years, there were no confirmed sightings. But in the past few weeks, this shy animal – known as “good news” – has been spotted in various European locations.

(AP)

Friday’s events from the World Economic Forum feature an address by Mario Draghi, president of the European Central Bank, and sessions looking at the challenges faced by, and presented by, the fast-changing Arab world. Reports from FT writers in Davos and by Ben Fenton, Lina Saigol and Lindsay Whipp in London

17.03: The Davos Live Blog is closing down now but for more reading and insight on today’s events, please visit the FT’s in depth page on the World Economic Forum.

16.41: Gideon Rachman, titular proprietor of this blog, has written his surmise from the earlier session on Syria.

16.16: Asked by the Amercian moderator of his panel session about corruption and banking regulation, Nigeria’s central bank governor Sanusi displays a little frustration:

He said: “We are the only country which has taken people out of banks and put them in jail. No bankers in your countries have gone to jail.”

16.12: Martin Wolf has recorded his view on the politics and economics at play in a “low-intensity” Davos this year:

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Alan Beattie

There was a big kerfuffle in October when the IMF made a point of saying that it (along with a bunch of other forecasters) had underestimated the effect of fiscal tightening on European economic growth over the past couple of years, with obvious implications for the troika’s austerity programmes for the likes of Ireland, Greece and Spain.

The admission got some predictable pushback from troika members who have drunk deep from the austerian well. It was also questioned by my colleague Chris Giles, who pointed out that the results were highly sensitive to the inclusion in the sample of outlier countries – especially Germany (which, despite its frugal prescription for others, has itself followed expansionary fiscal policy and enjoyed good growth) and Greece (the opposite) – and possibly the exclusion of the Baltic states, which followed aggressive fiscal tightening to better effect than Greece. Read more

By Gideon Rachman

Everybody agrees that economic and political power is moving east. Barack Obama has constructed a whole new foreign policy around this theory – the “pivot to Asia”. But, as I assemble my annual list of the five most important events of the year, it is striking how events in Europe and the Middle East still dominate.

Tom Burgis


Welcome to our live coverage of the eurozone crisis. We’ll bring you all the developments. By Tom Burgis and Ben Fenton in London with contributions from FT correspondents across the world. All times are GMT.

 

 

17.37: As the EU’s political leaders get down to talks, we are closing down the live blog for today, but it will be up again bright and early tomorrow to pick up on whatever is decided overnight. Meanwhile, elsewhere on FT.com you’ll be able to find coverage of the summit kept fresh by our sleep-deprived Brussels team.

17.29 More bleak news for the UK’s Triple A credit rating, via FT markets editor Chris Adams:

[blackbirdpie url="https://twitter.com/chrisadamsmkts/status/279275102162522112"]

17.24 More twists and turns in this tale of what said what to whom about the Italian elections at the centre-right EPP’s pre-summit meeting today (see 15.49 and 17.06).

Antonio Tajani, the Italian EU commissioner and a Berlusconi ally, is quoted by Italian news agency Adnkronos as saying that none of the leaders of the EPP “expressly asked Monti to be a candidate”.

“Everyone spoke well of Monti but no one wants to interfere.”

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What’s holding up a European banking union?
When European leaders resolved to finally solve the eurozone crisis, they swore that that a banking union would be a crucial part of the solution and that agreement would be in place by the end of this year. But with the latest negotiations bogged down, what’s happened and does it pose a threat to financial stability in Europe? Patrick Jenkins, banking editor, and Alex Barker, Brussels correspondent, join Gideon Rachman to discuss.