Carmen Reinhart: Don’t Discount Cyprus
Harvard University professor of economics Carmen Reinhart, co-author with Kenneth Rogoff of This Time Is Different: Eight Centuries of Financial Folly was on hand with CNBC’s Simon Hobbs and Melissa Lee yesterday commenting on the Cyprus situation.
Reinhart didn’t believe Cyprus banks would open with regular withdrawals. She said the last time this happened with a dollarized economy in Panama, the closure lasted two months.
Reinhart stated that Cyprus’ gross public and private debt is 500% of GDP; half of which is short-term deposits, and they simply don’t have the wherewithal to meet withdrawals.
Rienhart said it wasn’t a question whether Cyprus would default; it was now a question of how they default. It wouldn’t necessarily be a haircut on government debt ala Greece, she added, but you can’t achieve a solution without addressing foreign deposits, which gets to Russia. Reinhart said she wouldn’t bet on the Russians coming forth with a big rescue package.
Reinhart said bank deposits would be converted one way or another, meaning depositors could be stuck with 20-year bonds. There could also be some type of freeze where withdrawals are limited, she added. Reinhart compared the Cyprus situation to the Bonex plan in Argentina where overnight deposits became long-term deposits.
Melissa Lee asked Reinhart to comment on an earlier guest’s opinion comparing Cyprus to Green Bay, Wisconsin. Reinhart warned not to take size as an indicator of importance. Looking back, Reinhart said Thailand, as well as Russia, were not large countries systemically when they had their crises in 1998, which reverberated throughout the global financial system. Reinhart said the Cyprus situation would be different in that households, governments and everyone in peripheral Europe would be looking at their banks and thinking twice about keeping their money in them. She added this would result in more capital controls, but in the politically correct system we live in they won’t be referred to as capital controls, but will in effect be Tobin’s “sand in the wheels.”