1 Malta could be next Cyprus (Guy Verhoftstadt in Khaleej Times) Now that the crisis in Cyprus has been temporarily resolved, the unspoken question is: Who’s next? Perhaps Malta, which has an even bigger banking sector than Cyprus relative to GDP, much of it highly reliant on offshore depositors. Or maybe Latvia, fast becoming the destination of choice for Russian funds flowing out of Cyprus and now on course to join the eurozone. Even Spain or Italy could be vulnerable to a similar bailout, now that the Dutch finance minister, Jeroen Dijsselbloem, who is president of the Euro Group of finance ministers, has hinted that Cyprus could provide a model for the resolution of future banking crises.
And while eurozone leaders eventually backed down from targeting depositors with less than 100,000 euros, a dangerous precedent has been set. The rights spelled out in the European Union’s deposit guarantee laws should never have been put into doubt, and the specter of future runs on banks looms large across the periphery of the eurozone. The inconvenient truth for eurozone leaders is that we will never emerge from this state of crisis until a fully functioning banking union is put into place. For this to work, there must be a European banking resolution mechanism to recapitalise banks and provide a backstop for a eurozone-wide deposit guarantee scheme.
We are no longer simply facing a debt crisis, concerned only with market confidence or the views of credit rating agencies. At stake is the trust of ordinary EU citizens in the European project as a whole. Unless steps are taken to restore this trust, we risk seeing the disintegration of the eurozone and the European Union as we know it.
2 Stockton is most populous bankrupt US city (BBC) A judge has approved the California city of Stockton’s bankruptcy filing, making it the most populous US city ever to enter bankruptcy protection. A federal judge said without bankruptcy protection, Stockton would be unable to provide basic government services. The city of 290,000, 90 miles east of San Francisco, saw its tax base plummet in the US housing market crash. The ruling grants Stockton protection from creditors – who opposed the filing – while it negotiates debt repayment.
Stockton’s creditors – bond holders and insurers who had financed the city’s debt – argued the city had not cut spending enough nor sought a tax increase to avoid bankruptcy. With the city now in bankruptcy, they may not be repaid their full principals. But lawyers for the city said it had slashed its budget to the bone after a 70% decline in the city’s tax base.
3 Britain, the world and end of free lunch? (Stephanie Flanders on BBC) They say there’s no such thing as a free lunch. But for many years, Britain has been enjoying something similar when it comes to its international investments. Year after year, as a country we have somehow made a lot more on our investments abroad than the rest of the world has earned on its investments in the UK, even though – in cash terms – foreigners have more invested in us than we have invested in them.
But not last year. More than any other factor, it is the collapse in our foreign investment earnings in 2012 that explains why today’s balance of payments figures show Britain’s current account deficit last year was an eye-popping £58bn, up from £20bn in 2011. In case you were wondering, £58bn is a big number. It means the gap between what we earned in the global economy last year, and what we spent, was 3.7% of GDP. That’s the highest since 1989 and only the fourth time since 1948 that our current account deficit has been greater than 3% of GDP.
Everyone knows that the growth in our manufacturing exports has been deeply disappointing. But just as important has been the sharp fall in exports in the area we traditionally run a large surplus – namely services. Even larger is the collapse in foreign investment earnings. Last year, we only earned £1.56bn more on our investments abroad than foreigners earned on their UK holdings. In 2011 that investment surplus was nearly £26bn. What’s driving all this? The honest answer is no-one is really sure.
Our global investment earnings have defied gravity since the start of the century – and helped to make up for the fact that large parts of our economy were no longer paying their way. Perhaps we shouldn’t be surprised that they have come down to earth. But it would be a serious blow to our international economic hopes if this turns out to be a permanent shift. The coalition came in promising to put an end to Britain’s “something for nothing” culture. But this is definitely one area where they would have liked it to continue.