Thursday, 5 July 2012

Things that are cheaper than the Laiki Bailout: No.1 & 2


I do believe increasingly in the ideas that markets should really work on the principle of "let the buyer beware" and hence I am not the most keen supporter of the Cypriot government sponsored bailout of Cypriot banks.

These bailouts have disquieted me even more with the way they have been made: I would prefer a share deal that is straightforward and a more outright nationalization. That would allow the government to collect information on possible regulation violations, kick out all executives who actively brought the banks in this mess, and perhaps prosecute those who might be liable, either through civil courts or the the security and exchange commission.

My views might sound as they lack consistency but they do not: what I am saying is that I am against bailouts due to the creation of moral hazard problems (allowing bank managers to use high risk strategies, knowing the state will cover any losses). But if a bail out has to happen then it should take place in such a way as for government has full control and it can punish those who let the bank down severely.
The latest move by the government of Cyprus to purchase 1.79 billion worth of Laiki shares based on a law that was unnecessarily rushed through parliament was a huge deal for the small Cypriot state, as the amount is just over 10% the county's GDP.

But what can 1.79bn buy you in the world? Well you are just shy of building the shard in London with that amount of money and since real estate in Cyrpus is cheap8er than in London, I am guessing you could build 1/2 little buildings on the side.

[Corrected 06/06/2012] Alternatively you can build a pipeline for gas from the Cypriot gas find to Cyprus as underwater pipelines are very expensive to build and maintain.

I wonder if the people that find the bailout of Cypriot banks so appealing can convince me that buying Laiki will provide more returns that these two suggestions...

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