http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100024025/cyprus-goes-from-bad-to-worse-by-the-day-so-does-portugal/
I can think of a way to save Portugal and the Greek Cypriots. I am not an economist but an engineer. So please don't scream "it won't work!" or "moral hazard" before reading it to the end.
Most countries are using a system known as fractional reserve banking. When we deposit $100 in a bank, the bank is required by law to deposit a fraction of that in the central bank. After that, it can loan the rest of the money once or several times to customers. How many times it can loan it and to what type of customers is decided by every nation's own laws. In my own country and in case of foreign currency liabilities lasting more than three years, the central bank quotes a reserve requirement of 6%. In case of current accounts denominated in the national currency, the reserve requirement is 11.5%. And an inquisitive bank client can look it up on the Internet.http://www.tcmb.gov.tr/yeni/ppyeni/disponibilite_yeni.html
Now, if the reserve requirement is 6%, then a deposit of $100 can be loaned up to nearly seventeen times. I don't know whether this loan can be issued by the original bank or needs to be circulated through seventeen individual banks or branches. But it can be done and there is a well written explanation of that subject in Wikipedia. Right here:http://en.wikipedia.org/wiki/Fractional-reserve_banking
Now, Greece needs E300bn to get out of the woods and if memory serves Portugal needs around half of that sum. Ireland needs a little more, Spain and Cyprus are also in trouble and Slovenia is in queue. But most of these counries are victims of cheaply borrowed money which was poorly invested as a result of the deceivingly low interest rates. It is fair to say they were victims of the fractional reserve banking which made it possible for them to borrow at an artificially low interest rate. Since the root of the problem is the way our banks work, fix the problem the same way. The way out must be the same as the way in.
For example, let the government of Turkey set up a bank under Turkish law. Call it the SEB (Save Eurozone Bank). Its board of directors and starting capital would be assigned by this government. The inspectors which inspect its business would also be assigned by this government. Our special purpose bank is not to accept deposits from the general public. Its founding contract stipulates that its purpose is to invest in failing economies. Everything should be done in accordance with the law!
Now let our government deposit a sum of say E18bn in our special purpose bank, the SEB. Then let the SEB make a loan of E300bn to the government of Greece. Then let our government do the same for Portugal, Ireland, Spain and any other country which is experiencing difficulties. If the Greek Cypriots agree to stop stirring up trouble, they should be rescued too! And all at a fraction (1/16.7) of the mind numbing, astronomical figures which we read in the press every day now. Of course Greece and the others will never pay back the loan and our bank will have to close as soon as it has fulfilled its purpose. But the courts will not lock up anybody as long as they work within the confines of the banking law. This is especially true if the inspectors, appointed by the government, gave this bank a clean bill of health.
I can think of a way to save Portugal and the Greek Cypriots. I am not an economist but an engineer. So please don't scream "it won't work!" or "moral hazard" before reading it to the end.
Most countries are using a system known as fractional reserve banking. When we deposit $100 in a bank, the bank is required by law to deposit a fraction of that in the central bank. After that, it can loan the rest of the money once or several times to customers. How many times it can loan it and to what type of customers is decided by every nation's own laws. In my own country and in case of foreign currency liabilities lasting more than three years, the central bank quotes a reserve requirement of 6%. In case of current accounts denominated in the national currency, the reserve requirement is 11.5%. And an inquisitive bank client can look it up on the Internet.http://www.tcmb.gov.tr/yeni/ppyeni/disponibilite_yeni.html
Now, if the reserve requirement is 6%, then a deposit of $100 can be loaned up to nearly seventeen times. I don't know whether this loan can be issued by the original bank or needs to be circulated through seventeen individual banks or branches. But it can be done and there is a well written explanation of that subject in Wikipedia. Right here:http://en.wikipedia.org/wiki/Fractional-reserve_banking
Now, Greece needs E300bn to get out of the woods and if memory serves Portugal needs around half of that sum. Ireland needs a little more, Spain and Cyprus are also in trouble and Slovenia is in queue. But most of these counries are victims of cheaply borrowed money which was poorly invested as a result of the deceivingly low interest rates. It is fair to say they were victims of the fractional reserve banking which made it possible for them to borrow at an artificially low interest rate. Since the root of the problem is the way our banks work, fix the problem the same way. The way out must be the same as the way in.
For example, let the government of Turkey set up a bank under Turkish law. Call it the SEB (Save Eurozone Bank). Its board of directors and starting capital would be assigned by this government. The inspectors which inspect its business would also be assigned by this government. Our special purpose bank is not to accept deposits from the general public. Its founding contract stipulates that its purpose is to invest in failing economies. Everything should be done in accordance with the law!
Now let our government deposit a sum of say E18bn in our special purpose bank, the SEB. Then let the SEB make a loan of E300bn to the government of Greece. Then let our government do the same for Portugal, Ireland, Spain and any other country which is experiencing difficulties. If the Greek Cypriots agree to stop stirring up trouble, they should be rescued too! And all at a fraction (1/16.7) of the mind numbing, astronomical figures which we read in the press every day now. Of course Greece and the others will never pay back the loan and our bank will have to close as soon as it has fulfilled its purpose. But the courts will not lock up anybody as long as they work within the confines of the banking law. This is especially true if the inspectors, appointed by the government, gave this bank a clean bill of health.
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