Satyajit Das | The Big Picture

It would be ironic if Cyprus, one the smallest countries in Europe with little over 1 million people and about 0.5% of the European Union (“EU”) economically, were to prove a key inflexion point in the crisis.

Since June 2012, it has been known that Cyprus needs around Euro 17-18 billion to recapitalise its banks (around Euro 10 billion) and for general government operations including debt servicing (around Euro 7-8 billion). While small in nominal terms and well within EU’s resources, the amount is large relative to Cyprus’ Gross Domestic Product (“GDP”) of Euro 18 billion. It is unlikely that Cyprus can realistically repay it, in the absence of a dramatic change in its circumstances such as the mooted oil and gas reserves in the Eastern Mediterranean.

Pawelmorski | Some Of It Was True

  • The hedge funds win again. A favourite trade for speculators has been Cypriot government debt. And it’s done very nicely. Mayfair sends its thanks. Update: This implies that you’re better off with your money in peripheral government debt than in a bank. That’s a message I personally would be very hesitant to send.
  • And the Russians? The reason small depositors have been hit is that the losses inflicted would be much bigger if a) only large deposits b) only non-EU deposits were haircut. The data on Cyprus deposits is here (MUMs = Monetary Union Members). I would guess the thinking is that 10% is seen as a cost of doing business when it comes to money laundering, but 30% would probably finish Cypriot banking for good. If the infliction of losses on small depositors has a purpose, it’s probably to reassure the Russians that they are not being discriminated against. Yes, I may have thrown up a little in my mouth typing that.
  • analysis

    Pawelmorski | Some Of It Was True

    We can also enjoy the spectacle of people who right now couldn’t name him interpret the importance of the intervention of Archbishop Chrysostomos. Not for the first time, Twitter was ahead of expensive analysts in concern about deposit haircuts.


  • This is not going quite as smoothly as planned. The Cypriot parliamentary vote has been postponed and a Bank Holiday announced for Tuesday (following the usual one tomorrow). Basically inconceivable that the levy will be revoked, but there may be some noise around finally getting it through. A la TARP or EU referendum, the question will be asked until an acceptable answer is received.
  • The central mystery boils down to “WHAT THE HELL WERE THEY THINKING?”. Haircutting Taxing small depositors doesn’t only violate the principle of social equity, it hurts a lot of people and creates political and logistical difficulties without playing a central part in raising the cash.
  • Some metrics around deposit distribution: poor people have very little cash. I haven’t managed to track down statistics on Cypriot deposits (if they exist) but: in the UK 2% of depositors account for 49% of deposits. The median savings of the bottom half by income of the population is £400. Cyprus is an only marginally more equal society than the UK (Gini of 0.3 vs UK 0.33), a somewhat poorer one, so it doesn’t seem unlikely that a floor of say EUR50,000 would massively reduce the number of people captured but not hugely impact the amount of deposits.

  • Probably of more lasting importance is the latest bout of rule-changing by the authorities. Debt unwindings are generally well-defined in law. First equity, then sub debt, then deposits and senior bonds together, and all treated equally. Most of these principles have been tweaked over the last few years, but the tweaks are getting steadily more aggressive. The ECB, holders of Athens-law and foreign law Greek debt all got different treatment; the Dutch didn’t restructure SNS Reaal paper, they confiscated it; the Irish banned lawsuits against the ultimate wind-down of Anglo Irish. This is scratching the surface compared with the rule-changes of the past but it’s getting steadily more creative.The referee has gone from being quasi-neutral arbiter, to pulling off his black shirt to reveal a Manchester United one underneath and awarding himself a series of penalties. While there’s clearly no point in market participants playing the shocked blushing virgin in the face of a situation where the consequences of following the legally-logical steps are socially unacceptable, the uncertainty generated creates costs too.

    It’s going to be an interesting week. I think it’s unlikely to be a traumatic one, but I’d feel more comfortable if there weren’t quite so many journalists gagging for a bank run.. . . [more]

    Wolfgang Münchau | The Financial Times

    I just could not believe it when I heard that eurozone finance ministers went after the small depositors in Cyprus. I understand the purely technical reason why they did it. The eurozone could not agree a full bailout, which would have cost €17bn.

    The Germans rejected a loan which they were certain Cyprus would invariably default on. So the sum was cut to €10bn. A depositor haircut was the only way to co-finance this. When they did the maths, they found the big deposits would not have sufficed.

    So they opted for a wealth tax with hardly any progression. There is not even an exemption for people with only very small savings.

    If one wanted to feed the political mood of insurrection in southern Europe, this was the way to do it. The long-term political damage of this agreement is going to be huge. In the short term, the danger consists of a generalised bank run, not just in Cyprus.

    Paul Murphy | Alphaville | The Financial Times

    The Cyprus bail-in is qualified good news, in the eyes of Citi’s chief economist Willem Buiter.

    Sure, it would be better if insured depositors on the island had been spared and it would have been nice if losses of uninsured depositors had reflected the recapitalisation needs of each individual bank. But first and foremost Buiter sees this as a decisive step in restructuring excessive debt across Europe, which is a necessity if the euro area wants to grow again.

    Further restructurings — both OSI and PSI — should now follow, he says.

    What about bank runs? No problem, says Buiter. The ECB can provide substitute funding. A taste (our emphasis):

    In a euro area where any kind of bold initiative is a rare bird indeed, this senior bank creditor bail-in is important because it creates a precedent that we expect to be emulated many times in the next few years, despite the assertions of the troika that Cyprus is unique and the senior unsecured bank creditor bail-in will not be repeated.

    The Cypriot bank creditor bail-in is a net positive for the euro area, first, because it paves the way for more extensive debt restructuring of excessively indebted banks as well as other private sector entities and sovereigns. Such accelerated debt restructuring is necessary for the euro area to return to sustainable growth soon – without risking a lost decade to follow the lost half decade since 2008. Second, the Cyprus depositors bail-in is also good news politically, as it will limit additional bail-out fatigue in EA creditor countries and avoids putting the burden of bailing out investors to an even more unbearable extent on taxpayers and beneficiaries of public spending in debtor countries. Third, the bank creditor bail-in improves the creditworthiness of the Cypriot sovereign compared to the alternative where an additional €5.8bn worth of bank recapitalisation demands were to land on the public sector balance sheet. . .

    James Coterill | Alphaville | The Financial Times

    Famous last words and all, but it is hard to see the fear flowing from Cyprus to the average depositor in a Spanish or Italian bank. Not in the short term. As for Lehman II, well, come off it.

    After all, that’s probably partly why this inequitable tax on small depositors across Cypriot banks could be put on the Eurogroup negotiating table on Friday. The systemic danger is absent.

    Also, just to be clear on this at the outset: if Cyprus were to tax larger uninsured depositors to the hilt to make up the numbers instead — a levy well into double digits, for example — there’d be no complaints here. Burn ‘em to a crisp. The problem isn’t depositor bail-in itself. The problem of Cyprus was that some depositor bail-in had eventually become unavoidable: the chart via Barclays below helps show the scale of this problem. It is the injustice of how it is being meted out. There are also arguably longer-term dangers of meting it out below €100k (more on this in a bit).

    As it is, on Sunday night the FT reported moves to renegotiate the balance of the tax rates between the insured and uninsured. From 6.75 and 9.9 per cent to 3.5 and 12.5 per cent, or that ballpark. It’s a start.

    They should be putting thresholds in to protect the poor and the lame next. That is, if they are still going to insist on collecting dues from accounts below €100k at all. I really don’t think they should be. Hopefully — famous last words again — the plan to hit the insured is within hours of being canned.

    Cyprus is if anything an illustration of not having a framework: there wasn’t even a senior debt buffer to bail-in, and so on. Not a happy picture of loss-absorbing capacity by any means.

    It’s really the arbitrariness — which is further exposed by the late-weekend rush to make the tax rates more progressive (from 6.75 and 9.9 per cent to 3.5 and 12.5 per cent, as noted above).

    What we have here is a nationwide tax on insured depositors, which is being applied irrespective of bank resolution procedure, to savings held in solvent and insolvent banks alike. Again, when it comes to the principle of a depositor bail-in? I’m absolutely fine. As creditors to any one bank, depositors shouldn’t be sanctified. But this kind of tax as a way to do it?


    Izabella Kaminiska | Alphaville | The Financial Times

    Small wonder then that we’re hearing things like this now:

    Russian energy giant Gazprom has offered the Republic of Cyprus a plan in which the company will undertake the restructuring of the scountry’s banks in exchange for exploration rights for natural gas in Cyprus’’ exclusive economic zone, local media reported. Representatives of the Russian company submitted the proposal to the office of Cypriot President Nicos Anastasiades on Sunday evening, Sigma TV reported.

    The proposal states that Gazprom will fund the restructuring of the country’s crippled financial institutions in exchange for substantial control over the country’s gas resources while Cyprus won’t need to take the harsh bailout package offered by the EU.

    What a beautiful solution for Russian depositors in Cyprus.

    Izabella Kaminiska | Alphaville | The Financial Times

    The hunt for an accurate Russian exposure figure to Cyprus continues.

    Here’s Danske Bank’s Vladimir Miklashevsky with the best estimate we’ve seen yet (our emphasis):

    Russian banks, corporations and private clients together with British depositors constitute the largest foreign investor groups that will be hurt by the deal, if approved. Russian residents comprise the biggest foreign depositor group in Cypriot banks, with USD19bn in holdings at end-2012, according to Moody’s. Cypriot companies with Russian capital could lead to about USD53bn in losses to Russia’s banking giants such as Alfa bank, Gazprombank, Sberbank and VTB, which has a wealth management division on the island.

    The euro group is waiting for Russia-Cyprus’s deal on financial aid. The Cypriot minister of finance Michalis Sarris is heading to Moscow on 20 March to negotiate it. In 2011, Cyprus got a five-year loan from Russia of EUR2.5bn followed by a request to extend it until 2022. Rusian top officials have expressed their concern on the bailout deal. President Vladimir Putin called Cyprus’s bank tax ‘unfair and dangerous’ and later Prime Minister Dmitry Medvedev labelled it ‘a move akin to confiscation’. Russian stocks lost more than 3% after opening this Monday. The dual currency basket was volatile early this morning but has stabilised and is now bit weaker, as the EUR has been losing against the USD. If corporate accounts are frozen, it will be even more RUB negative together with general risk-off sentiment.

    Which means it’s the corporate exposure that’s probably the most significant.

    Update: 15:32 UK time.

    The following just dropped in our inbox from Credit Suisse:

    . . . Ultimately, Eurozone policy makers may be attempting to force a last-minute Russian contribution towards a Cypriot bailout, sufficient in magnitude to reduce or even remove the need for the deposit levy, a measure which according to the Financial Times, Russian president Vladimir Putin branded on Monday as “unfair, unprofessional and dangerous”.

    Paul Murphy | Alphaville | The Financial Times

    And when the ECB was busy last week threatening President Anastasiades with an immediate disorderly default if his government did not sign up to this shotgun bail-in, they seem to have overlooked the fact that Anastasiades has to get this all voted through.

    Here’s what the Cypriot parliament currently looks like on the issue, courtesy of Alex White at JP Morgan:
    Anastasiades and co need 29 votes and they haven’t got them, yet.

    That’s why Monday’s bank holiday on the island has become a two day bank holiday and may become a further extended no-fun holiday weekend.


    Paul Krugman | The Conscience of a Liberal | The New York Times

    Let me make a broader point: we’ve now seen three island nations around Europe become huge international banking hubs relative to their GDPs, then get into crisis because their domestic economies don’t have the resources to bail out those metastasized banking systems if something goes wrong. This strongly suggests, to me at least, that we have a fundamental problem with the whole architecture (to use the preferred fancy word) of international finance.

    As long as you haven’t bought into the Barney-Frank-did-it school of thought, you realize that the global crisis of 2008 was in a fundamental sense made possible by the erosion of effective bank regulation.

    But this regulation in turn depended, to an important extent, on limited international capital flows; otherwise regulations made in Washington or elsewhere would have been bypassed via havens like, well, Cyprus. And once capital controls began to be lifted in the 1970s we entered an era of ever-bigger financial crises, starting in Latin America, then moving to Asia, and finally striking the whole world.

    So what are we going to do about this? Cyprus, as a euro-zone country, should really be part of a euro-wide safety net buttressed by appropriate regulation; it’s insane to imagine that the euro can be run indefinitely with merely national deposit insurance. But euro-area deposit insurance doesn’t seem to be in the cards — and anyway, there are plenty of other potential Cypruses out there.

    Matthew Ygleisas | Moneybox | Slate

    So suppose Ben Bernanke is looking at financial markets and decides it would be perverse for there to be hundreds of billions worth of stock market declines around the world for want of €5.8 billion. He could have the Fed print up some dollars to purchase €5.8 billion or (€5.8 billion worth of Finnish, Slovakian, Austrian, Dutch, German, Belgian, and French debt) and then deliver the money as a gift to President Nicos Anastasiades and tell him his problems are solved.

    Nobody needs to lose anything. Of course people might ask Bernanke what kind of precedent this sets, but he could just say it’s really not clear. It was a weird situation and Cyprus is freakishly small. You can’t necessarily expect the same thing to happen next time, so who knows. Plus he might get impeached over it.

    But economically, what’s the downside here? Would we see runaway price inflation in the United States if the Fed handed €5.8 billion over to the government of Cyprus to prevent the haircutting of bank depositors? It’s difficult to see how that would happen. Would you see runaway price inflation in Cyprus? Again, hard to see.

    rorschach test

    Joe Weisenthal | Business Insider

    check out what Osborne took away as the broader message from Cyprus. He used it as an example of why the U.K. must maintain its austerity path:

    “That is an example in Cyprus of what happens if you don’t show the world that you can pay your way.

    “I mean that is why in Britain we’ve got to retain the confidence of world markets,” he said.

    This is sheer nonsense. This has nothing to do with whether the country could “show the world that you can pay your own way.” It has to do with the fact that the Cypriot banks had large exposure to Greek debt (because of how intertwined their economies are) and took big losses on Greek debt writedowns. And it has to do with the screwed-up Euro system, whereby no country has their own currency.

    And it has to do with having an oversized banking system, and all kinds of other things. There are virtually no applicable lessons to the U.K. here. But the government is using the incident as another excuse to justify disastrous policy.


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