Tuesday 26 March 2013

Cyprus: The Big Raid

Bank of Cyprus to cut up to 40% off deposits over €100,000
Depositors in the Bank of Cyprus, the biggest bank on the island, will reportedly lose from 30 to 40 per cent on their holdings above 100,000 euro as result of a bailout agreement which Cyprus and the troika of international backers signed on Monday.

25 March, 2013

Irish Radio is quoting the chairman of the Cypriot parliamentary finance committee, Nicholas Papadopoulos, who said that the levy of 30 per cent will be imposed on the deep-pocketed savers.

"I haven't heard a formal announcement about the haircut, but this is the figure I heard," he said.

Bloomberg reports an even bigger figure as it refers to two EU officials, who claimed that the losses would be no more than 40 per cent on uninsured depositors at the Bank of Cyprus.

At dawn on Monday, Cyprus and the troika of international backers (EU, ECB, IMF) reached agreement on a €10bn bailout plan, aimed at preventing the bankruptcy of the island’s financial system and the country’s exit from the Eurozone.

Under the plan the depositors in Bank of Cyprus will be compensated with equity in the bank, while Laiki Bank, which is the island’s second largest financial institution, will be closed down.

Those with deposits under 100,000 euros in both banks will continue to enjoy the protection of the state's guarantees, after an earlier proposal to impose a 6.75% tax on them provoked anger.

The result that was found is right,'' German Chancellor Angela Merkel said. “It also makes those who helped cause these undesirable developments play their part. That is how it should be.”

Germany has long insisted Cypriot banks, which attracted foreign investors with high interest rates, needed to contribute to the bailout.

I think that a fair sharing of the burden was achieved,'' she said. “On one hand, the banks have to take responsibility for themselves. That is what we have always said: we do not want taxpayers to have to rescue banks, we want banks to rescue themselves.”

It will help "stabilize the situation in Cyprus and help Cyprus back onto a path of sustainable consolidation. I think the solution can help win back lost confidence for and in Cyprus," German Finance Minister Wolfgang Schaeuble told a news conference after the 11th-hour talks ended with a deal.

"It is the best path possible even if it isn't an easy one."

Russia doesn’t appear so optimistic.

"I think they continue stealing what's already been stolen. We need to understand what this story will finally lead to," Russian Prime Minister Dmitry Medvedev commented on the move during a meeting with his aides on Monday.

Despite the deal Cyprus will remain at risk of default and a Eurozone exit for a "prolonged period," believes Moody's senior credit officer Sarah Carlson.

"The system's profile as an offshore financial center is unlikely to survive this crisis," Carlson added. "The potentially irreparable damage to the country's current drivers of economic growth leaves its ability to sustain its current debt highly in doubt."

Growth and stability are a thing of the past for Cyprus according to Steen Jakobsen, Chief Economist at Saxo Bank, who told RT Business that only gloom lies ahead.

Unfortunately I think it’s unlikely Cyprus gets back to the same momentum of growth and stability they have seen over last 20 years because if you want to take a banking system down to the European average, you have to remember that 60% of all export come from services rented, meaning basically banking services. You have an economy that’s wholly depending on foreign investment to the country, so they need to find a new basis money in order to restart themselves. Of course they will do that, but this will come with huge amount of pain both in terms of social fabric, but most certainly also in terms of capital investment in Cyprus.”

Cyprus’ financial turmoil has shown how the European Union is still powerless to tackle the crisis raging across the Eurozone, five years after it first gripped the bloc, Jakobsen said.

The main lesson, if I may, from these weeks debacle is the following – it’s the first time we are seeing the senior bondholders being bailed in, it’s the first time we are seeing deposit holders over €100,000 being bailed in and most importantly we now have capital controls in Cyprus. This means €1 in Cyprus is no longer the same as €1 in Paris or in Berlin, because in Paris or in Berlin you can actually move the money around, whereas in Cyprus it needs to be standing still at the island and I think that’s a very dangerous road we have gone down. I think EU as an overall institute has shown to have no remedies for crisis, they have no ways to control the imperilment of banks in the system and this is pretty sad, concerning we are five years into this crisis and we are pretty much back to square one in terms of having banks who are undercapitalized not only in Cyprus, but across a number of other countries.”

"NATO and the United States should change their policy because the time when they dictate their conditions to the world has passed," Ahmadinejad said in a speech in Dushanbe, capital of the Central Asian republic of Tajikistan

Cyprus imposes "temporary" capital controls after bailout
Cyprus is introducing "very temporary" restrictions on capital flows when banks reopen this week, the island's president said on Monday, seeking to reassure panicked Cypriots that a bailout deal struck overnight was in their best interests.

25 March, 2013

The step follows a last-ditch deal with international lenders on a 10-billion euro ($13-billion) rescue plan to avoid economic meltdown, with Cyprus agreeing to close down its second-largest bank and inflict heavy losses on big depositors.

Without an agreement, Cyprus had faced certain banking collapse on Monday and potential exit from the European single currency. It still risks a run on banks when they reopen their doors this week. The two biggest stay shut until Thursday, but the rest will be open from Tuesday.

"The agreement that we reached is difficult but, under the circumstances, the best that we could achieve," newly elected conservative head of state Nicos Anastasiades said in a televised address to the nation on his return from fraught negotiations with the European Union, European Central Bank and International Monetary Fund in Brussels.

He said the Cypriot central bank would implement capital controls on bank transactions, anticipating a run on deposits by Cypriots and foreigners fearing for the safety of their money.

But the president added: "I want to assure you that this will be a very temporary measure that will gradually be relaxed."

Many larger investors face steep losses they cannot avoid.

Backed by euro zone finance ministers, the bailout plan will spare the Mediterranean island a financial catastrophe by winding down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shifting deposits under 100,000 euros to the Bank of Cyprus to create a "good bank", leaving problems behind in, effectively, a "bad bank".

Deposits above 100,000 euros in both banks, which are not guaranteed by the state under EU law, will be frozen and used to resolve Laiki's debts and recapitalize the Bank of Cyprus, the island's biggest, through a deposit/equity conversion.


The raid on uninsured Laiki depositors is expected to raise 4.2 billion euros, Eurogroup chairman Jeroen Dijssebloem said.

Laiki will effectively be shuttered, with thousands of job losses. Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution - setting a precedent for the euro zone.

An EU spokesman said no across-the-board levy or tax would be imposed on deposits in Cypriot banks, although the hit on large account holders in the two biggest banks is likely to be far greater than initially planned.

A first attempt at a deal last week collapsed when the Cypriot parliament rejected a proposed levy on all deposits.

The Central Bank of Cyprus said both Bank of Cyprus and Laiki would remain shut until Thursday, while all other lenders would reopen on Tuesday, just over a week after the government ordered them to close their doors to halt a run on deposits.

Have The Russians Already Quietly Withdrawn All Their Cash From Cyprus?

25 March, 2013

Yesterday, we first reported on something very disturbing (at least to Cyprus' citizens): despite the closed banks (which will mostly reopen tomorrow, while the two biggest soon to be liquidated banks Laiki and BoC will be shuttered until Thursday) and the capital controls, the local financial system has been leaking cash. Lots and lots of cash.

Alas, we did not have much granularity or details on who or where these illegal transfers were conducted with. Today, courtesy of a follow up by Reuters, we do.

The result, at least for Europe, is quite scary because let's recall that the primary political purpose of destroying the Cyprus financial system was simply to punish and humiliate Russian billionaire oligarchs who held tens of billions in "unsecured" deposits with the island nation's two biggest banks.

As it turns out, these same oligrachs may have used the one week hiatus period of total chaos in the banking system to transfer the bulk of the cash they had deposited with one of the two main Cypriot banks, in the process making the whole punitive point of collapsing the Cyprus financial system entirely moot.
From Reuters:

While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.

No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis - Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus - have units in London which remained open throughout the week and placed no limits on withdrawalsBank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia.Russians were among Cypriot banks' largest depositors.

So while one could not withdraw from Bank of Cyprus or Laiki, one could withdraw without limitations from subsidiary and OpCo banks, and other affiliates?

Just brilliant.

And if there was any doubt that the entire process of destroying one entire nation was simply to punish Cyprus, it can be completely cleared away now:

ECB officials contacted Latvia, another EU country that has received large Russian deposits, to warn authorities against taking in Russian money fleeing Cyprus, two sources familiar with the contacts said.
"It was made clear to our Latvian friends that if they want to join the euro, they should not provide a haven for Russian money exiting Cyprus," a euro zone central banker said.

If one thinks there is any material Russian cash therefore left in Cyprus with this epic loophole in place, we urge them to make a deposit in the insolvent nation. One person who certainly will not be allocating any of his money into Bank of Cyprus is German FinMin Schaeuble:

German Finance Minister Wolfgang Schaeuble said the bank closure had limited capital flight but that the ECB was looking closely at the issue. He declined to provide figures.

Perhaps because if he did, it would become clear that the only entities truly punished by this weekend's actions are not evil Russian billionaires, but small and medium domestic companies, and other moderately wealthy individuals, hardly any of them from the former "Evil Empire.

Companies that had to meet margin calls to avoid defaulting on deals were granted funds. Transfers for trade in humanitarian products, medicines and jet fuel were allowed.

The stealth withdrawals by Russians of course means that the two megabanks are now utterly drained of capital, and that the haircuts on those who still have unsecured deposits with the two banks will be so big it will likely mean a complete wipeout of all deposits. As in 0% recovery on your deposits! 

In other words, by now any big Russian funds in Cyprus are long gone, and the only damage accrues to the locals: for one reason because their money over the critical EUR100K threshold has been "vaporized", and for another because the marginal driving force and loan demand creator in Cyprus, the Russians, are gone and are never coming back again.

This is what passes for monetary real-politik in the New Normal - an entire nation becomes collateral when pursuing a wealthy group of people.

If we were Cypriots at this point we would be angry. Very, very angry.

Update: Cyprus banks to remain closed until Thursday - central bank

25 March, 2013

The Cypriot finance minister has ordered all the country's banks to remain closed until Thursday, the country's central bank announced.

Just hours before the announcement late Monday, the central bank said all but two country’s largest banks would open on Tuesday morning.

The postponement could be a sign that the country's banks are even lower on cash than they believed at the end of last week.


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