Monday, March 18, 2013

Crossing the Rubicon...

A day has passed since I published my first assessment of the Cyprus deal and I am even more concerned about the most terrible precedent which has been set by the Eurogroup. No, I don't mean the precedent of having customers contribute to the bail-out of their bank. That makes eminent common sense. Barack Obama was rightfully blamed for letting some customers of AIG (such as Goldman, Deutsche, etc.) so easily off the hook.

The most terrible precedent is the messing around with deposit insurance, with a law which guarantees that deposits up to 100 TEUR are safe. It would have been bad enough if Cyprus alone had messed around with that law because then the rest of the Eurozone could have said that this was strictly a domestic Cypriot decision. Here it was a decision of the Eurogroup imposed on Cyprus. Chancellor Merkel had the good sense last night to repeat on TV how correct she thought this decision was.

The Cypriot storm may well blow over in the next few days. What will not be forgotten, not only by Cypriots, Greeks et. al., is that the Eurogroup, in extreme situations, will not shy away from messing around with legal deposit insurance. From now on, that will also be in the back of the minds of savers in Northern countries. Who knows? Their banking systems might hit trouble one day and what then?

Simon Nixon of the WSJ also criticizes this terrible precedent but takes a more relaxed view on it. He thinks there is a chance that the storm will blow over and, after all, Cyprus is a singular case. Maybe yes, maybe no.

Eamonn Fingleton of Forbes makes a damning assessment of Germany and considers the Cypriot decision worse than the Lehman decision. With regard to the messing around with a deposit insurance law, I would agree. With regard to the remainder of his conclusions, I am more reserved.

Either way, there was a time when the expression 'post-Lehman' entered the dictionary of finance. I would predict that we are now entering a 'post-Cyprus' time.


  1. Mr. Kastner, i don't think they messed with the law. They messed with the impression the average citizen has of the "100.000 insurance" on deposits, which is just as bad of course.

    But technically, reading cypriot newspapers, those who will make legal action against the cypriot state in the court of Luxemburg, cite the "Right to Property". That a forceful tax on savings, is expropriation. I am sure that if there was a legal way to attack the cypriot state for violating the EU insurance on deposits, we would have read it by now. This also explains why the cypriot part didn't want to hear about 40% tax. Because it would look more "expropriation" than tax and chances of having Cyprus condemned by big savers in Luxemburg's court, would increase.

  2. The most idiotic thing in the whole story, is that this "strike" in the subconscious of the european savers, was done... to find 6 bln! It sounds like a bad joke! When in 2018 Cyprus is supposed to be pumping the first gas. You don't want to believe it's worth 600 bln? Fine. Let's say it's 50 bln. Couldn't you device a solution to wait to get the money and have ESM do the job for now?

    At the place of the Europeans, i would have done ANYTHING, BUT strike the savings.

  3. Whatever you call it, the EU has made a serious mistake. However, given past form, it is par for the course that they would make it.

    Showing that you can trust them about as far as you could throw an American banker or politician might just wake up the dormant citizens of the North.

    As the anonymous poster notes above, this alarming action was taken to raise ... 6 billion. Had the EU given the least thought to the effect of their actions they could have taken a slice out of the savings that were above the 100,000 mark and still made a handsome profit. But no. Leaden thinking leads to leaden hands slapping leaden actions to spark electric responses.

    The problem is that the savings are the easiest to target, needs no imagination or strategic thinking. The problem for those thinking in this way is that the problems they face need a lot of imagination and some really strategic thinking. That is the real danger they - and by extension, we - face. Our danger is that these people think they are right when they are so wrong they can't even see it.

  4. In my argument that the professional market participants should have been hit, I overlooked a point which was made in the WSJ article. If the bonds are subject to foreign law (particularly UK law), then hitting those bondholders would have been next to impossible. However, all that would have meant is that other professional market participants (interbank lenders, institutional depositors) would have had to be hit more.

    Mind you, this is NOT about amounts! 6,75% is peanuts when comparing it to the over-market interest which these depositors collected in the last couple of years. Even 9,9% is no scare for institutional investors. Stock markets can move by that amount within a short period of time.

    Again, and again, and again --- it's the principal of legal deposit insurance and the precedent of having messed with that. And, of course, it's also an issue of fairness.

  5. As expected, according to El Pais' non mentioned source, the cypriot side wanted to avoid drinking the bitter calice (that will kill Cyprus' banking business) and proposed the gas reserves as collateral. Schoible laughed at the cypriot minister.

    Alemania manda cada vez más, y el Eurogrupo del viernes al sábado fue un claro ejemplo de los tiempos que corren. Schäuble “estuvo muy duro, implacable como nunca”; en algún momento incluso llegó a mofarse del ministro chipriota, “se reía cuando éste proponía colocar sus reservas de gas como garantía”,

    1. Yes, I saw Schäuble making the statement on TV that he was not in favor of hitting regular depositors. But that's a bit besides the point. Even if the depositor's cut (the non-professional market participants, that is) had come at the express will of the Cypriot government, the Eurogroup would have had to veto it on the grounds that it would bear unacceptble consequences for the entire Eurozone.

    2. Mr Kastner, i agree and Anastasiades isn't exactly famous for being a "tough" nut to crack (see Annan plan). In a way or the other, deposits will flee from Cyprus and the electorate is outraged with Anastasiades, so there isn't much of a gain either way for Anastasiades.

      I do believe that the cypriot part wanted tax on everyone, from reasons already mentioned: legal. One thing, is the "right to property" , which both constitutional and under EU protection and is already written that will be used in legal action. Another is concerning tax. Tax by constitution, is proportional to the giving capacity of an individual to be constitutional. The tax on deposits isn't based on income (and thus on the ability to give in proportion), but to the simple fact that you happen to have money in there in that given moment. So if you put 0% below 100.000, this may not hold water in a court.

      I say this, because in Italy, in 1992, when there was a devaluation, there was a similar 0,6% on all deposits (no exception made) tax. The tax being low was in line with it being "tax" and not "seizing of property" and nobody could sue the italian state for "uneven tax treatment".

  6. And the "blame game" starts. Now the cypriot minister says that today there is a differentiation on the stance of the troika, that while in Eurogroup wanted a tax on all deposits, now they that it's up to the cypriot gov and so the gov now studies a plan to make a close to 0% tax up to 100.000.

    The director of the central bank of Cyprus, said that savings up to 100.000 should be completely excluded, as this is the basis upon which the credibility of the banking system is based.

  7. Some numbers.

    estimated cost of paying out deposit insurance to cypriot deposit-holders up to the E100,000 limit: €30bn.

    Amount that emergency liquidity assistance (ELA) has increased from Late 2011 (when cypriot sovereign bonds were no longer accepted as collateral at the ECB, as cyprus was already cut off from the market): €9.5bn. (so: about 60% of cyprus GDP). That's not an estiimate, that's from Central Bank of Cyprus' balance sheet.

    Cypriot Bank Bond issues: about €1bn.

    Probability of getting the bailout package through the finnish, german, slovakian, dutch parliaments, without Cypriot involvement: 0%.

    Yes, it's harsh. I don't see many alternatives though. Neither did the IMF or the above mentioned donor governments. And the ECB finally set the new cypriot government an ultimatum, that ELA is only meant to be for illiquid banks, not insolvent ones.

    Yes, the principle of deposit insurance should be holy. Unfortunately: nobody except the cypriot government wants to pay out full deposit insurance, should the banks fail. And they can't afford to.

    No alternatives around, that I can see. But the whole thing is an object lesson in why we need eurozone-wide banking regulation. These two banks should have been wound up back in late 2011. At the latest, in April 2012.

    Because they had billions of exposure to greek PSI. They could have hedged it with CDS. They decided not to.

    It's that "too big to fail" mentality again. The banks took a bet on the Troika backing down and bailing out. The previous cypriot government took every opportunity to attack the very bodies that have keeping their banking system (and hence, their economy) afloat for the last year and a half.

    Their bets just failed. Pretty tough on Anastasiades, I admit. It's not as if it's his fault.

    6.5% / 9.9%. Pretty small amounts, compared to what will be lost, if the bailout package fails to be ratified. Which it may well do. In either Nicosia, or the Hague, Berlin, Helsinki, or Bratislava.

    But cyprus is sovereign. They can reject the package. And say goodbye to their pensions, 8,000 or so jobs, 60% or so of their GDP. If they want to, they can do that. And they may well do so, since they seem pretty clueless about what banking regulation means.

    It means sometimes saying "no".

    1. It's hardly over for Cyprus. Nomura predicts that the "solution", will shrink cypriot economy by 15% in the next 2 years.

      (who could imagine it!)

  8. Medvedev: "Russia will be forced to readjust her relations with Cyprus, if the deposits are taxed".

    Putin: "the taxation would be unfair, unprofessional and unjust".

    Well, now i understand why Schoible was laughing. After this, there is no chance of russian involvement in the cypriot gas exploitation. :)

  9. Given the current mess I have a question that I need Herr Kastner's professional opinion: suppose that the EuroGroup decides that, in a Cyprus like situation, bondholders will get to foot the bill and this should include bonds under UK law. Then what is to be expected, legally and in practice?This is not all that theoretical as after the Greek PSI many Greek bonds were sold to investors under UK law and the relationship between London and the rest of the EC seems to be strained.
    As to who said what, I think that the whole thing has become irrelevant. Events have moved along. With one exception: the obvious attempt be the Germans to distance themselves from the responsibility for the mess. Somebody wanders what scared them. The bond markets, the bank share sellout, fears about their banking sector or the sudden realization that even the irrelevant looking things can become dangerous?

    1. Regarding your bond question, lawyers get rich dealing with such issues. Suffice it so say: Argentina, over 10 years ago, messed with some bonds subject to foreign law and now foreign law courts are messing with Argentina.

      Cyprus can do to these bondholders whatever it wants to. That's not the problem. The problem is that those bondholders can sue Cyprus, seemingly forever. And once the conditions of a public bond are not complied with, a default becomes effective very, very quickly.

      In my experience, the only thing one can do with such bonds is to get the bondholders to the table and negotiate something with them consensually. But that requires time and I am not sure that hedgefunds are all that interested in consensual negotiations if they mean reducing their profit.

      So, I guess holders of bonds subject to foreign law are pretty safe. UNLESS the country were to change its currency from Euro to something else.

    2. I was trying to find out what was in your answer that I didn't like. Well this is it: what you are in effect saying is that if Kleingut & Dog Investment Bank, Nicosia, Cyprus had its Russian mafia money converted into bonds under UK law on Friday evening then the money is safe from any haircut. I only hope that nobody is outed trying something like that, because an explosion, even an attack on British bases in Cyprus, might follow.

    3. Well, that is true. If the bond is subject to UK (or any other) law and if the bond terms do not allow for anything but full payment (if there were a collective action clause which stipulates that, say, 51% of creditors can change the terms of the bonds, then the other 49% would be bound by it), then full payment is required. If it doesn't come, the UK court would undoubtedly rule against Cyprus.

      The only question is what such bondholders would get if they played tough. What they have gotten so far is full payment from tax payers (Greece repaid such a bond for about 500 MEUR during the election campaigns and when the country was strapped for cash, for the only reason to not get sued). If the country did not pay and if the creditors sued, cross-defaults would blow up the entire sovereign debt situation, at the end of which reason would assume that there will be some kind of a settlement agreed to by all parties. But as Argentina showed, some were not prepared to settle. They are still suing today and I read that they have a fair chance. If they win, Argentina blows up in financial smoke.

    4. I should add: lawyers will always find reasons to sue and to counter-sue. If depositors had switched their deposits to bonds Friday evening, I think that this would immediately be contested and then a court might rule that the contest is justified. But that would be a suit again the process and not a suit against the terms of the bond.

  10. CYpriot govermental spokesman:

    "we fought to avert this unprecedented event and it was imposed with blackmail, by those that today try to justify their own decisions. As a matter of fact, their position was that non including the first 100.000, was insufficient to give the result wanted."

    According to the spokesman, the creditors were asking the immediate shut down of the 2 major banks and transfer of deposits of up to 100.000 to a "good bank". IMF's estimate, was that the rest of the deposits would lose 40% of their value and would remain frozen for 5-10 years. For the European Commission, loss of value in the totality of deposits would be much greater and the repercussions to the economy catastrophic.

    The goverment, with the complete plan of savers' protection has made sure that their losses don't equatate a permanent loss, but there will be compensated by the bank shares and income from natural gas".

  11. Below is an amazingly cool reaction from Citibank. They do say that messing with insured deposits was not a good idea but, more or less, so what? We'll see.

    1. I read the Citibank paper and while I agree - to some extent - that debt restructuring (and the deleveraging that it will bring) is desirable I think they are overestimating the prospects of growth.

      The governments will still be bound by the "fiscal compact", and I doubt the private sector will be in a rush to get into indebtedness yet again, so where's the demand gonna come from? The external sector? I doubt when even the consumer of last resort (the USA) retreats.

      Besides, I don't know whether we can classify the Cyprus rescue as restructuring. As for the Greek restructuring, it didn't do Greece much good, did it?

      No, I don't really share their optimism. In fact, I reckon we are witnessing the disintegration of the Eurozone. Now that's something to feel good about.

    2. That Citi report seems level-headed. They point out the unique cypriot aspects:

      "Few other EA countries, however, are in the Cypriot position that almost all the SUCs are depositors. None have bank balance sheets in excess of 700% of annual GDP"

      Like they say. It's bold. (Even if all sorts of people are disputing having influenced the result).

  12. The only thing that i expect now, is for Christine Lagarde to come and say that it was a horrible deal that she never wanted.

    IMF Statement on Cyprus at the Eurogroup Meeting
    Press Release No. 13/80
    March 16, 2013

    Christine Lagarde, Managing Director of the International Monetary Fund (IMF), issued the following statement today following the Eurogroup meeting:

    “I welcome the agreement reached today to address Cyprus’ economic challenges. The IMF has always said that we would support a solution that is sustainable, that is fully financed, and that appropriately allocates the burden sharing. I believe that the agreed package meets these three objectives. On this basis, I intend to make a recommendation to our Executive Board for the IMF to contribute to the financing of the package.”

  13. According to Mega CHannel (greek tv), Anastasiades talked to the phone with Oli Rehn and an assistant of Mrs Merkel and said:

    "When i was warning you that there isn't a majority in the Parliament to pass this bill, you weren't listening. My greetings to Mrs Merkel."

    The ECB didn't like the deal either btw:

    Germany and ECB blame each other for Cyprus levy

    Probably they were all feeling sleepy and voted "yes, whatever, let us go to bed".

    Awaiting the EU Commission to say that someone else wanted this.σκληρή-γλώσσα-αναστασιάδη-προς-βερολίνο-και-βρυξέλλες-να-δώσετε-χαιρετίσματα-στη-merkel-είχα-προειδοποιήσει-πως-δεν-θα-υπάρξει-συμφωνία-στη-βουλή-για-τις-καταθέσεις-αλλά-δεν-με-ακούσατε

    1. "When i was warning you that there isn't a majority in the Parliament to pass this bill, you weren't listening. My greetings to Mrs Merkel."

      She'd probably answer that there may not be a majority in her Parliament for it either. (Because it's too lenient).

      SPD and Greens are likely to vote against. She needs to cut down the number of rebels in her own coalition, to get it through. And she can only do that, by making the bailout terms harsh.

    2. The real statement is probably as follows:" I warned you, you didn't listen and now I am history. Get them to vote or I am taking you down too" With the markets in turmoil the threat is not idle. Bank shares fall all over the world, bond prices go up. Is an attack in Deutsche Bank (40:1 leverage) that far off? A unstable Cyprus can easily influence Syria, Egypt, Israel, Greece. Can you imagine Mrs Merkel asking for naval forces in the Eastern Mediterranean in six month time? She already had to declare that German deposits are safe.This sounds a bit desperate.This is why this haircut decision is so stupid: it is so obviously wrong and the stakes so high that the political blame cannot really be avoided by anybody who agreed.

    3. @ Richard Bourke

      You know what the problem is? Germany could have remained "content" with the "simple" troika program that was agreed for months. With this move, it makes Cyprus pretty desperate either way. The other problem is that the Cypriots now, KNOW what will happen to them. I heard a cypriot politician who said "the troika program will derail because of the hit to the real economy. Then we will have them coming every 3 months like they do in Greece and blackmail with new taxes. Everyone knows that in our position, with banks dead and high taxes, we will go back to 1950. At this point, even a return to the lira, would have similar effects, with the difference that the recovery will start immediately and we will have control over the decisions of natural gas and privatizations. With the troika, we will be in a comatose condition for 10 years".

      THe other problem, is that Anastasiades is finished. He is a political corpse, just 2 weeks after he got elected. Merkel still hopes to win her elections. Anastasiades is now a man with very little to lose...

  14. Now that the Cypriot parliament has voted, and particularly after seeing/reading the reactions in Cyprus and abroad, the question below goes through my mind.

    Again, that the hitting of depositors under 100 TEUR should have been voted against is, as I have pointed out from the start, a no-brainer. That condition should never have been approved by the Eurogroup regardless of what Cyprus wanted!

    But why is Cyprus so protective about the foreign 'professional market participants' who lent to and/or deposited money with Cypriot banks?

    We have seen in Spain and Ireland how problems began when otherwise well-functioning states assumed the liabilities of the banking sector. Everyone and his brother seemed to scream there and everywhere that Spain/Ireland should never have done that.

    Whether it is loans or deposits from abraod, both are liabilities of Cypriot banks. The Cypriot state was about to do what Spain/Ireland got clobbered for, i.e. take up debt of 17 BEUR on behalf of all citizens in order to protect foreign creditors of the banking sector and the banks' shareholders.

    Following rational thought, one could have expected that those who critized Spain/Ireland for having assumed debt on behalf of all citizens in order to save foreign creditors and bank shareholders, that those would have advised Cyprus: "Don't take up 17 BEUR on behalf of all citizens; don't even take up 10 BEUR. Protect your own citizens and let foreign creditors bleed!" In fact, one could have expected the Cypriots to feel that way, too.

    One argument seems to be that Cyprus wanted to do everything to uphold its role as a center of finance. To a certain degree, yes, but to the degree which the Cypriot banking sector had expanded its size, it can't be in the longer-term interest of such a small country to have such an overblown financial sector. If banks take in deposits and pay interest, they have to lend the money to someone and collect interest. For some years, it looked like sovereign bonds were risk-free and that was good business. But what is risk-free today? Taking in so much money from abraod would appear to be more of a burden than a benefit for Cyprus.

    The second reason quoted refers to geopolitics. Since geopolitics is not my cup of tea, I cannot judge that but the geopolitical reasons better be very good ones in order to justify new debt on behalf of all citizens in order to save foreign creditors and bank shareholders.

    Greece is different because there the state's debt originally was not a consequence of having bailed out the banking sector. Still, even in Greece, many people passionately argued that the state should not take on new debt in order to please foreign creditors and bank shareholders. A point which, in a different way, I have also made frequently.

    So I return to the question: why is Cyprus so protective of the foreign 'professional market participants' who lent to and/or deposited money with Cypriot banks?

    1. Mr. Kastner, i will try to sum in 1 post, several things read or heard from cypriot analysts or media and will end up with a question too.

      1) A 45% of cypriot GDP is tied to services connected to banking. This also means jobs.

      2) Cyprus had no objection of deflating the size of banking sector, gradually, inside a troika program, not with this aggressive manner.

      3) There are legal issues on both the nature of the tax and on high much of a tax can be regarded as expopriation. Today a university professor of Nicosia was explaining in newspaper how one can sue the state.

      Example written in other times:
      In 1941, The Federal Reserve Wrote A Letter Explaining Why The Cyprus Bailout Was Such A Terrible Idea

      Read more:

      Cypriot lawyers are actually very familiar with such lawsuits (ask the Turks and British that have lost in international and british courts againt cypriot privates). For example, will a court accept that 15,7% over 100.000 is a constitutional tax and in respect of right to property, while 99.999 is excempt of tax, because it's "poor" and thus proportionally just to be tax-free? The "100.000 is insurance" is no legal argument. That's insurance for a bank that goes bust, it's another story.

      4) When Cyprus joined the EU, everyone knew her status with her relations with Russians (even that 40.000 Russians are permanent residents in Cyprus). Now suddenly they discovered that it was the evilest moneylaundring center and must be purged immediately by fire. Already Cyprus had agreed with the troika, to have Moneyval, under ECB supervision to control the bank account. Why this urge to simply set them on fire for 6 bln? Why deny the natural gas as collateral (at least on lot 12, the reserves have been confirmed by drillings, they are not theoretical). Why not allow for ESM to directly give 6 bln, in exchange for banks shares?

      5) Is the sudden "urge" to "purge" in fire the cypriot banking system, despite the HUGE risk taken in the Eurogroup (because i will never believe that there were IMF+EU+ECB and combined they yielded to the cypriot terms. They had the means, at least one to say "no" and postpone, if not blackmail, Cyprus).

      Small technical detail: In the Eurogroup vote, Cyprus DID NOT VOTE. The party interested, has no voting right. So the Eurogroup voted to adopt this plan, in absence of Cypriot vote or veto possibility. Only Greece could have voted against as "friendly" to Cyprus, but didn't.

      Why put so much at stake, over 6 bln and 1,8 bln loss to the "russian oligarchs"?

      Maybe the answer is geopolitical. Hoping that Russia would become permanently alienated towards Cyprus, not just as banking site, but also energetically, "clearing" the east med gas route from russian influence (Israel would never give her lots to russian companies, too close to USA). It's the only thing with high enough reward to justify the high risk taken. The "moral" side of the story, is for media propaganda for the masses. Like if the russian money will disappear if they leave Cyprus. As a greek journalist said, the disaster of Cyprus, is that it's small enough to be too "evident". Moneylaundring is done just as well in "sober" countries, but they are less evident due to the total amount of deposits.

      Do you think that Switzerland would be protective of foreign partecipants?

    2. Dwar Mr Kleingut,

      I think you are perfectly right. Those foreign investors who got higher interest rates for lending to Cypriot banks instead of lending to German or Dutch banks must have been aware that they were taking a higher risk. So, clearly, it is them who should take the hit, after the owners of the bank, not the small depositors and certainly not the taxpayers in other European countries..
      I have just heard the theory - in a television discussion - that the EU did not want a haircut for holders of government bonds again, because they had promised that the Greek case (the so-called private sector involvement) would not repeat itself, and they were afraid that otherwise the trust in government bonds might be damaged.
      I am not sure what to think about that. Anyway, who still trusts the EU?.

  15. " For some years, it looked like sovereign bonds were risk-free and that was good business. But what is risk-free today? Taking in so much money from abraod would appear to be more of a burden than a benefit for Cyprus."

    You assume that it is Cyprus choosing whether to hit senior bonds or not.

    "At the time, the European Commission insisted senior bondholders would remain protected and the euro zone’s commitment to do so wasn’t tested, since none of the Spanish cajas were ultimately wound down.

    With Cyprus, the euro zone once again sidestepped the question. Officials involved in the rescue talks say that “bailing in” senior bondholders wouldn’t have made sense given that, by the end of September, Laiki and Bank of Cyprus had only some €184 million of senior bonds between them—peanuts next to the €10 billion the two banks need in new capital."

  16. There are serious political reasons for the EU taxpayer to take the load. These reasons exist exactly because the Cypriot taxpayer cannot take such a load without severe risk of political instability. In other words there are geopolitical reasons for the Cyprus taxpayer NOT TO TAKE the debt. Why are then the Cypriot political class protecting the foreigners?(Note: not Cyprus but the political class. Irrespective of what the politicos say these two things are different and often diverge). Well:a) A game of chicken. The Cyprus politicos are trying to force the EU to back down and avoid the political cost. In this game the EU is threatening Cyprus politicians with bankruptcy and Cyprus politicians threaten the EU with political mayhem in the Eastern Mediterranean. The first to blink pays the political cost.b) The Cyprus politicians offer political protection to the foreign money in exchange for their cut.c) The protection of the money offers them substantial influence which they cherish. There might be darker reasons involved, especially if the money belong to particularly unsavory characters. My bet is b)
    However I believe that the Cypriot blackmail worked, probably inadvertently, because the German government proved incompetent and inflexible. I just read in Kathimerini (in Greek, that the ECB stands by to offer all necessary liquidity to the Cypriot banks when they open. This means that the bankruptcy threat has been disarmed for the foreseeable future, whereas the Cypriots have publicly rejected the EU orders.Cyprus-Germany 1-0. Just like Greece, Cyprus will stay alive on ECB newly minted cash while political negotiations go on ad nauseam.But unlike Greece they will have explicitly rejected the EU orders, scoring a serious political victory over the punishment brigade, which seems to be just another political victim of the post war mess known as the Cyprus problem.

  17. Just for the history. Cypriot analysts don't claim that the nature of Cypriot problem is the same as greek. They claim that they will end up like Greece. That the current troika program will derail, as doesn't take into account the hit in cypriot economy. Soon enough, the debt will drown Cyprus. This will force a "new troika program" (just like in Greece), after of course Cyprus will have lost any access to the markets herself. The disarray in the structure of the economy (Cyprus will have to re-invent a new growth model for 50% of the GDP) will be so big, that will end in a "greek style disaster" or worse and even the gas extraction will be problematic, as if all has derailed, there will be no way to finance a local entity that i haven't understood well how is involved in the gas extraction and will have to search exclusively foreign funding. Even then, the debt will be so high, that even the gas won't do it for some years, as they expect 5 bln per year as income. So, they predict, that they will end up like a "troika program" addict, just like Greece, with the troika as the only funding mechanism for the economy for unknown amount of time and every 3 months they will have to bend to new troika demands and so on.

    The reasoning is "this is a disaster that we may cause it upon ourselves too without troika help". How this can happen you may say. Well, i am sure the troika will find that "cypriots are lazy, don't want reforms, don't move quickly enough, are refuge for evil russians etc etc, so who cares if they go to memorandum 2,3 etc". At the worst case, Cypriots will be paying forever with gas the troika! :))))

    So, many say "since our problem's nature isn't the same as Greece's and we have also Russia as option and we 've the prospect of gas, why surrender to certain disaster?"

    This is heard also by many "europeanist" analysts. They say plan 1 should be find 6 bln in other way. Leaving the euro should be the last plan, but they shouldn't exclude it.

    1. Well, I think Cyprus is rid of the Troika in fact. It wasn't exactly a popular job, listening to innumerate cypriot politicians endlessly thumping the table, spouting conspiracy theories, and making ridiculous demands, in any case. And not having to get any cypriot bailout through parliamentary ratification is going to be a huge relief for the four or five countries that mandate it.

      I think bankruptcy proceedings will now assert themselves for Laiki and BOC. The ECB has announced it will support the cypriot financial system "within its existing rules". ie: no ELA for insolvent banks. Hellenic Bank and the others will survive, with a lot of support from the ECB.

      The day after the banks reopen is going to be bad. They really should just put Laiki and BOC into receivership before the banks reopen, and save themselves a lot of grief.

      There certainly won't be much appetite for resumption of negotiations, given the recent experience.

  18. The association of international banks told the Cypriot goverment that up to 50% of the deposits will flee Cyprus in an event of a tax. Marios Anastasiou, spokesman of the association, said that any tax on foreign banks in Cyprus, is uncostitutional, saying that 25 out of the 26 foreign banks on the island, operate under differnt legal status.

    I wonder how this will affect the recap requirements of the cypriot banks.

  19. Since I have virtually no knowledge of Cyprus and its banking system, I found the above comments most interesting. Yes, if 45% of the employment is in the financial sector, that is a critical aspect. If there are many foreign banks with branches, that is critical, too (depositors could technically claim repayment at their Head Offices).

    Still, I still don't quite understand why Cyrpus is so adamant to protect foreign creditors and bank shareholders. My role model is Iceland. They said: "We'll save our domestic savers but we are not going to assume public debt of all to protect foreign creditors and/or shareholders of banks." Iceland was threatened with being blown out of the water and sued until eternity. Iceland still is in the water and it has won the law suits. Obviously, it helped to have a local currency but that's can't be the only explanation.

    The Irish and Spaniards blamed their governments for not having done what Iceland did. Cyprus now had the opportunity (with the support of the Eurogroup) to do something similar to Iceland (albeit in a much, much smaller and less painful way to creditors and bank shareholders) and they celebrate having had the guts NOT to do that.

    My own sense is that this may be due to the terrible idea of a deposit cut for regular savers. Perhaps things would have turned out quite differently if that terrible idea had not been included in the package.

    One commentator said that Cypriots don't want to end up like Greeks, increasing debt to sky-high levels and having the Troika visit every 3 months. But that is exactly what Cyprus is getting when it assumes Troika-loans instead of hitting foreign creditors and/or shareholders of banks.

    Some people in Greece have argued for some time that Greece should REFUSE any more Troika-loans to pay off creditors. To me, Greece should have done that from the very beginning. I fail to understand why Cyprus doesn't understand that it is a benefit for Cypriots NOT to take on new debt but, instead, get risk takers to assume part of the risk.

    In Iceland, foreign creditors got virtually nothing. Cyprus is offering them a debt/equity swap. As I explained in a previous article, a debt/equity swap can be an excellent thing for both sides. Again, I am afraid the small but very terrible idea of hitting regular savers clouded the overall issue involved here.

    This seems to have converted into a game of chicken. It must not be forgotten that the initial spark for that game came from the Eurogroup's terrible decision to hit regular depositors. A HUGE mistake. I think that Cyprus, with some smart and unemotional maneouvering, could have taken advantage of that huge mistake of the 'big guys'. Cyprus could have shown how 'small guys' can act more wisely, come out smelling like a rose and garner support from those many Northerners who dislike EU-elites as much as Southener do.

    Interestingly, last week it sounded like Cypriot bankruptcy was imminent. Now I read that there is time until early June. What this means to me is that there is time for senses to return and, at the end of the day, there will be a new agreement.

    1. Mr. Kastner, my english is not good enough to explain complicated things and this is a complex situation, where one must look at all factors at a chain of events, not invididually.

      The (previous) cypriot goverment, had agreed in a troika plan, which would make for a moderate transition and would bring the cypriot banking system to 3,5:1 GDP ratio by 2018. That plan was supposed to be very easy on salaries, pensions, etc. This would give time to Cyprus to make a smooth transition of the economy, given that in 2018 the first gas is supposed to be pumped and would allow a transition to energy based economy, which would replace the loss of the banking sector.

      By hitting the deposits, there is no "smooth" transition. The cypriot economy will plummet within months. The troika program is condemned to fail (just like many were warning that the initial greek program was doomed to lose all targets). Instead, Cyprus, will have no way back and the only path will be to subdue to new troika plan, debt skyrocket, GDP collapse, etc. It is like fooling yourself into accepting a program that will exist only on paper, while in reality, none of its provvisions will be able to stay as predicted and the troika, will be coming and saying "well, the original plan isn't enough, now you sign a new plan, sorry". To put it simply, they say that the "gain" from hitting deposits, will be vanished the next day, because of the repercussions to the real economy. The troika program that was negotiated during Christofias, will simply be a fairytale, it will be good only for trash paper and once Cyprus will have decided to go the troika way, there will be nobody who will care about that, when someone will say "Cyprus program failed, unfortunately, Cyprus will now have to take harsher than predicted measures".

      A few moments ago, Professor of Political Economy on Nicosia University Theofanus, said: "I do not advocate lightly to leave the euro. But, if you ask me, what is preferable for the cypriot economy between hitting the deposits and leaving the euro, my preference is leaving the euro. But i believe that Cyprus has other options to explore first, before arriving to that".

      As for bond holders, assuming that Cyprus has "hands free" to do that, they don't solve the problem. (see March 19, 2013 at 11:16 PM). I also think that they are under british law, which is very protective of creditors.

      Another, a known professor of international relations, said, that the obvious target, is Russia. Cyprus has traditionally good relations with Russia. Russia once or twice even vetoed UN resolution backed by USA that were against Cyprus. This "incident" would break up the russian-cypriot relations, not just in banking, but also in general, including gas prospects.

      According to this NYT, refers to a Gazprom plan to aid Cyprus in exchange for gas:

      Alexei Miller, CEO of Gazprom (and Putin's friend), is coming AGAIN, today in Athens. This is 2 times in 1 week.

      Speculations is that this time it may have to do something with Cyprus, although Gazprom in the past days had denied that their company offered to save Cyprus.

      I don't like conspiracies, but it is hard not to note such things. Especially when someone is drowning for 6 bln and everyone knows he is sitting on several hundred billions under his feet.

      And it's not everyday that you see Gazprom's CEO visiting Greece twice in a week, nor Putin and Medvedev speaking with so clear and harsh words over 1,8 bln of losses to some of their compatriots.

      I am sorry, but as the Americans say, "follow the money".

  20. This is a brief way to understand part of the geopolitics of the region.

    The EU is "hostage" to Russia for gas.

    The EU since 2002, decided to counter the dependenace on Russia, building the Nabucco pipeline.

    Alas, due to problems of finding enough gas supply to FILL the pipeline, the pipeline has been postponed and postponed.

    Of course, you can imagine, that Russian politics also have to do something with that...

    In the meantime, Russia didn't remain idle. While the Europeans were dreaming of the Nabucco, but remaining with empty dreams, Russia decided to make her own, competing pipeline, which is actually risking to "kill" permanently the Nabucco (contrary to the Europeans, the Russians have their own gas to fill the pipeline).

    This is a reality, not a dream like Nabucco. After this pipeline, Russia will be distributing gas to EU, both in the North (Northern Stream), to the South (South Stream) and to the middle.

    Then, out of the blue, you have the discovery of huge deposits of gas in Cyprus-Israel and maybe in Greece. For the first time, huge gas reserves inside EU soil! Would you risk having Russians exploit that too, if you could help it? Maybe i am just a cynic, evil Greek, made more evil by the passage of time, but i wouldn't! I would do my best to kick the russians out of there the best i can (without war of course).

    It's high stakes game that justifies high risks. I find it hard that someone "sees" 6 bln problem or a 1,8 bln of "evil Russians", and doesn't "see" this:

    I don't know about Mr. Schauble, but in his place, i wouldn't be able to help myself, from noticing that there is something more important in there than a small loan or the puritanism satisfaction of "bleeding" russian oligarchs from 1.8 bln.

  21. Remember also this. Cyprus, for years, pursues a policy of keeping friendly relations with both Russia and EU. For different reasons. Not just economical, but also political (solution to Cyprus issue vs Turkey).

    Cyprus, doesn't want to make "enemy" one over the other. Even in gas, the most "logical" option for Cyprus is to "split" the lots. Some lots give them to europans, some to russians, so relations with both are good. Of course, wouldn't you like to take all the lots? I would... And i am not even a greedy politician. Actually, the EU is more desperate for her "own" gas than Russia.

    1. There is absolutely nothing wrong with Cyprus, even as a EU-member, to seek (financial/commercial) friends outside the EU. In fact, a long time ago, I wrote a post advocating that Greece, too, should start looking around the world whether there aren't perhaps better friends than the EU.

      Again, not being familiar with Cypriot details, it's hard for me to judge (and geopolitics is definitely not my cup of tea). If, as is suggested above, the original Troika-plan would have provided for relatively smooth sailing until gas is found, one definitely shouldn't rock the boat in betweeen.

      You see, I don't even know what Cyprus needs the 17 BEUR for. Is it for the budget deficit? Is it to pay off maturing loans? Is it to put money into banks?

      If Cyprus has, like Greece did, a large primary deficit, things could get real tough for the Cypriot people. The world has become a tough place. No one, neither the Russians, will do anything without getting something in return. It will be interesting to see what the Russians will be asking in return.

      Exiting the Eurozone as suggested above? That should really be considered by Cyprus as a very real alternative. But there, too, a 'Cexit' would wipe out a lot of assets held by foreigners who now strike about a 9,9% hit. That would kill a lot of friendships, for sure.

    2. I am not very familiar exactly the cyprus economical situation either. The banks need recapitalization, that's for sure. Usually cypriots know a lot about what happens in Greece, the same is true for Greeks only for the political-geopolitical part. I am still learning myself, from cypriot media. The general impression in Greece, is that the cypriot economy was always strong (and the cypriot lira was quite hard currency). They suffered a big hig after a fire in their main power factory (electricity), which i think caused a huge damage for their GDP and then with the greek PSI their banks got hit. I don't know about their current situation in state finances.

      What i find remarkable is that there is a common condemnation of this eurogroup plan, not just by politicians, but from just about anyone (university professors, journalists, etc), so they can't be all crazy. What you hear is that the troika plan "won't be smooth sailing", because it's drafted with unrealistic data. They consider that accepting the hit or Cexit, would more or less be disastrous the same, the difference is in time, grades of freedom and political orientation.

      Nobody believes that Russians will ask for nothing. In fact, i haven't heard anyone to say "give anything to Russians". Cyprus entered EU for geopolitical reasons, not for economic reasons. They don't want to choose one or another. Unless they are forced too.

    3. the €17bn is composed of 10bn bank recapitalisation, and deficit funding until I think 2017 of €7.5bn.

      The figure for the necessary bank recap is highly disputed. There was a "top-down" stress test carried out by Pimco, but the headline figure they produced is considered too high (by the current cypriot government) and too low (by many commentators, who noted that it didn't cover all banks, was done quickly, had an overly-optimistic "adverse scenario" and so on.

  22. Austria's major tabloid is called "Krone". Measured in terms of readership as % of total population, allegedly the tabloid with the highest penetration in the world. Krone makes public opinion and reflects public opinion.

    Up until now, one would have expected headlines like "no more money for the lazy people and corrupt tax cheaters in the South" from Krone.

    Today's Krone goes overboard critcizing the Eurogroup for stealing deposit insurance from Cypriots. Letters to the editor are boiling over with blame for the Eurogroup. The head of FPOe (that was Jörg Haider's party; landmark philosophy: anti-foreigners and anti lazy people) published a full-page letter to the Austrian Chancellor in Krone. Message: the Eurogroup has committed rape of the common people of Cyprus. The Eurogroup must reverse that decision. The common people must rebel.

    I am reminded of what I suggested in my first post on this issue where I recommended that the Cypriot parliament should cancel hitting the regular savers and, instead, increase the burden of 'professional market participants'.

    Had the Cypriot parliament done that, I am sure that 'the common people of the Eurozone' would have gone overboard with praise. They would have fully supported the Cypriots and praised them for having the nerve to set the precedent that 'professional market participants' cannot get away with everything forever.

  23. @anonymous (I'm not sure if it's one or more posters).

    Look, I realise that cypriots have been told by their politicians they had an agreement with the Troika. On 22nd november President Christofias said:

    “After tough negotiations,” Cyprus is “very close to signing a memorandum,” Mr. Christofias said in a statement from Brussels, where he is attending a two-day summit of European Union leaders.

    And repeated the public support for what was now called an "preliminary agreement" about two weeks later. (Breaking down in tears every now and then).

    But if you read what Central Bank President Demetriades said closely:

    “The memorandum has been agreed and the only thing missing is the exact amount which will be discussed at a eurogroup meeting,” Demetriades told reporters in Nicosia today. “The main thing is that there is an agreement.”

    What they hadn't yet agreed was the things they were discussing over the weekend. The composition of the final figure. Who paid what, would it be sustainable, and so on.

    And in fact, reading what the Troika was saying at the time, for example the IMF

    "An EC/ECB/IMF mission has had productive discussions with the Cypriot authorities on the policy building blocks of a macroeconomic adjustment program. ... Discussions are expected to continue from respective headquarters with a view to making further progress toward a potential program."

    Now: you know already, if you're in Cyprus, why the government and central bank were sounding very much certain and optimistic about an agreement than the Troika were. But just in case you're not in cyprus, here's the back-story about the sudden announcement of cyprus "being very close to signing a memorandum" on november 19th - 21st 2012.

    It's a real-life political thriller.

    "Demetriades also got in touch with Christofias in Brussels and told him that big funds were being withdrawn from Laiki and only an announcement that a memorandum was agreed would stop this. If this did not happen immediately, the rest of the banks would come under the same pressure and the economy would collapse, warned Demetriades. Finding no sympathy in Brussels, Christofias finally made up his mind to say ‘yes’ to the bailout proposal. He issued an announcement saying we “were very close” to an agreement with the troika.
    His statement calmed things down. Anastasiades did not release the correspondence and in the afternoon parliament approved an additional €3 billion in state guarantees for the banks. On Thursday evening the government announced that an agreement was reached with troika.
    On Friday the markets calmed down, the deposit withdrawals from Laiki stopped and the situation was stabilised."

    In other words, your government and central bank head have been spinning the truth somewhat. To prevent a bank-run.

    And it worked. Until this weekend. Which is when they actually needed to sign the agreement, with the real figure attached.

  24. Here is a good article from the FT. Lo and behold, they have discovered the term 'professional investors' (aka 'professional market participants' in Basel-2 language).

  25. Here is another article for those who want to learn more about Cyprus.

  26. And here is another revealing article by Prof. Krugman.

  27. Another article which sounds rather well balanced to me.