Cyprus Issue

[AshokKumarMuthusamy]

It is becoming increasingly harder for me to digest the Cyprus Deal. Well I am not able to imagine Govt., one fine morning announcing that all your money is worth just 90% now. Won't it drain out the banking deposits in Cyprus for considerable future? In fact this will leave the Banking Deposits unsafe in whole of EU...

But at the same time I don't want to come to conclusion that, what EU and IMF did was stupidity. Can someone discuss why this decision was so inevitable? And possible pros and cons of this decision compared to formal Bankruptcy(and pull out from EU)...

And I don't see similar constraint imposed on other southern nations when they were bailed out. So why Cyprus?

Speaking logically, it is the shareholders or the bondholders who must take the pain, why should a client be robbed off?

 

[bigbadwolf]

Wasn't ECB's recommendation that all accounts be affected -- only the large ones. Decision to take money from all accounts was made solely by the Cypriot government, which it back-pedaled on after a day or two because of popular resistance. Cyprus is awash with hot (Russian) money.

 

[AshokKumarMuthusamy]

Even if it affects deposits larger than 100,000Euros only, who would want to make a deposit again in a Cyprus Bank? Won't this lead to another Banking Crisis in Europe if people start withdrawing money in other crisis hit nations?

In what sense I may be wrong, if I feel that a bankruptcy followed by a deal with depositors is way better than this EU sponsored deal. In the case of bankruptcy people would have thought that "Ok it was one unfortunate incident". But now it is official that Troika may rob off your deposits anyday...

 

[bigbadwolf]

But now it is official that Troika may rob off your deposits anyday...

EU guarantees deposits up to 100,000 euros. This was the Cypriot government trying to spread the pain to everyone to protect their Russian mafia friends with huge deposits in the Cypriot offshore tax haven. Anyway, a deal has been reached, which is close to the original EU/ECB recommendations.

http://www.guardian.co.uk/business/2013/mar/25/cyprus-bailout-flawed-best-effort-consequences

Finally, the Russians who have a total of €20bn stashed away in Cypriot banks are going to be caned by the bailout deal. The chances of retaliation against the eurozone by the Kremlin over the coming months are high.

It is part of a bigger tussle between Russia and the EU:

http://oilprice.com/Energy/Energy-General/EU-Caught-Playing-Dirty-and-its-all-about-Russian-Gas.html

 

[bigbadwolf]

A new blog post this morning:

http://thenextrecession.wordpress.com/2013/03/25/cyprus-sold/

The pressure on Cypriot leaders finally worked. Cyprus’ parliament had thrown out the plan to levy the bank deposits of ordinary Cypriot citizens – a plan drummed up by Cyprus right-wing president Nicos Anastasiades and the EU leaders. The Cypriot leaders then appealed to its Russian ‘benefactors’ (the main foreign bank deposit holders) to give them a new loan to bail them out. But Anastasiades’ Russian pals refused to help – they did not want to make a new loan as it would eventually have to be written off. Good money after bad.

So Cyprus has been forced to return to the idea of a hit to deposits to find enough money to trigger the EU-IMF bailout funds of €10bn. The final deal is a ‘restructuring’ of the second biggest bank, Laiki, with deposits over €100,000 (so-called uninsured) being frozen for use in restructuring and the largest Bank of Cyprus may also be hit with a levy on uninsured deposits and will take on the debt that Laiki has with the ECB. All other bank deposits will be untouched. This measure means big losses for Russian depositors and the end of banking as we know it in Cyprus. Apparently, the plan to restructure Laiki angered Anastasiades so much that he threatened to resign rather than see his beloved ‘casino banking’ centre wiped out- yet another example of his great leadership of the Cypriot people.

The aim of making Cyprus pay part of the bailout is two-fold. First, the German and other Euro leaders did not want to bail out in full all those Russian oligarchs and ‘mafia’ who used Cypriot banks as tax havens and money launderers. It would look bad in German parliament just months before a general election to have to explain why Russian crooks should get German money because Cyprus banks acted like money prostitutes for Russians and then went on a speculative spending spree across Europe.

 

[bigbadwolf]

The levy on deposits is unprecedented in the Eurozone, as is the proposal to introduce capital controls so that Cypriots, Russians and other foreigners cannot take all their money out of Cyprus when the banks open on Tuesday. For the first time in the Eurozone, a member state is taking people’s savings and blocking the movement of euros within the Single Currency area in order to pay its bills. This is breaching EU Treaty rules. It is a big sign that the Eurozone area is in deep crisis. The impact on deposits in banks in other EMU states like Greece, Spain or Portugal could be damaging. Depositors will look to get outside the risk of capital controls being applied again within the Eurozone.

 

[AshokKumarMuthusamy]

Thanks for the detailed discussions!

Well it is all about a simple equation, income-expense = savings/liability;

We have made the simple equation into a complex Electrical Circuit with many Short-Circuits in its length. Now if we ON the switch, the Circuit Breaker blows away...

And yes, we the future Financial Engineers will have tough time to clear all the short circuits and make the light glow brightly, as it was once!

 

[rockanalyst]

The concept of "Stable Market" might be consigned to the history after you read some of the statements that keep coming out of EU and ECB.
Just read on Marketwatch and on FT that Dutch Finance minister (who also happens to be Chairperson of EuroGroup) that the "Cyprus deal might serve as a model for future bank bailouts."
Trading in Italian banks temporarily suspended after the comments from Dutch FM. Might there be a run on banks in Spain, Italy and France? The bets are off, I guess.

 

[bigbadwolf]

Unfettered financial markets are a thing of the past and probably capital controls will be re-imposed (after a hiatus of decades).

 

[rockanalyst]

And I don't see similar constraint imposed on other southern nations when they were bailed out. So why Cyprus

None of the Southern European nations were safe even after "temporary" bailouts and they are not out of the woods yet, completely. Fear, jitters, panic and paranoia has set in across Europe and even America is not immune from shocks in Europe these days.

I call them "temporary" bailouts because structural problems still persist in France, Spain and Italy.

 

[bigbadwolf]

None of the Southern European nations were safe even after "temporary" bailouts and they are not out of the woods yet, completely. Fear, jitters, panic and paranoia has set in across Europe and even America is not immune from shocks in Europe these days.

I call them "temporary" bailouts because structural problems still persist in France, Spain and Italy.

The EU (i.e., Germany) has done the least possible -- just enough to avert meltdown but not remotely enough to tackle the problems properly. So they continue to fester. I don't know how long these temporary fixes will last before things get out of control.

 

[Anthony DeAngelis]

This is ruinous IMO. You will get the initial lump of money, but all confidence in the banking sector is gone. The Cyprus government should never of even uttered the word that all deposits would be hair cut. Now everyone, right or poor will start pulling money from the bank. The limits the are imposing is only compounding the fear and lack of faith in the system.

While the realities of having to bank in certain countries will prevent mass exodus of deposits, anyone with large sums of cash would be a fool to have it sit in a Eurozone bank. Convert it to gold, hold hard cash or look elsewhere.

You cannot have a fiscal union without a political union.

 

[rockanalyst]

The EU (i.e., Germany) has done the least possible -- just enough to avert meltdown but not remotely enough to tackle the problems properly

I agree with this to a certain extent. However, I would go a step further and say that EU has not averted meltdown but rather it has been postponed to a next date. Yesterday's reaction at EU was - okay, we have stopped Cyprus and now we can go and sleep easily while rest of the world stays in panic. Unless and until EU does not understand,address and come up with long term solutions to structural problems and differences that exist within EU, markets will keep falling in love with volatility.

I always believed that EU was a marriage of convenience rather than marriage of love and we are seeing the effects of the same.

 

[AshokKumarMuthusamy]

Also can someone point me to some pages of history which shows that, Yes this country adopted austerity measures and rebuilt effectively out of crisis?

 

[bigbadwolf]

Now everyone, right or poor will start pulling money from the bank.

Not from Cypriot banks, in which connection read this:

http://coppolacomment.blogspot.co.uk/2013/03/the-broken-euro.html

Capital controls are back. In the longer term, Southern Europe will split away from Northern Europe (Germany, Austria, Benelux, Scandinavia, maybe France), which I've been saying for years. I also expect capital controls to be re-imposed in the USA, whose problems are at least as great as those of the EU.

 

[Anthony DeAngelis]

^^ Very correct, but I would say capital controls are the only thing keeping the money in the bank. These funds will just slowly drip out of the accounts with no new money coming in. If I had accounts in Southern Europe I would be yanking cash quick, fast and in a hurry right now.

 

[AshokKumarMuthusamy]

Also can someone point me to some pages of history which shows that, Yes this country adopted austerity measures and rebuilt effectively out of crisis?

Can I safely assume that there is no country that was successful by adopting austerity measures to fight crisis?

 

[bigbadwolf]

If I had accounts in Southern Europe I would be yanking cash quick, fast and in a hurry right now.

They already are:

http://www.guardian.co.uk/world/2013/mar/25/cyprus-bailout-dijsselbloem-chaos-markets

Then, in a couple of interviews, Dijsselbloem said Cyprus would be used as the model for future bailouts.

The comments were an open invitation to any investor with more than €100,000 in a eurozone bank to remove it without delay, which some then did.

By the end of the day shares in Europe were tumbling, the euro was dropping against the dollar and the cost of insuring European banks against default was rising, forcing Dijsselbloem to issue a clarification of his earlier remarks. Confirming that European politicians could not organise a booze-up in a brewery, Cyprus was back to being a special case once again.

In a recent poll 49% of Germans -- I said Germans -- expressed fear the same could happen to their accounts:

http://www.zdf.de/Politbarometer/Eurokrise-Angst-um-Ersparnisse-nimmt-zu-27169554,2942200.html

 

[financeguy]

I think there's another pretty dangerous consequence of this: a Euro in Cyprus is not worth the same as a Euro in Germany, which in turn is not worth the same as a Euro in Italy. I argue this is because of either a direct haircut on deposits (i.e. Euros held in Cyprus) or because of risk premium in holding Euros in a particular country due to the probability of a haircut or some other form of austerity that taxes savings - for which holders of cash (investors?) are not being compensated. This isn't quite the same as saying that one country's debt is more risky than another's - that is taken care of via relative sovereign interest rates in the bond market. The Cypriot banks were able to avoid borrowing at rightfully high yields in the bond market because of their large deposit base. Holding cash in a Cypriot bank was really akin to being a junior debt investor all along, but without receiving the high coupon payments; presumably there was some implied convenience yield for Russians to choose to bank with Cyprus - but it was probably too low in hindsight, and they probably didn't realize that there was any risk, with a Euro in Cyprus being just as valuable as a Euro in France. This is saying that the currency union may be diverging from being just that, and there may be social and political consequences to countries like Germany and France becoming more European than other European nations. Ultimately this has to do with these countries not being politically linked. The austerity measures imposed on Southern Europe by their more wealthy neighbors will ensure they sit in recession/depression pretty much indefinitely until they hit a breaking point and finally split. What exactly that breaking point will be or when it's coming, I'm not sure, but I have to believe we're getting closer.

 

[rockanalyst]

The Cypriot banks must have taken massive haircut on their holdings in Spanish, Italian and Greek bonds. This might have rendered their capital base in distress and balance sheet severely underfunded and triggered the crisis.