16 Mar 2013

Cyprus: ten huge consequences of the bailout of a small country

“We have taken immediate measures so that electronic transfers cannot take effect before banks reopen on Tuesday”.

Incredible words, from Cyprus’ finance minister of just two weeks in the early hours of this morning as reported to the Wall Street Journal.

Brussels has delivered a small bailout, large bail-in, with huge consequences. That’s the seven word summary of an epic decision and gamble made in Brussels re the financial rescue of Cyprus.

Cypriot contacts have told me that cash machines on the island have already been reprogrammed to print out a warning of the so-called “stability levy” which will see 6.75 per cent extracted by the Cypriot government from every bank account on the island, and 9.9 per cent if the deposits are more than 100,000 euros. This will raise a sum worth 5.8bn euros, or a third of Cyprus’s GDP, adding to a 10bn euro rescue from the Troika plus Russia possibly extending an existing 2.5bn euro loan (the Chetvyorka?).

Reuters is already reporting  the impact on some ordinary Cypriots:

“Co-op credit societies, normally open on Saturdays, were shut for business in the coastal town of Larnaca as depositors started queuing early in the morning to withdraw their cash.

“I’m extremely angry. I worked years and years to get it together and now I am losing it on the say-so of the Dutch and the Germans,” said British-Cypriot Andy Georgiou, 54, who returned to Cyprus in mid-2012 with his savings.
“They call Sicily the island of the mafia. It’s not Sicily, it’s Cyprus. This is theft, pure and simple,” said a pensioner.”

1. Cypriot households, families and widows, will pay the “stability levy” of 7-10 per cent of their life savings, wheras hedge funds and other bondholders that had bet on Cypriot government and bank debts will be made whole.

2. Cypriot banks were originally doing so well that in excess of 5bn euros of Greek deposits fled that country into Cyprus in 2010. It was the EU’s decision to haircut Greek government bonds that caused the Cypriot financial system problems. The EU did not want to repeat that haircut with Cyprus (“Greece is still a one-off”) so have shifted burden of adjustment to ordinary savers. I call it HSI – Household Sector Involvement.

3. Happily for them Greek depositors, are largely protected by this deal. An attempt to stop the virus of financial contagion.

4. UK depositors are the largest unprotected depositors in Cypriot banks, with just under £2bn. If all of it is housed then, the losses could be from £140m to £200m. The FSA did insist last year on UK deposits of most parts of Cypriot banking system be separated in a subsidiary. (UPDATE: 1530: UK treasury sources: “deposits in UK subsidiaries and branches aren’t affected”). So losses are unclear, but it seems likely that direct deposits in Cyprus, particularly from Brits of Cypriot origin, could be affected.

5. As a minor aside: UK interests may not be seen to have been fully represented yet again in the EU, at a meeting of the Eurogroup. Fuel for both Ukip and those arguing we are being sidelined. (See UPDATE to 4.)

6. Germany runs the Eurozone. We knew this. Sometimes they deny it. This is a result of German electoral politics. The Opposition SPD has been very hard line on German taxpayers’ money not being used to bailout “Russian oligarchs”. A straightforward bailout had the capacity to embarrass Chancellor Merkel with consequences for the election in September. This is the end result. On the Russian angle it’s worth reading Constantin Gurdgiev: 

7. Is the EU system of deposit protection worth anything when a member state can basically seize the deposits in a tax instead?

8. “Bail-ins” have been dabbled with under Mario Draghi, rhetorically, wheras they were ruled out by Trichet. Senior figures pointed to the frying of a small number of AngloIrish senior bondholders last month as a “precedent”. The calm in the markets since Draghi’s bazooka in September may have led to over-confidence.

Analogous operations have been occurring in the Netherlands and Spain. Bailing-in ordinary depositors is a different thing entirely however. The influence of Germany looms large here. Even above the ECB, it appears. Cypriot TV has run reports suggesting Germany “blackmailed” Cyprus with threats of euro exit and over emergency liquidity funding. Take it with a pinch of salt, but clearly in Cyprus they blame Germany. [UPDATE 1730: forget the pinch of salt. I’ve been told that German representatives told Finance minister Sarris words to the effect of ‘we’ve been watching to see if there has been any contagion for 90 days, there hasn’t, so this is take it or leave it’ [ie leave the euro]. Sarris should have told Germany that if there is no contagion, then it should accept Greek style bondholder haircuts (PSI on euro-jargon) to Cypriot government debt. It’s easy to say that sat in London.

9. Cyprus has been hard done by. Difficult to see how seizing deposits is consistent with its offshore financial centre strategy. The Russian money will be gone never to come back.

 (Pawel Morski speculates Latvia as the destination du jour). Entirely plausible that they’ll have to recapitalise Cypriot banks again. Cyprus was never is as bad a position as the other programme countries. It was pushed over edge by the Greek bond haircut and a mysterious explosion at a naval base which closed its main power plant.

10. Everything depends on the reaction of the Cypriot depositors. Will they feel relieved that they have only lost seven to ten per cent of their savings? Will they remove all their money when banks reopen on Tuesday, after a handily timed bank holiday on Monday? Will capital controls be instigated? What impact will this have on other depositors in programme countries? In Spain, there’s already a profound issue with 300,000 Bankia customers who lost all of what they thought were savings accounts, which turned out to be preference shares. This still has to get through Cyprus’ parliament this weekend. We are entering a new phase of this crisis.

UPDATE 1730: Parliamentary vote expected tomorrow afternoon. Presumably some of this deal could be voted down. A large protest is expected. Various pictures of broken cash machines, queues etc are circulating on social media. A good source in Cyprus confirmed to me that electronic bank transfers are currently blocked, and ATM withdrawals have been limited to €400 (that sounds high, or normal). I also failed to note here that the stability levy at least for Cypriot residents will be swapped for shares in Cypriot banks. A lot could yet move on this in the next 24 hours.

17 reader comments

  1. Andreas Koniotis says:

    my math is simple and goes like this… The bailout is needed to recapitalize banks. The banks need 10 billion but instead the solution they get is 5 and the rest they get by seizing deposits. So they are essentially not recapitalized because the other 5 they already had. The net result is an increase by 5 in deposits provided the bailout is voted by all the parliaments involved. Meanwhile running the very real risk of a bank run of upto 30 billion. That does not sound like a viable solution. In fact a second bailout is almost certain for a much larger amount. This was the death sentence for the Cypriot banks and not their salvation. In fact this experimentation by the EU. IMF to see if the patient will survive the surgery sets the country for a direct path to the exit from the euro zone and sets a catastrophic precedence for the euro. Personally I would prefer the Cypriot president had the courage to choose the exit under his own terms last night rather than choosing the certain path of economic collapse that will follow sooner than anyone anticipates.

  2. steve says:

    I live in limassol. The electronic payment system has been taken away from online banking, and the banks are shut so it is true there can be no transfers, There are queues at cash machines but that is all i have seen here, no unrest. It is carnival at the moment, like a bif fiesta, with the main day tomorrow, so whilst it would have put a dampener on things, spirits will be higher than usual, although this could be a catalyst with most of cyrpus in limassol, it seems, this weekend

  3. Trevor says:

    This madness will only end when this EU ‘project’ also comes to an end.

  4. benf says:

    Could be an interesting one Faisal. GBP up again? Poor Merv – he just can’t catch a break….

  5. Philip Edwards says:

    Faisal,

    “Incredible words”?

    Not really…….It was only a matter of time before they tried this somewhere. It was always likely to be a dry run on a “small” country. Cyprus is an ideal vulnerable size for this kind of scam. If they get away with it there you can guarantee there will be a variant of it in a larger nation.

    And let’s not hear anymore of this Eurozone or “technocrat” nonsense. You know perfectly well the origins of this lie at the IMF, which is nothing more than a closed bankers club.

    I hope Cypriot politicians have the guts to stand up to this and state publicly just which individuals and organisations are responsible for attempting this disgusting theft. Name them and shame them. Out them in the full glare of social media and build it up until even bought-and-paid-for mainstream media can’t ignore it.

    How much more proof do you need that capitalism is a stinking leech on society, always has been and always will be?

  6. Will Speak says:

    Perhaps I’m just being cynical but hasn’t this already happened in this country in a differnt form? Each round of Quantative easing has reduced the value of the money in our bank accounts, it’s a less direct form of tax but the effect is the same, the government bails the banks out and the victims of their greed have to pay for it.

    1. pierregonzalez says:

      Very well said . No real difference . People see their benefits reduced , get nothing from their deposits just to pay for the banks !

  7. John says:

    …….”How much more proof do you need that capitalism is a stinking leech on society, always has been and always will be?”……

    This is not “capitalism” at work! This is socialism through and through. If governments didn’t get involved and didn’t have such massive social programs and debt, you would simply let some of these riskier banks go bankrupt and that is it. People would be responsible for themselves and save their own money and not be made dependant of large government. There is no true capitalism in Europe….it is really just a highly socialist form of economy masked as capitalism that renders capitalism unworkable.

    1. Kes says:

      Exactly right. Capitalism and banks get the blame for everything to deflect attention from the true evil of “big government”. It is a great sadness to see so many duped by apparent government largesse which is wholly inimical to their interests long term.

  8. sue_m says:

    Theft, no other word for it. I hope Cypriots pull the rest of their money asap and let the market forces that uber capitalists love so much take their course with the weasel bankers and their corrupt organisations.

  9. Andrew Dundas says:

    Labour bailed out UK savers who were foolish and greedy and had deposited in Iceland. A small island in the same vulnerable category as Cyprus. Those greedy/reckless savers included several local governments, so the stupidity was cross-party.

    Iceland was our warning! Bank deposits in a very small State are less secure.

    That’s why sensible savers use banks in bigger countries. Like the UK, Germany, France and especially USA.

    Greed is a risky strategy.

  10. Adrian says:

    I find it completely logical that the EU politicians didn’t like the idea of giving billions directly to the Russian maffia.
    Unlike Greece, the UK, Netherlands or France, the Cypriotic banks have little bonds holders, all their money is though the deposits.
    The banking sector is 8x the size of the Cyprus economy, so like Iceland and Ireland before it, there is no way that it’s deposit guarantees are really going to be there if those banks fail.
    As someone else said, quantative easing basically does the same thing.
    And to understand how serious the problem is, the bailout is 100% of the Cyprus GDP, €10b from the EU, €6 from this levy. It would be similar to a £1.6 trillion bailout of a £120t banking sector.

  11. pierregonzalez says:

    You semm to forget a few things about the situation . The origin is not only the Greek banks but also the result of many years of communist ruling of the country , pushing for high salaries for unecessary civil servants .
    It is also the results of a to big welcome of russian money whose origin was suspicious .
    And finally the Cyprus government themselves choose the details of the tax on deposits , not the EU . They could have been chosing to tax 20% the big deposits and nothing for the small one.

  12. pierregonzalez says:

    And now they will end as usual getting money from the Russians in exchange of giving to Gasprom the exclusivity of the explotation of the offshore gas ! These people have nothing to do in the EU . They should join the Comecon !

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