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The Incredibly Ballooning Bailout Of Cyprus

testosteronepit's picture





 

Wolf Richter    www.testosteronepit.com

Cypriot President Christofias dug in his heels. On Greek TV. Not behind closed doors with the Troika, the austerity gang from the European Commission, the IMF, and the ECB that have performed such miracles in Greece. But as Cyprus veers toward bankruptcy, his game of playing the Russians against the Troika has fallen apart, banks are in worse condition than imagined, and the bailout amounts jumped again. How can a tiny country get in so much trouble in such a short time?

The real-estate and construction bubble, fed by corruption and abetted by banks, burst two years ago. Home sales and prices have collapsed. Some 130,000 homeowners (in a country of 840,000 souls) are tangled up in a nationwide title-deed scandal [Another Eurozone Country Bites the Dust]. The Troika estimated that 50,000 homes would be dumped on the market—though only 4,876 homes were sold during the first nine months of the year! Losses have gutted banks. Unemployment has reached record levels. And the construction industry, once a major employer, is being annihilated.

The index of building contracts, after a two-year downhill slide, has reached the lowest point in its history, and “activity is expected to continue dropping,” lamented the Federation of Associations of Building Contractors (OSEOK). Contractors are going out of business. Over the last four months, the morass has deepened. And now there are only enough pending construction projects for seven months, and after that, there are no projects.

Locked out from the financial markets since early summer 2011, Cyprus was bailed out by Russia last November with a €2.5 billion loan. In June, as the banks began to topple under a mountain of Greek debt and rotting mortgages, Cyprus asked for a bailout. The Troika took a look and figured €6 billion for the banks and €4 billion for the government. €10 billion in total. Alas, in August, Central Bank Governor Panicos Demetriades told parliament that the banks alone would need €12 billion! And the rumor consensus has settled on €15 billion for both the banks and the government.

Then Russian Finance Minister Anton Siluanov spilled the beans last week: Cyprus would indeed seek a €15 billion bailout from the Troika, and an additional €5 billion from Russia, for a total of €20 billion. A vertigo-inducing 107% of GDP.

But he cautioned that Russia and the Troika would need to coordinate the loans—thus throwing a monkey wrench into Christofias’ efforts to use the negotiations with Russia as a lever against the Troika to get a better deal and more lenient conditions.

Conditions that the Troika had already spelled out in a memorandum. Which was promptly leaked. It included measures that would make Cyprus a more efficient and competitive economy. Cypriots have seen how well that has worked in Greece. So, a whack at the bloated public sector: privatization of state-owned enterprises, a 15% cut in the public payroll by the end of 2013, a 10% cut in benefits, elimination of the automatic Cost of Living Adjustments (CoLA) that index salaries to inflation, and an increase of contributions to pension plans. The CoLA elimination would also hit unionized private sector employees, as would the elimination of the 13th month salary.

“You cannot tell someone they won’t receive a 13th salary. It automatically means you paralyze the market” declared communist President Christofias during the TV interview yesterday. “I can assure you, I will not sign any memorandum which scraps CoLA. The same applies to two or three other measures.” Hence, no privatizations, no public sector payroll reductions.... But he also made some sense: “What happened with the banks was a crime,” he said.

He would, however, try to cooperate with the Troika. “We aren’t just saying ‘no’ to them,” he added. “We are giving them counterproposals.” His cabinet met on Wednesday to finalize them. They focus apparently on a VAT increase, a luxury car tax, sin taxes on cigarettes and alcohol, disincentives for public sector workers to take early retirement, and a 5% wage cut for those earning over €1,500—the mindboggling phenomenon of a government cutting private sector pay plans is something we have already seen in Greece.

Yet, Cyprus has something that Greece and other Eurozone debt-sinners don’t have: lots of Russians with money. The island has become an offshore haven for their businesses, and the money-flows are staggering. For that amazing twist to the bailout story, read.... The Russian Connection.

And here is a thought: there is little that would rock the oil world more than a revolution in Saudi Arabia. And with a coming leadership crisis, it is becoming all too likely. Read.... Why an Islamic Revolution in Saudi Arabia Is a Surefire Way to Send Oil to $300 a Barrel.

 


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Fri, 10/05/2012 - 12:40 | Link to Comment SmittyinLA
SmittyinLA's picture

I don't think there is ever a "give up" point for the financiers of Socialism & Communism as they never have a choice, the state makes that decision for them.

 

I wonder how the Russian people frozen in the North with no vacations, pensions or free shit feel about subsidizing the tanning sessions of retired Greek public employees? 

Fri, 10/05/2012 - 12:32 | Link to Comment SmittyinLA
SmittyinLA's picture

Federation of Associations of Building Contractors (OSEOK)

 

Now there's a worthy group, I bet they don't employ one greek citizen, I bet they use 100% scab imported labor, and dump most of their labor's cost on the state. 

Fri, 10/05/2012 - 11:17 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

An essential commodity which money cannot buy, either due to high price or lack of currency, will be acquired by force.

Fri, 10/05/2012 - 10:07 | Link to Comment Choose Sanity
Choose Sanity's picture

Criminal behaviours? Surely not.

Fri, 10/05/2012 - 09:57 | Link to Comment steve from virginia
steve from virginia's picture

 

 

First:

 

“You cannot tell someone they won’t receive a 13th salary. It automatically means you paralyze the market” declared communist President Christofias during the TV interview yesterday. “I can assure you, I will not sign any memorandum which scraps CoLA. The same applies to two or three other measures.”

 

“You cannot tell someone they cannot live beyond their means. It automatically means you paralyze the market” Peeps cannot live beyond means any more the market is therefore paralyzed. Ipso Facto, Bitchez!

 

Second:

 

Why an Islamic Revolution in Saudi Arabia Is a Surefire Way to Send Oil to $300 a Barrel.

 

Howcum? What would an Islamic Revolution do to put an extra $200 per barrel into consumers' pockets? See 'the market is therefore paralyzed' above ... Analysts need to stop pretending the world is rich with bags of spare change laying about, waiting for high oil prices to 'appear'.

 

The world is bankrupt from top to bottom, it has run aground on the schoals of its own automobile waste ...

Fri, 10/05/2012 - 08:25 | Link to Comment SuitablyIronicM...
SuitablyIronicMoniker's picture

€20,000 for every man, woman and child on the island - and that's just for starters! I think my republic also needs a bailout, just ask the Troika to send a few boxes of €500 notes to my post box please.

Fri, 10/05/2012 - 12:46 | Link to Comment kaiserhoff
kaiserhoff's picture

Like your thinking... proactive, in tune with the new world order.

What sounds better, Republic of Mule Crick or Happy-Joy Land of Cow Pies ?

Fri, 10/05/2012 - 08:20 | Link to Comment Peter Pan
Peter Pan's picture

Everything is OK. Cyprus is the smallest of problems. Even a church collection in Germany over a couple of weekends can cover the cost of a bailout. It's the other bad children in Europe that are the real problem.

Fri, 10/05/2012 - 05:34 | Link to Comment falak pema
falak pema's picture

The Russian and American oil oligarchies rub noses dangerously in Cyprus, Syria, Saudi, Turkey and Kazakhstan; not to mention Israel where both are active.

Gazprom vs Exxon et al. Look out for Irak and Kurd plays. That is a linch pin too; like Iran. 

Irak/Iran; tweedle-dee and tweedle-dum, of the shia/sunni and oil oligarchy fracture lines. 

Saudi stays the big one in Pax Americana camp; if it goes islamist and radical its the end of the US hegemony "detente" style shooting match that Dear Henry instigated and the BUshes enhanced even more.

The whole ME scene is getting to be a frying pan that could become fire for Pax Americana.

The Russians can afford to play a divide and rule game, as its their natural back yard; not so for PAx Americana. They are far from base and getting more and more isolated. 

Fri, 10/05/2012 - 12:27 | Link to Comment Element
Element's picture

 

 

"Look out for Irak and Kurd plays."

 

Yes indeed, I've been waiting for this one.

Fri, 10/05/2012 - 05:22 | Link to Comment Navymugsy
Navymugsy's picture

The Russian part of the bailout is essentially a huge buy of "calls" on future gas revenues. Gazprom will own this bitch! Can't wait to see the Soviet er, Russian Federation frigates in the port of Limassol out of my kitchen window.

 

BTW, if any of you would like to buy property without title deeds then Cyprus is your dream market! I wonder what will happen when all of the Russians who are moving here and buying property find out they can't get clear title to their purchase? (They'll find this out after they buy of course...)

Fri, 10/05/2012 - 02:56 | Link to Comment Haager
Haager's picture

Russia on it's way to get a stake on $600bn Greece/Cyprus oil and gas reserves?

Fri, 10/05/2012 - 02:29 | Link to Comment q99x2
q99x2's picture

Bring back the cyclops by Zeus.

Fri, 10/05/2012 - 01:52 | Link to Comment El
El's picture

The scope of the fiscal issues caused by the banks and the governments is simply staggering. We need to seriously rein in both.

Fri, 10/05/2012 - 01:14 | Link to Comment Element
Element's picture

Another great read.

It seems to me the only reason Greece was ever permitted to grow the debts it was able to accrue, was more due to the strategic need to keep Greece and the Balkans out of the Russian sphere of influence (especially as the Greeks started to purchase a lot of the most advanced Russian SAM systems ... the same ones Iran and Syria want), in order to secure the crucial NATO SE periphery.

Everyone knows this is where the Black Sea Fleet must transit into the Mediterranean to have a meaningful power projection relevance, so Russia is very interested in maintaining influence in this area, and keeping Turkey vulnerable, which is a natural strategic alignment for Greece.

Hence the EU debt growth to keep the Greeks in the fold, and part of the desire to keep them in the Eurozone at any cost.

Basically the NATO expansion since the cold war is now rapidly unravelling.

Fri, 10/05/2012 - 01:58 | Link to Comment disabledvet
disabledvet's picture

I do agree...great article. Everytime I get in full rant mode this site finds a way to go full on exceptional and this piece is definitely top shelf. I think your comment is very interesting...but misses the point of the article. Cyprus is in deep doo-doo...and while the dollar amounts as a tax haven are indeed staggering a change in Government in Russia...which is indeed possible...could end that abruptly. Moreover it is easy to overstate the powers of the Troika as well. The crisis in the EZ has only just begun...and interest rates dropping and the euro strengthening could be construed as a prelude to a catastrophe. In other words "the economies of Europe are now headed for a massive recession." (the data backs this up btw.) how much longer will France stay with a massively over-valued euro? Clearly the political tides have turned dramatically in Paris...and they have been a front line force in the War on Terror...and still are. Any action out of Paris is not to be trifled with in my view...and that means enhancing NATO authority and dropping out of the EZ. We shall see.'these really are extraordinary times we are in...thanks for the input. Stay tuned folks...this thing is getting HOT.

Fri, 10/05/2012 - 06:01 | Link to Comment Element
Element's picture

Yes, plus Britain is now more keen than ever to pull its forces away from Afghanistan as quickly as possible.

As for Europe, the far greater danger is not just a plunge into a deep recession, but a slow sliding and gradual immersion into a deep recession (i.e. what's happening), because that's what is most damaging to capital, small businesses and employment, and building social desperation and pressure.  Bail out banks in that and you are asking for BIG trouble.

Europe bounced out of recession in 2009 because like everywhere else it plunged off a cliff into it.

Fast in = fast out

That was true everywhere in 2008-2009, but;

Slow in = something very much worse than stagflation with full employment - which is what Japan was fortunate enough to have for 20 years.

It isn't going to be like that in Europe ... nor in the US case (another major downgrade in 7 to 8 months from now) ... nor China .. and then Japan also can't sustain full employment, either.

Fri, 10/05/2012 - 00:42 | Link to Comment Divine Wind
Divine Wind's picture

 

Hmmm.

I wonder if a condition of the bailout is a claim on the natural gas deposits rumored to be nearby.

 

Fri, 10/05/2012 - 00:37 | Link to Comment Stuck on Zero
Stuck on Zero's picture

They need a 15 trillion Euro bailout.  This includes overstuffed Swiss bank accounts for all the political leaders, pools, spas, country club memberships, yachts, and limos.  They need to be bailed out in style.

 

Fri, 10/05/2012 - 00:11 | Link to Comment otto skorzeny
otto skorzeny's picture

 The Russian govt. already bailed Cyprus out once so the Russian mafia could continue to launder their $ through there. The banks there are nothing but a front-not that US banks aren't.

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