Cyprus: The Dog that Didn't Bite...Yet

Marc To Market's picture

Last week Eurogroup head Juncker warned that the situation tiny Cyprus was more worrisome than Greece.  While this seemed to be an exercise in hyperbole, sure enough Monday, a Cyprus official was quoted on the news wires warning of an imminent default.  


Hang on.  Didn't Cyprus reach a memorandum of understanding with the Troika ?  Indeed, it did.  However, it will take some time to deliver the funds.  


Essentially and in principle, there was an agreement on aid in the neighborhood of 17.5 bln euros.  This is for the bank recap (roughly 10 bln euros) and for funding the government for three years (7.5 bln euros).  An audit of the banks is needed to ascertain their condition and determine the recapitalization needs.  PIMCO recently conducted a preliminary audit for the government but the results have not been released.  A full audit is expected in mid-January. 


As was evident in the recent negotiations with Greece, there are fissures within the Troika.  The IMF is reportedly concerned that if Cyprus borrows the funds for the bank recapitalization it could push Cyprus' debt to unsustainable levels.  This in turn, would prevent the IMF from participating in an aid facility for it.  


In the mean time Cyprus has salaries to pay and other obligations.  Hence the threat of selective default.   Just as officials and traders were winding things down for the year, this seemed to throw a monkey wrench into the budding holiday mood.  EMU had survived a challenging year, didn't it?  


The threat of default was meant to persuade state-run organizations in Cyprus to loan the government funds for three months as a sort of bridge loan until the aid flows.  The government has been locked out of the capital markets for more than a year.  It promised to pay back the loan with interest. 


The government raised funds from the Cyprus Telecommunications Authority and the Electricity Authority.  Reports suggest it was also seeking borrow from the Port Authority. By late Monday, Finance Minister Shiarly claimed the government's short-term financing needs have been met.  


This course may be sufficient if the bank audit can be completed in time for the Eurogroup meeting on January 21.  Yet Cyprus is a great example of the a banking system that is too big to save.  Consider that at the end of last year, the IMF figures suggest Cyprus' bank assets were 152 bln euros, or 8.3x GDP.  Assets of commercial banks with Cypriot parents was 92 bl euros or 5x GDP.  These Cypriot banks had 29 bln euro exposure to Greece of 1.6x GDP.  


The private sector losses in the restructuring of Greece's debt was the prick that popped the bubble.  Cypriot banks were forced to seek state aid.  The needs overwhelm the government, whose debt is already three-quarters of GDP and rising.  


Another complication is that Cyprus goes to the polls in February.  The Christofias government lost the confidence of the people. During its five year-term unemployment has risen from below 4% to 10%.  The debt/GDP ratio has increased by half.  The government that the Troika is negotiating is not truly representative of the Cypriot people.  


This analysis suggests that although Cyprus has found a way to fund itself for the time being, problems are lurking around the corner and will likely come to head in Q1 13.  

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Navymugsy's picture

So the Gov't of Cyprus is begging for a 230,000,000 Euro loan from the Cyprus Telephone Authority (Cyta), the Port Authority and the electric company just to make the 400,000,000 December payroll. The largest supermarket chain on the island just went into bankruptcy owing suppliers 200,000,000 Euros and non-performing real estate loans are at 23,000,000,000 Euros. Everything is wonderful in the Eastern Med!


Somebody somewhere will be paying for all of this...



Orly's picture

"...non-performing real estate loans are at 23,000,000,000 Euros..."

Those seem like awfully gigantic numbers for an island the size of Nebraska.  $30B in non-performing real estate loans?  Someone's doing some exaggerating.

Navymugsy's picture

Lots of bad loans and many of them denominated in Swiss Francs. Ouch!

Orly's picture

Right.  So they fell in with that whole Eastern European, "we all get to be American and have a mortgage" fiasco?  Almost brought down Austria (or did it not?)

FMR Bankster's picture

Let's not forget all those super safe Greek goverment bonds that the Cyprus banks own. They are stuffed full of them.

taraxias's picture

Can we stop with this nonsense again please. .

Cyprus WILL BE bailed out, just like Greece. The narrative "trouble is brewing in the markets" because they MAY NOT be bailed out is naive.

They'll bail them out, and whoever else fails next. No choice. Otherwise their pet project comes to an abrupt end. What's so hard about that to understand?

Martel's picture

Truer words may have never been spoken. The Brussels bureaucrats will stop at nothing, NOTHING, trying to rescue their dream. Cyprus is a shoo-in, likewise with any demand for money Greece may come up with.

Volaille de Bresse's picture

"Who would notice if Cyprus vanished from the surface of the earth?"


This is where you're dead wrong. Cyprus like Bermuda or the Island of Man is one piece of the network of "dark finance" our elites are so fond of. 

That's one place that CANNOT go under as its demise could lead to ***ugly*** consequences all around the world. 


Have you ever wondered why each time the clown that runs this island coughs and begs for help Juncker IMMEDIATELY signs him a big check? Cyprus is indeed very important for the corrupted globalized elites. 

magpie's picture

The German nomenclatura just has to be told that the Russian money is really Israeli money. End of story, next please.

Orly's picture

Roll back the clock and it is all the more reason to go after it.

magpie's picture

"Roll back ?" Precisely, that will not be allowed to happen.

No, really, this was meant as philo-, not anti-semitic baiting - making the bailout most necessary.

Orly's picture

Then there is a quandary.  It has been my experieince that the NWO will do anything it can to stick it either to the Russians or the Chinese and if they can get a two-fer, all the better.

Propping up Cyprus will put the ECB/IMF rubber-stamp on all Russian money in Cyprus and the Euro won't see a dime of it.  It seems...out of character for that to happen so easily.

eigenvalue's picture

I always wonder why bunds or oats are not in the crosshairs of bond vigilantes. It makes perfect sense to short bunds or oats since the burden will mainly fall on France and Germany. However, Paulson shorted bunds this year and suffered heavy losses.

Ghordius's picture

lol, this just reminds me Churchill and his search for the "soft underbelly of Europe"

he then sent the Allied Expedition Force to what we call now the Gallipoli Campaign

somewhere must be a weak spot in the eurozone "fortress", keep sending fresh shorters until found, eh?

who knows, perhaps this will be true, either in this or in the next currency war

Orly's picture

Wasn't the idea behind, "the threat of default was meant to persuade state-run organizations in Cyprus to loan the government funds for three months as a sort of bridge loan until the aid flows," really just a ploy to draw out the massive amount of Russian money that is being held on the island?

Don't the Russians hold in (ill-begotten?) cash something like 5X Cypriot GDP and aren't the Germans trying to shake that tree, much to the chagrin of the Russian oligarchy?


CaptainAmerica's picture

"I'd rather be a conservative nut job, than a liberal with no nuts and no job!"

Dr. Sandi's picture

So by that, I'm guessing you're behind the Troika's terms for a Cyprus bailout?

jover's picture

Cyprus is not Iceland

Nussi34's picture

Cyprus = too small to save. Who would notice if Cyprus vanished from the surface of the earth?

Ghordius's picture

correct, lots of Russian banking in Cyprus. Putin would probably pay in gold for the British military base there

falak pema's picture


Cyprus is the pebble in the shoe of Russian oligarchs whose banks are going to die thru Greek bank demise. Its the domino effect in the Balkans. Just like Hungary. And the Troika doesn't want to save Russian white washed Oligarchs, unless its quid pro quo! Thats the rule amongst Oligarchs, and its ALL under the table negotiations.

Merkel is playing a much deeper game. But can she control it? Ost-politik and shaking out the Russian Mafia tree, as nobody wants to invest in Russia today until they clean their PUtin house and make it more transparent. That is a given, as Germany-Russia-Gazprom is there for decades now to come.

Thus the Ruski Oligarchs have to become more EUro compatible, like the UK City, and putting them  under the domino gun  is one way of doing it. those local Cyprus government shills playing casino with the people's pension funds, it makes a dangerous cocktail that has Balkanistan written all over it.

Not to forget the undersea game of Oil/gas bonanza that major players are also hatching, as future RM treasure island...

Cyprus has always been a staging ground for the Crusades, a hunting ground for the naval italian republics, then a pearl in the crown of Mediterranean Ottoman dreams, finally rule Britannia's staging post in Eastern Med schemes.

Soft underbelly indeed! 


Ghordius's picture

falak, have you forgotten to mention it? it's also the birthplace of Venus

Merkel is just continuing the policies started by Schröder - she is only a power broker 

but yes, we'll see if the "compatibility game" goes on

Orly's picture

You've got the world-view going on, falak!  Some white truffles for you, mon ami!

falak pema's picture

lol, thanks for the truffles and Venus is my true favorite too!