This page has been archived and commenting is disabled.
Cyrpus: Our of the Frying Pan into the Fire
Whew! Cyprus parliament began the week rejecting the tax on depositors. It has been scrambling to find an alternative source of funds. As a percentage of GDP, the 10 bln euro EU package that has been offered to Cyprus is larger than the initial package for Greece, Ireland and Portugal. Still 5.8 bln euros that Cyprus is being demanded to pony up is incredibly difficult. There are no easy answers.
The solution proposed to raiding the pension funds, giving them government bonds, which all three rating agencies as well below investment grade, seems to likely target many of the same people who would have been hurt by the tax on small depositors. Moreover, that would not stabilize the debt/GDP ratios, making it more likely that the government debt is restructured.
Given the bank holdings of government bonds, a restructuring of the government debt would also spur a banking crisis and likely trigger the deposit insurance, which Cyprus cannot make good on. The two largest Cyprus banks had a combined 50 bln euros of deposits at the end of 2011. This is more than twice the country's GDP. In addition, another obstacle to a sovereign restructuring is that much of the country's debt is under the governance of UK law, which make it easier for the creditors to block it.
Cyprus initially request assistance last summer. However, because the president at the time refused to consider privatization and that the creditors wanted to do their own analysis of Cyprus' banking system even though the OECD had previously said that Cyprus has met the 40 EU directives against money laundering. In November, a German study found that more than 21 bln euros of Russian and Middle East funds had found a home in the Cyprus haven.
Cyprus banks have not been good guardians of those foreign or domestic deposits. With roughly 50% of their deposits they bought Greek bonds. This was a huge leveraged carry trade that collapsed. The loan book has also soured. In Q3 last year, the top two banks tripled (Bank Popular/ Laiki) and quadrupled (Bank of Cyprus) their loan loss reserves.
Cyprus banks have long run out of collateral that is acceptable to the ECB. They have relied on Emergency Lending Assistance (ELA), which is provided by the national central bank, at its own risk, but with the ECB's approval. In January, the ECB warned Cyprus banks that they had two months to recapitalize or it would no longer sanction ELA funding. Those two months are up and the ECB now says officials have until Monday to reach an agreement.
There was a conference call yesterday, according to wire accounts, among euro area officials to discuss views and potential solutions. Cyprus officials reportedly did not take part, leaving European officials dumbfounded.
Clearly, the risk of an exit from the euro area has increased. Many of the critics of EMU, who think it is better to be out, may be able to test their hypothesis. We think Cypriots' lives will be made significantly worse on an exit. Small depositors will not simply seen 6 1/2 of their savings taken, but will lose much of savings. The banking system will collapse and the means to recapitalizing it are not obvious. The economy will collapse and unemployment will soar. The social fabric will be torn asunder.
The increase in miser in Cyprus, however, will likely have minimal impact on the euro area. If anything the misery of Cyprus, if our analysis of what an exit would mean, may be sufficient to scare other weak members of the euro area and convince them that it is better in, with all the yielding of sovereignty that it entails, than outside, where the degrees of freedom are limited, although in different ways.
Because of the economic and financial integration, Greece appears to be the most vulnerable to a Cyprus exit. A bankrupt Cyprus, cut off from the EMU and EU, may vulnerable, from a geopolitical vantage point, which also needs to be considered.
Although our medium term outlook is for a weaker euro ($1.20 for year end), we suspect that once there is closure on Cyprus, one way or the other, the euro may bounce. We continue to place technical significance in the gap on the bar charts created by Monday's sharply lower opening, The gap now extends from last Friday's low of $1.30 to yesterday's high near $1.2980. A move above the gap would be constructive and suggest another 1-2 cent advance. Until that gap is closed though, the risk is on the downside, where our next target is in the $1.2680-$1.2700 area.
»
- advertisements -
Old Russian proverb: "Do not call the bear to save you from the wolf, for who then will save you from the bear?"
The part about the Cypriot bankers not responding in the conference call(?) reminds me of when on 9/11 the powers that be were calling the FAA as the second plane zoomed in on WTC. Gopher remarked,"theres no one here,everyone left the room". In other words,HOW IS THIS GOING TO LOOK ON MY RESUME.
I find the discussions about deposit insurance interesting and disturbing.The point is there should be separation between depository banks and investment banking.This was the policy in the USA before the repeal of Glass/Steagall under Bill Clinton.If you want high risk/high yield go to Vegas,nobody stopping you. CALPERS,the giant public employees pension fund for California dropped something like $250 million on the Blackrock Bedford/Stuyvesant project in New York City.
This project was depending upon electing a mayor who would roll back rent control.This was wildly optimistic on their part.
Also,whoever advised them to sink so much cash into Greek Gov't bonds must have a last name close to "PONZI".
"separation between depository banks and investment banking" - correct that was indeed Glass Steagal, if you are an american tenant, your "representation" turned that law over in the late 1990s. Like I said in another post, recognize precisely who is accountable and who profitted from the fraud and then roll the motherfucking guillotines. Nothing else will "fix" anything.
Put 27 family members in a room.some of them hate each other for various reasons historical or cultural.theres a fight a brewing.id rather be the first one out of the room before the shit starts to fly.smart hardworking nations of good people will be able to move on.
"You can choose your friends but not your family"
Peace out all my European brothers and sisters.lets see how many tits buy audis and bmws when the dust settles.
Too many of those involved in this debacle seem to only think a couple of days ahead at a time.
In the big picture, Cyprus can either lose all its assets, and then collapse, or leave the euro now, tell the creditors (who are they by the way) to get stuffed, and take the pain early.
Either choice they make, they have to start again.
Better to start again with your own currency, so just default now.
Foreign tourism and property are the two biggest employers. Put a levy on all foreign purchase of housing land, and a tourist hotel/bar tax across the board and they will start to recover with a cheap currency. (maybe even scrap income tax and use a sales tax instead). Plenty of opportunity to rethink the tax laws.
I think that's a short run vs. long run issue. While it's clear that the long run for the financial industry is about 90 days (a year is infinity), the long run for most people in the real world tends to extend a bit farther.
Abortion is the private matter of the mother.
Remaining in the EU is just kicking the can down the road. There is no hope in that future. Best to take the hit now and start over. Go Iceland on them.
Am I the only one who thinks any country that invested so much in Greek bonds deserves to lose whatever it is they're going to lose? Since when should stupidity be bailed out?
NO BAILOUT EVER! IMHO.
Repealing Glass-Stegall was the beginning of the end. Bankers knew they were insolvent back in 1999.
What happened to SarBox rule about CEO personally liable for accuracy of the Corporate financial filings?
I'm hoping that my ROTH and positions in FAZ will protect me.
You're right of couse. However, my bet is there is a lot of arm twisting for all banks in the EU to by sovereign debt in effort to keep the Euro afloat...
Exactly, and before some fuckers says "those stuffed shirt EZ fucks forced them too", it's irrelevant. The "leadership" made the decision on behalf of the people and the bankers profitted. Roll the motherfucking guillotines already.
Totally bullshit. Another scared paper-pusher. The core structural problem the earth is facing is a lack of true price discovery because stuffed fucking shirts around the world are trying to maintain power and control through counterfeiting and other fraudulent activities. Go fuck yourself Marc to Fantasy man.
Bank guy,
Entirely incorrect.
Has ECU/EU asked the Cypriots to incur similar austerity measures as the PIGS ? NO.
Just a haircut in deposits maxxing out at %10. Ecb/EU mistake was over-reach into sub 100k depositors.
It is shaping up though that EU deal will probably be the best Cypriots will get.Outside ECB deal means Cypriot banks along with a Larger % of deposits will be lost and then will come those terrible events you speak of ! The Russians going to help? I don't think so.
... and outside of cyprus, while governments may feel that falling out of the EU is worse than the continual beatings as a member, the little people are *still* likely to conclude on their own that money in the bank is a very very foolish thing to trust. Que bank runs, in the face of any and all EU protestations about how the "good" countries are safe from what was meant to happen to Cypriots.
"We think Cypriots' lives will be made significantly worse on an exit. Small depositors will not simply seen 6 1/2 of their savings taken, but will lose much of savings. The banking system will collapse and the means to recapitalizing it are not obvious. The economy will collapse and unemployment will soar. The social fabric will be torn asunder."
I'm glad Greece continues to take bailout money or else the above might have happened to them...
And we'll get to see a mico-cosom of what is going to happen 'round the globe as all this pilfering comes home to roost. I hope the right folks know where to look to find the scoundrels who have set this all up and then deal with them with certain and immediate justice. This is going to be puke-ugly.
Marc Chandler of Marc to Market, you are just wrong, you are believing or promoting too much Western establishment garbage
Cypriots know that staying in the euro under Troika diktat would be hell, because life in Greece already IS HELL ... people going without medicines, dying ... the medical care and prescription drug funds stolen to pay the bondholders
Cypriots instinctively feel they have a fighting chance, either on their own, or with the Russians ... the alternative, suffering for a decade without medical supplies under the fascist jackboot of the troika, dying one by one like the Greeks, all to pay bondholders, is no life at all
The Cypriot church is pledging all its vast wealth and resources (billions) to Cypriot indepedence of the Troika ...
And a deal with Russia has a fairly good chance -
See the excellent piece in Asia Times Online today, by Russian economics expert, John Helmer 'Putin Has Med Opportunity':
http://atimes.com/atimes/Global_Economy/GECON-02-210313.html
No disagreements there. A deal with the Russians does have a good chance, although the ultimate cost of a Russian bailout for the Cypriots is an unknown quantity. Another often touted "solution" was CD - certificate of deposit - for large depositors, but I can't see anyone who has being queuing at their ATMs buying the future (5-10yrs) promises of banks that refuse to even open their doors and can barely stock their machines with cash.
As a recent JPM article intimated, the probability of a default is low but the risk of contagion is massive. Just look at the ft and wsj headlines almost exactly a year ago and it's full of "CDS options market multiplies" and "CBOE to launch CDS options alternative". I don't know how much the notional value of Cyprus related derivatives are worth (who does?) but a default trigger is likely to be monumental, so I suspect one type of intervention or another to prevent that event.