Cyprus: The World’s Biggest "Poker Game"

Tyler Durden's picture

While this kind of 'wealth tax' has been predicted, as we noted yesterday, this stunning move in Cyprus is likely only the beginning of this process (which seems only stoppable by social unrest now). To get a sense of both what just happened and what its implications are, RBS has put toegther an excellent summary of everything you need to know about what the Europeans did, why they did it, what the short- and medium-term market reaction is likely to be, and the big picture of this "toxic policy error." As RBS summarizes, "the deal to effectively haircut Cypriot deposits is an unprecedented move in the Euro crisis and highlights the limits of solidarity and the raw economics that somebody has to pay. It is also the most dangerous gambit that EMU leaders have made to date." And so we await Europe's open and what to expect as the rest of the PIIGSy Banks get plundered.


Authored by Harvinder Sian and Michael Michaelides of RBS,

Cyprus: the world’s biggest “poker game”

The deal to effectively haircut Cypriot deposits is an unprecedented move in the Euro crisis and highlights the limits of solidarity and the raw economics that somebody has to pay. It is also the most dangerous gambit that EMU leaders have made to date.

  • What did they do? Hit depositors.
  • Why did they do it? Politics, economics, and because they think they can get away with it.
  • Cyprus needs to vote on this and any delay of opening the banks on Tuesday is more risk-off.
  • Short term market reaction: Risk-off. The situation is fluid but watch politics, Cyprus bank runs risk, weak periphery banks impact and rating agencies. Worst case scenario? EMU exit talk. The Best case scenario? Germany is correct and the ECB bridges the time to when this is clear.
  • Big picture: This is toxic and a policy error.
  • Long bunds, sell the euro, sell periphery, Spain could underperform Italy, but nobody in the periphery wins.

1. What did they do?

In the early hours of this weekend, the Troika decided to impose an effective haircut to both uninsured and even more interestingly insured (<€100k) Cypriot bank deposits. More precisely, the €10bn bank rescue in Cyprus will end up with a bail-in on junior bondholders and a one-time tax on depositors. Deposits below €100k will be taxed 6.75%, and those above at 9.9%, for a total contribution of €5.8bn. Depositors will receive bank equity as compensation and the Cypriot President has offered Gas-linked notes if deposits are kept in the country for two years.

In addition, the Eurogroup expects the Russian government to come to an agreement with Cyprus soon to make a contribution to the rescue.

The Eurogroup head, Dutchman Jeroen Dijsselbloem, has refused to rule out that Cyprus will be the last instance where deposit holders get hit. Olli Rehn however has ruled this out by saying Cyprus is unique. The difference is that Mr Dijsselbloem represents the views of national finance ministers and leaders.

2. Why did they do it?

There is an excess debt problem and somebody has to pay. The division of costs is a policy choice.

The typical choices beyond growth and inflation, are via (a) getting friendly foreigners to pay such as Germany/EFSF/ESM etc; (b) getting wealthy domestics to pay (c) forcing the debtor nation to make good the loans over time through austerity; and (d) force losses on creditors such as the expropriation of SNS Reaal subordinated bonds, losses on Anglo Irish senior bonds, OSI, and of course PSI.

The signal is on the limits of core solidarity

The haircut on the deposit base in Cyprus is unique in hitting the most secure ladder in bank capital, when Cypriot government bonds and senior bank paper are still planned to be made whole. That policy choice was unexpected. One key message is that the decision represents visible evidence of the limits of core EMU solidarity. In truth, this was already evident via the ESM’s seniority and the CACs in 1y+ new government bonds.

...and the limits of the economics

According to media reports (FT) the Cypriot leaders were felt to be left with little choice. We discuss this below but why should Germany, other core countries and even the ECB threaten to take down the Cyprus’ largest banks or threaten full bail-in of depositors? The answer is that resources are limited. Core EMU is not large enough to bailout the periphery risk and so default has to be part of the solution.

Politicians are taking on the prospect that Cyprus is not systemic

Behind this political and economic backdrop is also another crucial factor: The implicit gambit here from the Troika is that the actions in Cyprus will not have systemic consequences. For instance, UK Sky television sources reported that this was indeed the message to the Cypriots over the weekend.

Is that true? Yes, on a myopic level this is correct. Cyprus has special features which include the size of the banking sector with assets of €126.4bn, or over 7-times GDP. The deposit base is €68bn, of with over €20bn is by non residents, mostly Russian. Moreover, there was little else in the banking sector to haircut with around €2bn in senior and sub, and PSI in Cypriot government bonds is was always problematic given that a large share of the debt is under English law where the CACs mean 25% holdings can provide a block while 55% domestic debt ownership implies PSI would necessitate further bank recapitalisation.

  • In other words, breaking the taboo on hitting depositors, was a deliberate policy on politics, economics and a ‘bet’ from the Trokia that Cyprus’ problems will not radiate into more widespread Euro risk concerns.
  • Very clearly, the OMT announcement effect coupled with the moderate reaction to SNS Reaal, Anglo Irish, and Italian elections have helped to embolden political ‘poker-like’ tactics with the markets.

3. Cyprus needs to vote on this and any delay of opening the banks on Tuesday is even more risk-off

The decision to hit depositors is a surprise to the markets but also Cypriot leaders, some of which had very recently described the idea of hitting depositors as ‘stupid’. So what happened? According to the FT and other media, a creditor group led by Germany & Finland and supported by the IMF, had been pushing for depositor haircuts to limit the overall size of the rescue loan. There was seemingly no appetite to recreate the fudges in the Greek debt sustainability analysis. The Cypriot leadership were stunned by this move but were cornered by news the ECB would otherwise pull the plug on Cyprus’ Laiki bank, which rather fortuitously, apparently no longer qualified for ELA. This in turn would have meant the sovereign would be on the hook for all insured deposits, which according to the FT would be some €30bn or 175% of GDP, as well as ushering in social upheaval.

This explains the fact that Cyprus – which had planned to vote for deal on Sunday 17th March – has had to delay the vote to Monday 18th March.

  • The reason is that Cypriot President Anastasiades did not have a mandate a move to haircut deposits.

Moreover, Anastasiades’ calls for all political parties to support the Eurogroup decision in parliament, to avoid an uncontrolled collapse of financial system; job losses and Euro exit, is a signal that a Yes vote is not assured.

As for the vote count in Parliament, the main governing party will likely say Yes but the junior coalition partner has set three conditions for support, (i) written confirmation this is a one-off, (ii) the ECB must provide unlimited liquidity to make up for any deposit run and (iii) no new austerity measures beyond those already agreed. We do not know whether these conditions can be met. Note all opposition parties are against. It is possible that the vote could be with abstentions. In addition, note the initial read of popular opinion is overwhelming against the deal with 71% of respondents to an early survey saying Parliament should reject the deal.

Bank runs and bank holidays

The local Cypriot media report that bank ATM machines have run dry and that there is general anger about a freeze in electronic transfers

The move by the Eurogroup is unprecedented but the fear is rather obviously that a bank run may be in the offing. This is behind the rationale of President Anastasiades’ statement that depositors keeping their money in Cyprus for 2-years will receive securities linked to future profits from natural gas revenues. It remains to be seen whether the confidence trick of paying Cypriot taxpayers with their own resources works.

  • The situation is rather fluid and there is enough concern on the political backlash in Cyprus that it has been mooted that Cypriot banks will stay closed beyond the Monday bank holiday. If this is the outcome (probably from political paralysis) then risk markets are likely to take even greater fright.

4. Short term market reaction

a) This is risk-off but how far it goes is too fluid to pin down with markets initially focused on bank risk, and related political risk, but also be watchful for ratings risk.

b) Worst case scenario: EMU exit debate.

c) Best case scenario: Cyprus swallows the medicine and this looks like a policy error at the next crisis... But even here we have a period of darkness to get through first.

The OMT announcement effect has been very powerful in reducing investor sensitivity to event risks in the European periphery. The fact the ECB can stand conditionally behind a sovereign is important in helping markets to differentiate between tail risks and this reduces contagion. This is part of the explanation behind the muted reaction to Anglo Irish Seniors, SNS Reaal subs and the Italian election. Nonetheless, wiping out depositors is at another level of concern.

What we are watching near term

  • Cypriot politics will dictate the most immediate reaction and obviously the local bank runs. A delay to the vote for the deal (which means extending the bank holiday) or a ‘No’, will heighten market concerns. Conversely, a ‘Yes’ vote could materially reduce near term risk as the ECB can stand behind the Cypriot financial system with ELA to compensate for lost deposits. The hope here will be that confidence and deposits eventually return as they have done in other countries such as Greece.
  • Cross border bank contagion - most likely to weaker periphery banks. The Cypriot banking system is sufficiently unique to mean that we are not looking at wholesale cross border contagion.
  • Ratings agencies: The sheer guile in taking haircuts to deposits means there is less EMU solidarity than initially thought and one could also make the argument that Loss-Given-Default is materially higher now. This combination means in our view that there is downside rating risk to the periphery.

How bad could it get? If Cyprus rejects the deal, there is a political vacuum, and uncertain funding vacuum in who will fill the gap when the Cypriot banks eventually do open, and net this means speculation on EMU exit.

The best scenario? The Parliament swallows the medicine fearing financial collapse and/or EMU exit, and in time the one-off promise of the deposit tax is seen as more credible, meaning that deposits flow back into Cyprus. In the meantime, the ECB ELA keeps the banks alive.

5. Big picture, this is toxic and policy error

Our view has been that debt restructuring is a necessary albeit painful component of the crisis resolution. This stems from the fact that creditor nations are simply too small to absorb debtor risk and because sovereign EMU states will still exist for many years. That means a line has to be drawn under the available cross-border assistance and in practical terms this means (a) sovereign debt restructuring risk is higher than the consensus believes and (b) private sector and intra-country wealth transfers would have to be forced.

The decision to hit depositors was however much bolder than we expected – and we think this has two major influences.

Firstly, game theory the future where a country such as Italy is reaching the limits of debt sustainability. The analogue here is to get wealthy Italians to finally pay tax via perhaps a one-time solidarity tax on sovereign bond coupons/principal, given that domestic residents and the ECB own 71% of the market. Alternatively, getting the locals to make a sacrifice by extending the debt maturity is also feasible under the concept of ‘you broke it – you pay for it’.

  • In a sense, the more domestic financial architecture, including ownership of government bonds, makes such local burden-sharing solutions more politically viable. One could even say that the ownership moves in markets aids some type of Paris Club and London Club workout.

Secondly, even if the Eurogroup wins on the idea that Cyprus wants the Euro so much that it takes the medicine, and Cyprus’ banks are unique enough to mean limited contagion effects, then that would only be phase one of the impact.

  • We think the very fact that deposit haircuts have been put on the table means the cost of future bailouts will be higher as banks (at a minimum the weak banks) will be destabilised.

6. Markets

This is risk-off, and we think that the most likely scenarios involve more political wrangling where Cyprus tries to fight for a better deal – and waits to see if there is contagion to force the hands of core EMU. That means, the odds are on the banks remaining closed for a few more days and more local political wrangling. We are also attentive to any deal with Russia. Moreover, once the banks do open, markets will be attentive to the scale of deposit flight. As we mentioned above, we are also alert to ratings risks and that even in a best case scenario, there is a period of turmoil to pass through.

This is a recipe for long bunds, sell the Euro FX, selling periphery risk in general. The focus on banks and deposits could see Spain underperform Italy.


(h/t Steve)

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The Watchman's picture

Royal flush - take that bitches!

flacon's picture

It can't be a real crisis. Just look at gold and especially silver - unchanged. Move along. Nothing see here. 

DoChenRollingBearing's picture

What the Eurozone has done to Cyprus is so stupid that even Euro area banks are saying that?!  

I agree with a proposal I saw elsewhere today at ZH: guarantee all accounts to 100,000 euros, and take bigger haircuts from larger accounts.

I also saw (but cannot confirm) that Russian Mob money does not typically stay long in Cyprus (except beach houses I suppose) before being sent on to Liechtenstein, etc.

There are a LOT of apparently contradictory things going here.  Yes, Risk Off!


YBNguy's picture

So, how much will the DOW be up tomorrow from pre-market emergency double-time QE pumping?

Cult_of_Reason's picture

The widespread effects of the global financial crisis began to truly take off in late 2007, when...

Divided States of America's picture

Wont change anything, the Dow winning streak was marginally broken last friday. This is the start of a new streak. The futures action indicates that its negative now but by the time we wake up, the ES will be flat or green. how much you wanna bet that is going to happen. Nothing phases me anymore. Until the Cypriots starts acting desperately and by that, i dont mean taking buldozers to banks, I mean having the heads of bankers rolling, nothing will change.

Cult_of_Reason's picture

No-one wants to be last in line if everyone else is pulling out their cash. This panic will spread to other countries. If people think that their money might be at risk, it's entirely rational for them to take it out.

andrewp111's picture

The big money can't simply pull it out as Euro notes. The money has to go somewhere, and has to stay in a banking system somewhere. Me thinks the flight capital comes to the USA and Germany.

Cult_of_Reason's picture

Cyprus bailout: 'people are panicking, they're afraid of losing their money'

Cypriots tell of shock finding government had seized up to 10% of savings – despite promise deposits would be safe

Supernova Born's picture

All the times in world history that folks could have reacted to obvious warning signs and got out but stayed put.

You're witnessing one of those times right now.

Cult_of_Reason's picture

Talking about the warning signs... as Merkel lying repeatedly last Thursday and Friday...

"Merkel said repeatedly on Thursday that a potential Cyprus bailout was not on the schedule"


“When it becomes serious, you have to lie."  -Juncker

Diogenes's picture

They aren't bailing out Cyprus. They are robbing them.

The Big Ching-aso's picture

"You can rip-off all the people some of the time, and some of the people all of the time, but you can sure as hell rip-off all the middle-class all the time."

Abe Lincoln Jr. IV






upWising's picture

As "The Honey Bucket" Septic Tank Pump Service always reminds us:

"A Flush beats a Full House"

ArkansasAngie's picture

This obviously has Ben's blessing ...testing the waters?

Kirk2NCC1701's picture

Of course. Scaring people out of peripheral regions (nice to customers) to core region (banks nice to Central Bank) is good for Fed. And a fear of Euro is great news for the Fed's shareholders and the Dollar. "It's all good" says Uncle Ben.

Oh, and as I predicted 12 hrs ago (before markets opened), as much as I share the disappointment, no gold price of significance has occurred or will occur.

auric1234's picture

Gold just broke the $1600 resistance.


The Navigator's picture

...testing the waters?


6% to 10% taxes on our IRA's and 401k's

No wonder NO ONE in Wash. DC is at all concerned about the $16Tril (soon to be $20Tril) debt.

Spitzer's picture

Cyprus has no central bank to call its own, so they get 10% 'taxed' off their purchasing power. The UK does have its own, so they 10% QE'd off theirs. So what's the difference?

ebear's picture

.......So what's the difference?


CaptainObvious's picture

This is why my version of the IRA/401k consists of little round golden and silver bits of metal that aren't far from that other precious metal, lead.  Confiscate THIS, bitchez!

JOYFUL's picture


there is only one 'team' - sovereign powers of putative 'nation states' is now a legacy concept...indulged in only by fantasists and antiquarians.

the steps in the road...MFG for clearing the path to seizure of investor assests; Cyprus for taking to the depositor level; next round - safety deposit boxes; afterthat - pension funds and 401ks; end game - metals confiscation. Royal flush.

The Shootist's picture

Everything's bullish for DOW 36,000. Buy it if it's not nailed down muppets!

andrewp111's picture

Could be. If there is a total capital flight from Europe, the DOW could hit 50,000 and T-bill rates could go to -2%.

Bingfa's picture

Cyprus woes spark Asia selloff, Nikkei flls 1.7%

Contagion works in mysterious ways...

AmCockerSpaniel's picture

Just who runs these banks, or who owns these banks (get paid by the bank, or got money during the good times)? It's their bank, but not their money in their bank. The people with money in the bank don't own those banks, any more than the German people do. Who ever was driving the thing when it broke has to be responsible. We are adults, and adults stand for what ever they did, or let happen. The depositors are the victims. It's Iceland time, now suck it up.

thewhitelion's picture

Or we they could try something different, follow the rule of law, and wipe out owners and bondholders first.  That whole "Russian mob money" thing, true or not, is just a way to sell a criminal act to a frightened and distracted population--in Cyprus, in Europe, and around the world.  

Next time it's to punish evil real estate speculators, and eventually they get to evil ball bearing speculators.

Harbanger's picture

"Just look at gold and especially silver - unchanged. "  Don't just Look at the PM prices, buy more now, prices had already bottomed regardless of the recent thefts.  Now add some emotional attachment to the recent news and things are looking very good for gold and silver.

maxmad's picture

Rumors are already floating that banks may not open in Southern Europe or close early if it gets to bad...

Stoploss's picture

"The hope here will be that confidence and deposits eventually return as they have done in other countries such as Greece."


Bullshit much??

flacon's picture

They are confident that confidence will return. What a bullshit monetary system this world had - "faith-based money". Years from now nobody will ever believe that the world was stupid enough to go along with it for so long. 

CClarity's picture

I worry the ECB will just "Fed-up" and become the "indirect bad bank" and do the excess reserves (oh wait, there aren't any) trick that the Fed has done to the tune of $2 trillion.  Extend and pretend.  

I don't  really think this is the TILT moment, but maybe it is, ala Sarajevo in WWI.  It is usually in the backwaters and hardly noticed places that the straw breaks the camels back.  Seatbelts folks.


Id fight Gandhi's picture

Closed? Good, fuck em. Sheeple need to wake up.

NoWayJose's picture

If any do close, they are all going under. ECB has to print Euros or let he banks write unfunded cashiers checks.

Number 156's picture

Not to mention, the longer they stay closed, the angrier the depositors become and its Game Over for the banks.

And if they allow depositors to withdraw their money unrestrained, its Game Over for the banks since they've certainly will have lost any remaining confidence in the banks,

If they want to steal their money now, the only thing they can do at this point is print and inflate the euro out from under them.


Supernova Born's picture

Being cut off from your money is like being financially waterboarded.

Depositors are not going to leave themselves open to a second round of financial suffocation.

MsCreant's picture

"Being cut off from your money is like being financially waterboarded."

Excellent metaphor. To not have access to your money is like being suffocated. You know the air/cash is there, you just can't get to it, and you don't know when you will get to it again.

Sheer panic. 

+ 6 - 9% haircut. Haircuts are torture too.

Kirk2NCC1701's picture

Look what it did for Sampson. Merkel: the German Delilah.

Theosebes Goodfellow's picture

Look, all this talk of containment flies out the window if you are banking in say, Ireland, Spain or Italy, because if the Cypriots don't riot in the streets over this then this little scenario will be played out in those countries as well. Do you really think the ECB won't do this again if they can get Cyprus to swallow its medicine, (regardless of the "this is special and this won't happen elsewhere" line of utter caca)? If the Cypriots go for this then it is license to do it everywhere else, including America. And if it does go down then it won't be the only time, because there is still a "spending problem" in these countries. Until they get spending under control, the "beatings will continue until morale improves", as the old saying goes.

geekgrrl's picture

"Depositors are not going to leave themselves open to a second round of financial suffocation."

No. And those of us watching from afar are not going to leave ourselves open to the first round.

We need to starve the banks of deposits. It's the only way. I am going to put a world of hurt on my bank tomorrow when I request all my funds in cash. At 100:1 leverage, they are going to feel it.

And when I fill out the FBI paperwork for a >10k+ plus withdrawal, I am specifically going to cite the failure of central bankers to protect savers over all the speculators. Fuck this.

auric1234's picture

Well done mate. Be sure to replace the funny paper with real money afterwards.


geekgrrl's picture

Yes, conveniently, the coin store is about 10 blocks from the main office.

lakecity55's picture

If u r in the ussa, it will take a while to get your fiat.

u have time to wlk to the coin shop and make up a list of pretties.

Tango in the Blight's picture

Watch out for those DHS drones circling overhead.

geekgrrl's picture

I hear them buzzing overhead, but evidently they are not yet armed, or they choose not to shoot at me. So far.

CaptainObvious's picture

This is exactly my plan.  I will be first in line at the bank this morning to withdraw the paltry <5k sum I trusted the bank with and it will be converted to hard assets by the time the second customer finishes his transaction.  Gold, silver, lead, and food FTW!