Think Tank: Cyprus 'Saved'; But At What Cost?

Tyler Durden's picture


Authored by Raoul Ruparel, originally posted at Open Europe blog,

The most positive aspect of last night’s deal was that a deal was reached at all, and that some steps have been taken to counter moral hazard. However, overall, this is a bad deal for Cyprus and the Cypriot population. Cypriot GDP is likely to collapse in the wake of the deal with the possible capital controls hampering the functioning of the economy. The large loan from the eurozone will push debt up to unsustainable levels while the austerity accompanying it (along with the bank restructuring plan) will increase unemployment and cause social tension. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and central bank funding, with little hope of economic growth. Meanwhile, the country will remain at the edge of the single currency as tensions increase between members with Germany, the ECB and the IMF now looking intent on a more radical approach to the crisis.

The eurozone took this one down to the wire. But late last night, after a week of intense back and forth negotiations, a deal was reached on the Cypriot bailout. Below we lay out the key points of the deal (the ones that are known, there are plenty of grey areas remaining) and our key reactions to the deal.

Key points of the deal:

  • Laiki bank will be fully resolved – it will be split into a good bank and bad bank. The good bank will merge with the Bank of Cyprus (which will also take on Laiki’s circa €8bn Emergency Liquidity Assistance – a last-resort funding system outside the usual ECB operations). The bad bank will be wound down over time with all uninsured depositors (over €100,000) taking significant losses (no percentage yet but some could lose all their money above the threshold).

  • The Bank of Cyprus will be recapitalised using a debt to equity swap and the transfer of assets from Laiki. Uninsured depositors will take large hits in this process – again no percentage but reports suggest up to 40%.

  • These actions will be taken using the new bank restructuring plan passed in the Cypriot Parliament on Friday. Crucially, no further vote will be needed in the Cypriot parliament since there is no direct deposit levy.

  • The banks will not receive any of the €10bn bailout money, the entire recapitalisation will be done using the tools outlined above.

  • Not clear when the banks will reopen but significant capital controls are likely to be in place, creating a risk of Cypriot euros being “localised”.

  • Further tax increases may be included in the detailed plan to be drawn up between the two sides.

What does this deal mean for Europe?

1. Europe once again sidestepped democratic procedure to secure a deal: By removing the deposit levy and forcing losses on depositors through the bank restructuring the eurozone was able to dodge a tricky second vote in the Cypriot Parliament. Although the bank restructuring proposals were approved in the Parliament on Friday, it is not clear that all Cypriot MPs were fully aware of how far the restructuring tools could be pushed. However, it’s likely that the final deal that will actually activate the bailout loan – the Memorandum of Understanding – will need approval of the Cypriot Parliament, so there may be another vote yet to come. Parliamentary approval is not guaranteed but voting it down would again be close to a vote to leave the euro.  

2. A change in tack from Germany and the ECB: Germany has made it clear that it is no longer willing to foot the bill for extensive bailouts without the recipient country taking a share of the burden and making some radical changes. The ECB, by setting an ultimatum, has signalled that it is willing to use the significant leverage and control which it has to force what it sees as the desirable outcome, meaning it is becoming an increasingly political actor (which its mandate does not allow). In combination with the sense of unfairness that has been built on all sides, this could serve to entrench the North-South standoff in the Eurozone, making future talks trickier.  

3. Will the Troika break up? Reports overnight and throughout the week have shown that this relationship has become increasingly strained, particularly between the IMF and the European Commission. Some strains were visible also over the Greek debt sustainability analysis, but looks to be far worse this time around. With Germany and the northern countries insistent on the IMF’s continued involvement there could be further conflict. Any future bailout deals will likely remain strained because of this.  

What does this deal mean for Cyprus?

1. Despite avoiding taxing small depositors, political upheaval looks likely: Although the most controversial aspect of the original plan was dropped there will likely be some political fallout. Ultimately, the government in Cyprus has been shown up by the crisis, with both the Finance Minister and President reportedly threatening to resign at various stages. Furthermore, the bank restructuring will likely cause significant unemployment.  

2. The standard of living and the wider economy could collapse: Cyprus’ position as a financial centre could be over. There are few other alternatives for growth. One option that remains is tourism, but with a significantly overvalued currency it is not clear to what extent Cyprus can take advantage of this. The capital controls will severely hamper liquidity in the economy, while it will be very difficult for the small island to trade with the rest of the world (it is far from self-sufficient). The collapse in GDP could be anywhere between 5% and 10% this year, depending on how long capital controls are imposed, while the resulting collapse in tax revenue could make the government’s position worse. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and ECB funding to function, possibly requiring further bailouts.  

3. The capital controls will keep Cyprus teetering at the edge of the euro: As we noted over the weekend, these controls are severe and could de facto lead to Cyprus being seen as out of the euro. Ultimately, money is no longer fungible between Cyprus and the rest of the Eurozone and, at this point in time, it’s hard to argue that a euro in Cyprus is worth the same as a euro elsewhere. The real problem though may not be imposing the controls but removing them – Iceland still has capital controls in place, five years after it installed them (despite having the advantage of a devalued currency).  

4. Is Cypriot debt sustainable? A key goal throughout these negotiations has been to make Cypriot debt sustainable (unlike under the Greek bailouts). We do not believe this has been achieved due to the likely collapse in GDP noted above. A €10bn bailout will push Cypriot debt to GDP to 140% - if Cypriot GDP falls by just 5% this year, that rises to 148%.  

What is the geopolitical fallout of this deal?

There is yet to be a clear reaction from Russia but Russian depositors are likely to be hit hard by this deal. Russia’s First Deputy Prime Minister Igor Shuvalov has suggested today that an extension of the €2.5bn loan given to Cyprus is not guaranteed – something which the eurozone indicated was necessary last night. Separately, Russia remains the key energy supplier for most of the EU and has already issued veiled threats around this deal – such as a withdrawal of money from the EU and a switch-away from euro currency reserves.  

Central banks once again dodge losses:

Overnight it became clear that the ECB and IMF were insistent that the ELA must be moved from Laiki bank to the Bank of Cyprus as part of the deal. The main reason for this must be to avoid the Cypriot Central Bank taking losses on the ELA, which would have been counterproductive as it would have to have been recapped by the Cypriot government, a cost which would need to be added to the bailout bill. This episode does highlight that the assets pledged as collateral at the ELA are basically worthless and that avoiding central bank losses will always be a key objective in any bailout negotiations. Worryingly, once the banks reopen (capital controls notwithstanding) money will likely flow out, leading to an increase in ELA and reliance on central bank funding.  

Are there any positives from this deal?

  • The main positive is that a deal was finally reached, the alternative would likely have been messy for the eurozone and the EU.

  • There is some reduction in moral hazard, since those who invested in the large undercapitalised banks are footing the bill – as opposed to all depositors.

  • Some trust in terms of the deposit guarantee below €100,000 may have been restored.

  • Senior bank bondholders in Laiki and possibly Bank of Cyprus will be bailed in (taking losses) – although this may not raise much cash, it is the correct order in which to restructure the banks.

These small points will provide little comfort as the Cypriot population endures the harsh reality of rising unemployment, fiscal consolidation, private sector stagnation and internal devaluation, all while under stringent capital controls.


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Mon, 03/25/2013 - 09:53 | 3371941 Croesus
Croesus's picture




Bankers Try Fucking Depositors ?

Banks To Fail Disastrously.

Best To Flee Defensively.

Better Try Finding Doubloons.


Mon, 03/25/2013 - 09:54 | 3371951 sunnydays
sunnydays's picture

Paul Krugman calling for Capital Controls in the U.S. and world today.  Says that is what caused the Cyprus problem was Foreign money.  



Mon, 03/25/2013 - 09:57 | 3371959 Croesus
Croesus's picture

If this isn't enough of an indication to get your money out of banks (and encourage everyone around you to do the same), I don't know what is.

Mon, 03/25/2013 - 10:10 | 3372003 ziggy59
ziggy59's picture

Yeah, everytime that idiot opens his mouth i go huh?
I want a refund for his noble prize in eco..

Mon, 03/25/2013 - 10:23 | 3372038 BaBaBouy
BaBaBouy's picture

Europe Now Financial Disaster Zone ...Trust NO-ONE, No Bank, No Gov't ...

Rule Of Law Can Change Overnight --- No Voting Allowed..


Best Option There Is To Buy ALL GOLD Phys, Or Take Out All Your Cash Printed!

Good Luck...

Mon, 03/25/2013 - 10:13 | 3372017 scatterbrains
scatterbrains's picture

looks like crude oil is saying  peace out niggas itz been realz!!  to the world measured in fiat bye bye

Mon, 03/25/2013 - 10:14 | 3372021 AlaricBalth
AlaricBalth's picture

Sometimes a picture is truly worth a thousand words.

Mon, 03/25/2013 - 10:33 | 3372104 asteroids
asteroids's picture

No, the REALLY bad thing about this deal is that they are still under the thumb of the ECB. They should have taken the Iceland route and told them all to fuck off. Cyprus, like Greece are no longer soverign nations.

Mon, 03/25/2013 - 09:53 | 3371946 kaiserhoff
kaiserhoff's picture

Pyrrhic Victory

Another such victory and we are undone.

Mon, 03/25/2013 - 10:27 | 3372072 I am more equal...
I am more equal than others's picture

We will save you by lending you more money to payback the money you couldn't afford to payback.  Don't worry, we'll extend the payment period from 10 years to 40 years.  You want In Rem?  You want a war?

Mon, 03/25/2013 - 11:36 | 3372394 yrbmegr
yrbmegr's picture

Madam, I have good news and bad news.  The good news is that your husband is cured.  The bad news is that he is also dead.

Mon, 03/25/2013 - 09:54 | 3371947 TeamDepends
TeamDepends's picture

Is Cypriot debt sustainable?  Hilarious!

Mon, 03/25/2013 - 10:28 | 3372077 Yamaha
Yamaha's picture

One thing that Cyprus is most famous for is being the final home of Lazarus after the death of Jesus he was forced their as many wanted to kill him. With that history there is no wonder they really do believe in coming back from the dead. Just call it the European Lazarus effect. Damn thing won't die......Oh, but Lazarus did finally die in Cyprus.

Mon, 03/25/2013 - 09:56 | 3371953 Mercury
Mon, 03/25/2013 - 10:00 | 3371967 kaiserhoff
kaiserhoff's picture

Great read, Mercury, and right on target.  Thanks.

Mon, 03/25/2013 - 09:58 | 3371962 Ban KKiller
Ban KKiller's picture

The main positive is that a deal was finally reached, the alternative would likely have been messy for the eurozone and the EU.

The deal will not be messy. In fact it will be sparkling clean you can eat off of it. 

Mon, 03/25/2013 - 10:16 | 3371965 LawsofPhysics
LawsofPhysics's picture

This will not stop the continuation of the bank runs.  When fraud becomes the stutus quo (as it is now), possession becomes the law.  If you want to stay solvent and keep doing business I suggest the following; revenue generating physical assets > physical PMs > physical fiat > dividend paying stocks with well lobbied corporations > bank deposits in well-lobbied banks.  Go long sharecropping, gun/ammo manufacturers, and guillotines.  The world has been here before and people will do whatever it takes to make ends meet no matter what the "official" policy is and regardless of what the MSM is saying.  hedge accordingly.

Mon, 03/25/2013 - 10:59 | 3372200 Never One Roach
Never One Roach's picture

Indians and many Chinese still do not trust banks and hold their money in silver or gold jewelry or both. In the 'old days' immigrants hid their money in shoe boxes in their closets in America since they did not trust banks (and bankers) either.

Seems like people might resort to these 'old fashioned' but time-proven methods of safety given recent events at MFGlobal, Cyprus, and so on. People are now more worried about protecting their principal then get a decent yield since the meager yields do not compare to the high risks.

Mon, 03/25/2013 - 10:02 | 3371966 Bicycle Repairman
Bicycle Repairman's picture

Time to start pumping that gas, Cypriot bitchez.

Mon, 03/25/2013 - 11:47 | 3372462 Bicycle Repairman
Bicycle Repairman's picture


Mon, 03/25/2013 - 10:00 | 3371972 fonzannoon
fonzannoon's picture

"Some trust in terms of the deposit guarantee below €100,000 may have been restored."


Mon, 03/25/2013 - 10:04 | 3371986 Racer
Racer's picture

Trust in Banksters?

anyone who leaves money in a bank or even more stupid puts some in it, should have moronic cash cow tattoed on their face

Mon, 03/25/2013 - 10:21 | 3372050 laomei
laomei's picture

Until people are smart enough to dump their accounts... and the banks have a new solvency crisis... in which case, everyone's fair game again.

Mon, 03/25/2013 - 10:01 | 3371975 stant
stant's picture

money flees to where its treated best. now where will that be?

Mon, 03/25/2013 - 10:03 | 3371984 LawsofPhysics
LawsofPhysics's picture

Define "money".  In general I was wondering when the first bank of Mars is set to open.

Mon, 03/25/2013 - 10:07 | 3371996 TeamDepends
TeamDepends's picture

My pants!

Mon, 03/25/2013 - 10:32 | 3372094 TeamDepends
TeamDepends's picture

Seriously, we are starting a bank.  Each new depositor will receive a LaGarde toaster and earn a respectable (in todays marketplace) .00014% interest.

Mon, 03/25/2013 - 10:20 | 3372046 kaiserhoff
kaiserhoff's picture

Silver and lead, until there really is a New World Order.

Maybe a very long time.

Mon, 03/25/2013 - 10:02 | 3371979 Serfs Up
Serfs Up's picture

My time.... it is coming.

Mon, 03/25/2013 - 10:03 | 3371981 ziggy59
ziggy59's picture

Everything Else Doesnt matter, banksters asses saved for the day...

Of course the peons are affected and effected most...but wait a small detail..

Russians, wealthy ones got caught in the net..
Ruh roh..

Mon, 03/25/2013 - 10:03 | 3371982 Whoa Dammit
Whoa Dammit's picture

I recommend reading up on the collapse of the banking system in medieval Florence and Venice. There are many parallels to today's problems. Their banks and corporations were, for that time, global. The system failed for the same reasons our is.

Mon, 03/25/2013 - 10:08 | 3371997 LawsofPhysics
LawsofPhysics's picture

Many such parallels in history.  They all boil down to some very fundamental principals having to do with real value, trust, and counterparty risk.  Many of us continue to watch the supply lines and perception.  Most sheep still have not figured out that they are working harder to maintain a decreasing standard of living.  All hell breaks loose when 7+ billion start to believe their "lying eyes".  Just like Venice then, the financialization of everything under the sun has only enriched the paper-pushers (moneychangers).  Now remind us, what do these folks actually produce that is of real value again?

Mon, 03/25/2013 - 10:04 | 3371988 Hoi Polloi
Hoi Polloi's picture's gone.

Mon, 03/25/2013 - 10:06 | 3371992 kito
kito's picture

no balls.....These leaders have no balls...shouldve left the eu and paid pig merkel back in funny money.....

Mon, 03/25/2013 - 10:14 | 3372023 Spastica Rex
Spastica Rex's picture

Estrogen producing GMO crops to blame, maybe?

Enjoy your testicular-free future, neo-eunuchs.

Mon, 03/25/2013 - 10:21 | 3372054 falak pema
falak pema's picture

lol, your pipe is fuming hot and its not blowing white fluffy genteel peace puffs...

Mon, 03/25/2013 - 11:27 | 3372349 Kirk2NCC1701
Kirk2NCC1701's picture

"Estrogen producing GMO to blame..."

Offbase. The EU is not into GMO. The US is. Thanks to the Monsanto lobby.

What exactly is in that pipe of yours? Someone play a joke on your 'tobacco'? ;-)

Mon, 03/25/2013 - 10:06 | 3371994 machineh
machineh's picture

'This episode does highlight that the assets pledged as collateral at the ELA are basically worthless'

Read that again, folks.

Then try to find out what the ECB's current ELA total is. (Good luck.)

Mon, 03/25/2013 - 10:09 | 3372000 jmcadg
jmcadg's picture

And this is better than exiting the Euro for Cyprus.

Mmmm. Life support or roll your sleeves up and give it a go. Come on Cyprus 'BAIL OUT NOW'!

Mon, 03/25/2013 - 10:11 | 3372009 chubbar
chubbar's picture

When the article mentions that the bondholders are going to be "taking losses", I assume that means 100% losses. No depositor should take any loss while there are still bondholders worth something.

"Cyprus’ position as a financial centre could be over." Gee, do ya think? Any idiot with over 100K in any bank in the EU should be bailing out right now or shut the fuck up forever about any losses you sustain in the future.

One lesson that should come out of this for depositors is to know what the hell the banks are investing in with your deposits. Anyone who knew these bozos were investing in Greek bonds and still left their funds with the bank deserves the assfucking they are getting.

Mon, 03/25/2013 - 10:11 | 3372010 Itch
Itch's picture

I was going to post a rant about the Russians having the second largest bank in Cyprus under their thumb, and Eurocrats being only marginally better...but i spellchecked it, and guess what MS word suggested for Eurocrats?

...Euro rats.

Mon, 03/25/2013 - 10:14 | 3372022 JP McManus
JP McManus's picture

Poor bastards don't have a 2nd amendment...

Mon, 03/25/2013 - 10:24 | 3372065 akarc
akarc's picture

We in the U.S. do and we get screwed by the Corporate/government alliance daily

Mon, 03/25/2013 - 10:17 | 3372031 falak pema
falak pema's picture

EU stealing cyprus

This is a joke. The Cyprus banks played poker with their Russian and small depositor money and lost their whole house in the process. Once again the Cyprus bankstas, like bankstas everywhere else, think the world is a casino, where they are Sheldon Adelson, top casino oligarch!

The fact that the russian money was stolen via tax evasion, from Russia, compounds the sins of big-easy sleazy depositors whose money has whetted appetites of the whole Cyprus caboodle, from top political oligarch to simple bank clerk, all networked in the bamboozling economy we call Cyprus.

Now the Augean stables stinking in debt pile-up get cleaned out under EU forceps!

And the EU CONTRIBUTES 10 B of its member's money as does the IMF; all to save poor bankrupt crony corrupt Cyprus. That some of those shady rich guys get haircutted is normal.

When you tax evade, when you wank yourself with ouzo every night, in a low tax corporate zone that thinks free money grows on trees, you are in for a big surprise one day...

SO what is this about the EU stealing Cyprus's money...???

Is this a forum for trolls, for barbie dolls or serious kleptocratic clones?

Mon, 03/25/2013 - 10:32 | 3372089 unununium
unununium's picture


Mon, 03/25/2013 - 10:32 | 3372091 unununium
unununium's picture

You seem to have missed the part where nobody can get their money out.

Presumably you agree with Frau Merkel that they deserve this.

Mon, 03/25/2013 - 12:06 | 3372301 falak pema
falak pema's picture

you seem to have  missed the part that those banks are totally belly up WITHOUT EU SUPPORT...

What money Out?

there is none without EU support and saving of banks via our credit lines. 

The whole country is one big Lehman....its been that way since your question is whose money gets stolen if those ATM work a few more days...why should it be anybody else's except those who dumped their money in those banks in the first place!

If the ATM works somebody's pie gets smaller, it could be the EU tax payer or it could be the russian depositor, now that the small guy is you choose...that money does not grow on trees, and the hole is very real. 

Do you believe in private contractual repsonsibility between bank and depositor and when it gets broken by a hole the size of the pacific, somebody has to own up and somebody else has to bear the pain. Simple, its a one to one situation.

And...I'm sure the big ruski players moved their money out in time as these banks are belly up since months n months, the politicians probably told their big clients; in their own interests to protect their skins...

The EU action is saving their skins from TOTAL disappearance, with our money, and thats fine if its contained risk. (Big unknown).

Mon, 03/25/2013 - 10:19 | 3372036 Super Broccoli
Super Broccoli's picture

Cyprus saved ?

1. even with capital control savers will succeed in drying their accounts. Will take some time but at some point when you take as much cash out as you can everyday and only spend with your bankcard where it still is accepted, the accounts will turn dry, just a matter of weeks.

2. black market will boom diminishing VAT and taxes for Cyprus

3. shortages will occur all around (petrol, food, water, cigarettes ...)

4. collapsing banks will fire like mad, increasing the unemployment and thus unsustainable cost for the state

5. companies will go bust since their current account has been tapped

... and much more i can't even think of

---> Cyprus is doomed and will (with the helping hands of all the PIIGS) drag europe down !



Mon, 03/25/2013 - 10:20 | 3372044 Smiley
Smiley's picture

20 Years ago Russia would have regarded this as an act of war.  I expect some gas and oil shortages to pop up in the next month for all of Europe; perhaps some billowing smoke as well...

Mon, 03/25/2013 - 10:27 | 3372073 laomei
laomei's picture

Just jack the gas prices to make up the difference.

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