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Guest Post: The Real Story Of The Cyprus Debt Crisis (Part 2)

Tyler Durden's picture




 

Perfectly timed given the Cypriot President's call for better terms, we look at what really went on to crush this tiny island nation...

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Not only is the bail-in a direct theft of depositors' money, the entire bailout of Cyprus is essentially a wholesale theft of national assets.

Here is Part 2 of our comprehensive account of the banking/debt crisis in Cyprus. As noted yesterday, the debt crisis in Cyprus and the subsequent "bail-in" confiscation of bank depositors' money matter for two reasons:
 
1. The banking/debt crisis in Cyprus shares many characteristics with other banking/debt crises.
 
2. The official Eurozone resolution of the crisis may provide a template for future resolutions of other banking/debt crises.
 
It also matters for another reason: not only is the bail-in a direct theft of depositors' money, the entire bailout is essentially a wholesale theft of national assets. This is the inevitable result of political Elites swearing allegiance to the European Monetary Union.
 
I am honored to present Part 2 of Cyprus resident John H. Morgan's report.
 

The Cyprus Bank Deposit Bail-in

On 16 March 2013, the noose was tightened around Cyprus. Emergency Liquidity Assistance (ELA) was cut off. Banks remained closed while the Government negotiated with the Eurogroup of European finance ministers to save the Cyprus banking system. President Anastasiades announced the first proposal to the nation: he would tax all bank deposits in Cyprus to fund the recapitalisation of Laiki Bank. This plan was rejected by the Cypriot Parliament as it infringed the guarantee on all insured deposits up to €100,000. The Minister of Finance visited Russia to ask for financial assistance, to no avail.

On 25 March 2013, as Greece celebrated Independence Day, it was announced that Laiki Bank would be wound up and Bank of Cyprus would be restructured. All Cypriot depositors in Laiki Bank and Bank of Cyprus who held more than €100,000 would be forced to pay for Cypriot bank losses and withdrawals, mostly sustained in Greece (the so-called “bail-in” of depositors). Bank of Cyprus would be responsible for paying back Emergency Liquidity Assistance provided by the European Central Bank to Laiki Bank. It would also assume liability for all Laiki insured deposits up to €100,000.

The value of uninsured deposits over €100,000 held by Cypriot Banks came to €38bn (billion) out of a total €68bn in deposits. The governor of the Central Bank of Cyprus stated that 70% of all uninsured deposits were held by foreigners. There are an estimated 60 000 British citizens, 30,000 Russian citizens and 10,000 other European nationals living in Cyprus. Together with Cypriot-domiciled foreign firms (such as German shipping companies), they had deposited €30bn in Cypriot banks.

Cypriot Banks were closed for 10 days to prevent a bank-run. Their overseas branches stayed open to preserve a semblance of normality and avoid triggering a bank-run on Greek banks. Cash was rapidly withdrawn from the British, Greek and Russian branches of the Cypriot banks. The value of the assets held by the Greek branches of the Cypriot Banks was €23bn. These assets received huge haircuts as they were traded for €9.2bn of Emergency Liquidity Assistance (ELA). The ELA was provided by the European Central Bank to replace money withdrawn from Cypriot Banks via their Greek branches. To prevent further losses in Greece, the Central Bank of Cyprus was ordered to sell the Greek operations of the Cyprus Banks in a fire-sale.

Piraeus Bank of Athens paid €524m (million) for the remaining Greek assets of Laiki Bank, BoC and Hellenic Bank. The purchase was funded by the European Central Banks’ European Financial Stability Fund (EFSF), using Piraeus shares as collateral. The boards of Laiki Bank and BoC resigned immediately as they had been kept out of negotiations. The governor of the Central Bank of Cyprus confirmed that the deal was stitched together by the Cypriot and Greek governments and the Eurogroup of finance ministers. Piraeus Bank of Athens was even awarded a €3.1bn write-back on the purchase price for buying impaired assets. It recorded its first profit in years.

This massive mark-down of assets owned by Cypriot bank shareholders and bondholders (worth 75% of Cyprus’ annual GDP), was hushed up. Once again, Cyprus banks had been forced to make crippling sacrifices to support Greece’s ailing economy. Within weeks of the deal, the CEO of Piraeus Bank of Athens was in Cyprus touting for business.

In a radical departure from accepted practice, two major groups of creditors, financial institutions and government agencies, were exempted from the bail-in haircuts. This meant that Central Banks were refunded their liabilities ahead of uninsured depositors. The ECB would get 100% of its €9.2bn ELA and the Bundesbank would get 100% of its €7bn TARGET2 liability.

These loans had been given to Cypriot Banks to replace the cash withdrawn when depositors moved their money elsewhere, especially to Germany. Technically, ELA is no different from a bank bailout, apart from costing 4% interest compared to 2.5%. The TARGET2 component of the Eurosystem shifts Euros back to European banks whose deposits have been depleted by interstate transfers, in effect giving them a loan.

Under the Troika deal, the liquidity provided by the European Central Bank and Bundesbank would be refunded first. Uninsured depositors would receive worthless bank shares to replace the cash and assets confiscated to cover Central Bank liabilities. It would have caused massive scandal in the EU if Cyprus commercial banks defaulted on the liquidity assistance provided by European Central Banks. Politically, it was much easier to raid the uninsured deposits of Cyprus account-holders after accusing them of money-laundering.

This ruthless action by the Eurogroup reassured taxpayers of Germany, Finland, Netherlands and Austria, who saw Northern economies carrying ever-increasing risks of default by Southern European banks and governments. Currency controls were put in place to staunch the movement of capital out of Cyprus. Nevertheless, billions of Euros are leaving Cyprus on a monthly basis.
As a reward for its compliance with the conditions set by the Troika of lenders, the government of Cyprus was granted a soft loan of €10bn by the European Stability Mechanism and IMF. €4.1bn was made available to roll over Cyprus external sovereign debt; €3.4bn was given to President Anastasiades to spend on governance; €2.5bn could be used to re-capitalize Cyprus’ smaller banks, Hellenic Bank and the Co-op Bank.

The Cyprus government must start repaying the loan and interest back after 10 years. The interest bill will exceed €3bn. This will be enough time to fund loan repayments from offshore gas revenues, expected to be earned from 2018 onwards.

External bond-holders of Cypriot Government debt will be repaid 100% of their investment, courtesy of Cypriot taxpayers. This vindicates the promise made by EU Economic and Monetary Affairs Commissioner Olli Rehn of Finland. In a January 2013 interview with Handelsblatt daily, Rehn reassured financial markets that there would be no haircuts on Cyprus Government Bonds.
However, President of the European Central Bank, Mario Draghi, announced in May 2013 that Cyprus banks may use Cyprus Government Junk Bonds “guaranteed by the Cyprus Government, with the agreed haircuts” as collateral for ECB funding.

This means that uninsured depositors will pay off much of the Cyprus Government debt as the value of Cyprus Government Bonds has been written down. The ECB has agreed to accept lower quality Asset-Backed Securities as collateral. Uninsured depositors will lose yet more of their funds in order to pay out the billions of Euros of insured deposits that are being painstakingly withdrawn within the constraints of capital controls.

Slowly, brick by brick, the last remaining wealth of Cyprus is being wrung from its soil and auctioned off. Central banks are extracting every ounce of gold from an island that was once renowned for its copper in Roman times.

*********************************************************

Economic Effects of the Cyprus Bank Deposit Bail-in

Cypriot businesses have seen their working capital plundered. The country is increasingly reverting to a cash-economy with a consequent dive in tax revenues. Provident funds, including those of bank-employees, have been severely impaired.

Most companies have cut wages, leading to severe distress among families who are paying off housing loans. This is intended to achieve the Troika’s goal of “internal devaluation”. By cutting labour costs, it is hoped to make Cyprus as competitive as countries like Germany.

Cyprus Airways is undergoing restructuring. Half of its staff have been retrenched. €20m in severance pay will be paid out of future airline revenues as the European Commission has barred the state from subsidising a commercial airline. The three Lufthansa consultants in charge of the restructuring are set to receive €1.3m. The remaining staff will suffer a 25% salary cut.

Even charities have not been spared a deposit haircut. Soup-kitchens for the legions of unemployed rely on constant donations of food from the public. The Cyprus Olympic Committee has lost €600,000 from the bail-in.

In an act that beggars belief, the Cypriot Parliament has levied a 30% tax on the interest earned from bank deposits. This has made Cypriot banks totally uncompetitive and deposits are tapering off. Money is being deposited offshore and ELA requirements of the Bank of Cyprus are increasing. The Central Bank of Cyprus announced that €6.34bn or 9.96% of deposits were withdrawn from domestic banks in April 2013. Deposits had dropped by €14.23bn or 19.87% since April 2012. (This fall, in one year, is equivalent to 80% of Cyprus’ annual GDP.)

In another measure which defies logic, a property tax was insisted on by the Troika of international lenders. The government aims to extract maximum tax revenue by inflating property prices by the annual rate of consumer price inflation since 1980. Currently, property prices are at an all-time low. This tax will further depress the property market and withdraw large amounts of liquidity from the battered economy.

The reasons are not hard to fathom. A week after the Memorandum of Understanding was signed with the country’s lenders, President Anastasiades apologised to State employee unions that he had been forced to cut their salaries and pensions. He assured them that there would be no further cuts. The Minister of Finance assured government employees that their benefits would be maintained by reducing state expenditure on infrastructure. The opening of a new medical faculty at the University of Cyprus, costing €100m, would be funded, as it formed part of an election pledge.

Between January and May 2013, unemployment in the Cyprus private sector increased from 52,000 (11.8%) to 71,000 (16.1%), the steepest increase in the European Union. The EU has warned that Cyprus runs the greatest risk of social upheaval of all European countries.

*********************************************************

Economic and Political Prospects for Cyprus post-2013

Unable to devalue its currency to remain competitive, unable to print money to buy its citizens’ assets and stimulate its moribund economy, the Republic of Cyprus has come to realise that membership of the Eurozone is a poisoned chalice. The island has been cast adrift from Europe and left to sink or swim.

NATO continues to frame the geopolitical agenda of the Eastern Mediterranean, as it did when Turkey was allowed to invade the island in July 1974. In May 2013, two months after the Cypriot government had ceded control of its economy to the Troika of international lenders, Prime Minister Erdogan of Turkey listed 5 demands to President Barack Obama of the USA. One of those demands was that none of the estimated €200 billion of Cyprus offshore oil and gas reserves be sold to Russia. A week later, the Secretary General of NATO, Anders Fogh Rasmussen, warned the leaders of Cyprus that the island must settle the Cyprus Problem before it drills for oil and gas.

There is no need to bribe NATO member Turkey with trillions of cubic feet of hydrocarbons from the Levantine Basin to facilitate settlement of the Cyprus Problem. Turkey can use its military superiority to seize the island and its gas reserves. Despite reassuring noises that America will defend American energy companies drilling for hydrocarbons off the Cyprus coast, it is likely America would support its strategic ally Turkey, rather than side with insignificant Cyprus. In a display of solidarity, NATO allies in Europe have moved Patriot missiles to Turkey’s border with Syria.

Europe and Turkey are about to sign the aptly named “European Readmission Treaty” whereby Turkey has agreed to become a dumping ground for illegal migrants who have entered the EU through Turkey from countries to its east. This goes a long way towards reassuring German and French voters that the European Empire is spreading eastwards, rather than the Ottoman Empire spreading westwards.

During 2013, in a sign of Europe’s softening stance on Turkey, the European Court of Justice accorded Turkish Law primacy in settling all land restitution claims on the island of Cyprus.
Greek and Turkish speaking Cypriots have been promised a €200 billion bonanza from the discovery of hydrocarbons off the Cyprus coast. The use of most of the gas revenues to bankroll multinational energy conglomerates and to offset State “borrowings” will go largely unnoticed: a drop in the vast ocean of political corruption.

copyright 2013 by John Henry Morgan; all global rights reserved in all media

John Morgan is the director of a company based in Larnaca, Cyprus. He owns property in Cyprus and has lived there since 2004. He comes from the United Kingdom. He has also worked in Europe, Africa and the Middle East.

*********************************************************

The 2013 Cyprus Deposit Bail-in: POSTSCRIPT

"I run a Cypriot marine & diving company operating in the UAE in the Middle East. We have had €400,000 (a 90% retention) frozen by the Bank of Cyprus which was all the money we had to finish mobilizing for the final stage of a project. We desperately need that money to finish our mobilization and complete the project. We must finish the project in order to receive payment for all the work we have already done. We are now without funds in an Arab country that imprisons debtors and we have debts. We can't pay the salaries and wages of our people, and soon won't have enough money to feed them. We stand to lose our marine and equipment assets if we can't pay our debts. We are in very serious trouble and all the pleading and demands that at least some of our funds are released are ignored. We are desperate. We are the only company in this sort of trouble according to the Cypriot Ambassador. There is no protection for foreign nationals in this country. We need our money, we need help. Can you help us please by investigating or publishing our story?"Christopher M Penny

Bank of Cyprus starts process of turning uninsured deposits into stocks

Dubai Business Directory Listing for COMBINED DIVING & INSPECTION SERVICES

 

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Tue, 06/18/2013 - 14:59 | 3669092 negative rates
negative rates's picture

From the people that brought you the BP oil spill, what next?

Tue, 06/18/2013 - 15:23 | 3669138 Herd Redirectio...
Herd Redirection Committee's picture

Silent Weapons for Quiet Wars.

Shock testing the population of Cyprus, in order to fine tune the (bail in) approach used on the populations of North America and Europe.

Tue, 06/18/2013 - 17:21 | 3669439 smlbizman
smlbizman's picture

i can break this entire 2 part speech to 11 seconds...

http://www.youtube.com/watch?v=0c3bhh8fqYs

Tue, 06/18/2013 - 15:04 | 3669107 Yen Cross
Yen Cross's picture

    First of all, I want to say the author of this post did his/her homework.

      Secondly, I want to see the rubber bullets flying.

  LMAO, the second chart showing bank confiscation.

Tue, 06/18/2013 - 15:56 | 3669209 El Viejo
El Viejo's picture

"inevitable result of political Elites swearing allegiance to the European Monetary Union"

Suicide pact.

Tue, 06/18/2013 - 16:11 | 3669264 NoDebt
NoDebt's picture

That.

As I recall, the regulars on this board had forseen ALL of these downsides about 2 hours into the first Cyprus bail-in plan announcement.  It was a Sunday afternoon and ZH was LIT UP LIKE A CHRISTMAS TREE.  I still remember quite clearly the comments (my own included).  Most started with "I can't believe they would sign off on this.  If they do it  the following things will happen......."  And down the list of horror we went.

I'm not trying to pat everyone on the back here.  I'm trying to point out that if a bunch of Keyboard Cowboys like ourselves nailed this one in a matter of a couple hours, there is NO WAY they couldn't have seen this coming in the Cypriot government or the EU.  NO WAY.  They did it anyway.  Which leaves us where exactly?  I'm lost.  I don't know what to think of this situation any more.  It can't be simple incompetence so it must be......

 

Tue, 06/18/2013 - 17:47 | 3669480 Things that go bump
Things that go bump's picture

What it leaves us with is a clear warning to complete our own personal preparations because it is coming here soon (no matter where your here is). I'm not even confident they will respect small savers with less than the insured amount in an account as they did in Cyprus.  

Tue, 06/18/2013 - 15:08 | 3669121 semperfi
semperfi's picture

Dumbfucks everywhere deserve the govt they vote for.  Dumbfucks also deserve to be raped by the criminal bankers if they trust them to hold their money.

Tue, 06/18/2013 - 16:45 | 3669342 MissCellany
MissCellany's picture

The problem with that is, no matter who you vote for (and even if you don't vote), the government gets elected.

Except for the non-elected ones...at every level...who also do so much damage.

Tue, 06/18/2013 - 15:12 | 3669124 bank guy in Brussels
bank guy in Brussels's picture

A tale of deep criminality, the EU supervision of the mauling of Cyprus

The fact that local Cypriots co-operated does not excuse the EU

The EU will in fact never recover, from the consequences of the crimes committed in Cyprus

---

Sad story at end about the Cypriot company operating in Dubai UAE and the officers now facing Dubai's brutal jails because they cannot pay their debts, because their Cypriot bank deposits were stolen

But there is a moral here ... Be careful of doing business in countries with cruel or corrupt laws and practices and brutal jails

Jim Sinclair noted recently, that many Western executives have recently resigned from their jobs in Dubai, he had a list

Maybe they could see those Arab Gulf monarchies are all going to go up in flames and revolutions soon ... especially alongside the big one in Saudi Arabia ... Barack Obomber may help push that cycle along

Tue, 06/18/2013 - 15:21 | 3669127 Kreditanstalt
Kreditanstalt's picture

"In a radical departure from accepted practice, two major groups of creditors, financial institutions and government agencies, were exempted from the bail-in haircuts."  ALL should take haircuts.  No one should be protected.

To tell the truth, I don't see any reason why depositors (who lent money to the bank) should not take haircuts too.  They, along with the bondholders, bank employees and stockholders are all in the same position: they have either a financial interest in the bank or have lent money to it.  It is still a fractional reserve system: they can't expect to all gain access to their deposits at the same time, so deposit money is no higher-placed in the pecking order than any other loans.

Deposits are not "allocated" in the way a safety deposit box is.  And deposit "insurance" is merely another bailout from the innocent taxpaying public.

When that happens with any other business, losses are imposed on all lenders.

The only protection is: don't deal with shaky banks - or ANY banks

Tue, 06/18/2013 - 15:22 | 3669137 are we there yet
are we there yet's picture

A more interesting graph than the change in Cyprus deposits, would be who and why would anyone now be putting money into a Cyprus bank at all at this time. It would be like loaning money to Detroit Michigan right now.

Tue, 06/18/2013 - 15:23 | 3669139 Kreditanstalt
Kreditanstalt's picture

"The Cyprus government must start repaying the loan and interest back after 10 years. The interest bill will exceed €3bn. This will be enough time to fund loan repayments from offshore gas revenues, expected to be earned from 2018 onwards."

Haha...as always, at the root of this is another ASSET GRAB.

Tue, 06/18/2013 - 15:30 | 3669159 Yen Cross
Yen Cross's picture

 Australia has just shut down massive {natgas exploration} Un-Impeded shipping. 

  The Greeks need to do what they do best. (tourism) and extra virgin olive oil ;-)

Tue, 06/18/2013 - 16:03 | 3669233 NoDebt
NoDebt's picture

The Greeks need to do what they do best..... I thought you were going in a totally different direction with that one!

OK, I'll add yogurt to the list.  I tried some just last week.  It's actually good.

 

Tue, 06/18/2013 - 16:48 | 3669345 MissCellany
MissCellany's picture

I enjoyed some Greek-style yogurt the other day too (every dang brand out there now has jumped on the Greek train!), and wondered if Greece gets royalties on the recipe or the name usage...now there would be an economic lifesaver!

Tue, 06/18/2013 - 15:37 | 3669173 FiatFapper
FiatFapper's picture

TL;DR

But if you put on a tin-foil hat and look at a map of the ME, it all becomes obvious of what 'they' are planning.

Look at Qatar and this quote It [South Pars] is the world's largest gas field.

Syria is the hub of the four seas: regional hub for oil transportation between the Persian Gulf and the Black, Caspian and Mediterranean seas

Now look at Cyprus, an ideal 'platform' to facilitate further pipeline development. The confiscation is only part of their plan, they are now land-grabbing to keep their black-gold running, without which society will negate g'ment as they have no more control and necessity.

Tue, 06/18/2013 - 15:59 | 3669222 Joe A
Joe A's picture

Remember Dijsselbloem's words: "this is a template for the future".

Wed, 06/19/2013 - 01:21 | 3670504 e-recep
e-recep's picture

how can a sane person ever forget.

Tue, 06/18/2013 - 16:50 | 3669354 PTR
PTR's picture

Neo-feudalism. Coming to a country near you. Stay tuned.

Tue, 06/18/2013 - 17:22 | 3669442 123dobryden
123dobryden's picture

although sounds like sorry sad  son of hercules, your  country is JUST returnig to NORMAL, waking up from a DREAM.

 

be happy to be among the FIRST...:) without courage to show foreign creditors your small cypriot finger, your people will suffer the fate of losers for a decade,......or two

Tue, 06/18/2013 - 20:04 | 3669775 newworldorder
newworldorder's picture

The reality of all this is that the Euro Political Elites, the Troika, ECB, IMF, BIS and the FED have all been emboldened by how easy it has been to take what they wanted from Cyprus. They willl try this in many other countries. Become prepared or be taken advantage of by the banksters.

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