Cyprus: The deal that is not a deal but an understanding

Let’s talk about what we do know, which is very different from what the Troika and Cypriot government want us to believe:

• Cyprus will be in a three-year program – The Troika will provide EUR 10 billion which can not be used for recapitalising the two biggest banks.

• Cyprus needs to bring its government debt down to 100 percent of GDP by 2020.

• The banking sector need to be at European average level by 2018.

• Laiki bank will be split in a good and a bad bank. The “good” bank will be folded into Bank of Cyprus including the ELA funding (approximately nine billion EUR). This should raise roughly four billion EUR according to EU Group.

• Bank of Cyprus will need to be capitalised to have a core capital ratio of nine percent which means a serious amount of bail-ins from its equity, bond and depositors with in excess of EUR 100,000 in their accounts. Estimates run from a conservative 20 percent to a draconian 50 depending on the model used and the future impairment of the loan book.

• Time-line: By Mid-April (Note: not this week but by Mid-April) a memorandum of understanding needs to be signed by the Troika and the Cypriot government. Then this MoU needs to ratified by all members of the Eurozone including Germany by late April/early May for the first installment to be paid out by May.

This is the facts as I see them. From now until mid-April is a very long time, especially for a country which just introduced three "firsts" in EU history:

1. Capital controls. One euro in Cyprus is not the same as one euro in Berlin or Paris any more. You cannot move your money off the island.
2. Bail-in of senior bondholders – In Greece it was only junior bondholderss
3. Bail-in of depositors with more than EUR 100,000 in their accounts.

Leaving aside the fact that “capital controls” are only supposed to be for EMERGENCY circumstances, it is, like most solutions from the EU, a direct violation of the bloc's own treaties which enshrine the free movement of capital.

In Europe, it's been over a generation since anybody who was voted into office on a mandate for change actually came tru on their promise. Yes, the Lady with the handbag, Margaret Thatcher in 1979, but it was also in 1979 that the UK abolished its last capital controls. Have we gone full circle back to the 1970s? If so, let’s hope that somewhere in Europe there's a new Baroness Thatcher waiting in the wings who is willing and able to see beyond the next ECOFIN or EU Council Meeting. With the current rate of policy backsliding and regression the EU is destined only for one thing: decade after decade of lost opportunities and a social fabric that will be hard to sustain in the face of rising unemployment, capital controls and a general attitude that more macro is needed and not less.

The German election can’t come soon enough. We need to break this negative cycle which is spiraling out of control while politicians stands idly by. This weekend's 'deal' has no winners - only losers. And it has left European decision-making bleeding and without hope of recovery as the EU commission and IMF exchanged harsh words all in the name of a power game, never for the sake of future Europeans.

http://www.fxstreet.com/fundamental/analysis-reports/macro/2013/03/25/ 

Cyprus Salvaged After EU Deal Shuts Bank to Get $13B

Cyprus dodged a disorderly default and unprecedented exit from the euro currency by bowing to demands to shrink its banking system in exchange for a 10 billion-euro ($13 billion) bailout.

Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc of creditors in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets.

http://www.bloomberg.com/news/2013-03-25/cyprus-to-chop-banking-system-to-win-aid-avoid-default.html

Eurogroup press conference and statement about new deal

It's 2:30am, do you know where your deposits are? Tune in to see the Eurogroup explain how this is in the best interest of the Cypriot people, how the 'deal' illustrates the solidarity of the European people, and how the worst of the crisis is now behind us.

• *SCHAEUBLE SAYS CYPRIOT DEAL NEEDED BAIL-IN AT BOTH BIG BANKS
• *SCHAEUBLE SAYS MUCH WORK REMAINS TO BE DONE :BOCY CY, CPB CY
• *SCHAEUBLE SAYS TIME LOST ON CYPRUS, SITUATION DIDN'T IMPROVE
• *EU COMMISSION SAYS NO CYPRUS PARLIAMENT VOTE NEEDED: SCHAEUBLE
• *SCHAEUBLE SAYS TROIKA TO CONTACT RUSSIAN GOVT ON DEAL :BOCY CY

Live Webcast here...

Here it is - in all its glory. The full Eurogroup statement explaining how there is no need for the Cypriots to vote on this, how Laiki bank is totally liquidated with equity, debt, and uninsured depositors wiped out, and how they believe in some way that this will not end in a disorderly process...

• *DIJSSELBLOEM SAYS DEPOSITOR LOSSES STILL TO BE DETERMINED
• *REHN SAYS EU TO PERFORM NEW CYPRUS DEBT-SUSTAINABILITY STUDY
• *DIJSSELBLOEM SAYS LAIKI BANK TO BE RESOLVED IMMEDIATELY

http://www.zerohedge.com/print/471852

Russia demanding Cyprus out of Eurozone

Jorgo Hatzimarkakis, the German Euro deputy of Greek origin told Skai television on Sunday morning that Russia did not want Cyprus to stay in the eurozone.

“Cyprus’s alternative plan was only a half-plan that also relied on Moscow’s help. However Russia preferred a Cyprus outside the eurozone, but inside the European Union,” stated Hatzimarkakis.

ekathimerini.com | 'Russia prefers Cyprus out of the euro area'

As has been made abundantly clear on these pages since the breakout of the latest Cyprus crisis, the Russian policy vis-a-vis its now former Mediterranean offshore deposit haven-cum-soon to be naval base, has been a simple one: let the country implode on the heels of the Eurozone's latest humiliating policy faux pas, so that Putin can swoop in, pick up assets (including those of a gaseous nature, much to Turkey's chagrin [7]) for free, while being welcome like the victorious Russian red army saving Cyprus from its slavedriving European overlords (a strategy whose culmination Merkel has very generously assisted with).

Curiously there had been some confusion about Russia's "noble" motives in Cyprus (seemingly forgetting that in Realpolitik, as in love and war, all is fair). We hope all such confusion can now be put to rest following the clarification by Jorgo Hatzimarkakis, the German Euro deputy of Greek origin, who told Skai television on Sunday morning that Russia did not want Cyprus to stay in the eurozone.

http://www.zerohedge.com/print/471836

Cypriot Crisis Endangers Russian Financial Flows

Cypriot Crisis Endangers Russian Financial Flows

24 March 2013
Reuters

If Russian elites still have money in Cyprus, where many of them base their businesses, they aren't letting on.

"You must be out of your mind!" snapped tycoon Igor Zyuzin, main owner of New York-listed coal-to-steel group Mechel, as he dismissed a suggestion this week that the financial meltdown in Cyprus posed a risk to his interests.

His response is typical across the rarefied class of major corporations and super-rich individuals, reflecting the assessment of officials and bankers on the Mediterranean island who say the bulk of the billions of euros of Russian money in Cyprus comes from smaller firms and middle-class savers.

The collapse of an economy 75 times smaller than its own may not have much impact in Russia, though the crisis has strained relations with the European Union, raised questions on Russian influence over Cypriot politicians and highlighted geopolitical competition for new offshore gas fields. But some Russians would suffer.

As much as losses likely to be sustained on deposits held in Cypriot banks, pain for the Russian economy could come from a disruption in money flows between Russians that pass through the island — transfers that dwarf Cyprus's own national income.

Light regulation and taxes, cultural ties through Orthodox Christianity, and the Mediterranean weather have long attracted the capital and savings of Russians, many keen to keep their wealth out of the sight of often predatory bureaucrats at home.

Yet, precisely because investors can hide their wealth behind nominee structures, often held in the name of a local lawyer, it is difficult to say just how much Russian money is tied up on the Mediterranean island, or how much has already left.

Where it is going is also unclear, though a possible rise in Russian deposits in fellow EU member Latvia, a former Soviet republic that hopes to enter the euro zone next year, has raised concerns of displacing instability northward.

Billions Held

Russians are believed to account for most of the 19 billion euros ($25 billion) of non-EU, non-bank money held in Cypriot banks at the last count by the central bank in January, when total non-bank deposits were 70 billion, 60 percent of them classified as "domestic". Of 38 billion in deposits from banks, 13 billion came from outside the European Union.

But the ease with which Russians can establish residency and local corporations in Cyprus muddies the data. One senior financial source in Moscow said a total of 20 billion euros held by Russian firms in Cyprus was a "significant underestimate."

Cypriot central bank chief Panicos Demetriades was asked by Russia's Vedomosti newspaper this week how much money Russians held on the island. He replied, "It depends how you count it."

Deposits formally identified as Russian totaled 4.9 billion euros, he said. Add the funds of shell companies believed to be linked to Russia and the figure rose to 10.2 billion euros. But many Russian and other analysts think the sums are much higher.

One Cyprus-based lawyer reckons that $2 billion in Russian money fled in the 10 days before banks were shut down this week while Nicosia argued over an EU bailout. Phones are ringing from Malta to the Isle of Man as that cash seeks a new safe haven.

Russian business leaders criticized the EU bailout plan and the "haircut" it would impose on depositors. However, if Cyprus stands by its rejection, heavier losses could result.

"There will be a serious outflow of capital from Cyprus," said Vladimir Potanin, the chief executive of Norilsk Nickel, the world's largest nickel and palladium miner.

"It won't affect me or my company. But they have put Cyprus to the knife and what has happened is a disgrace."

Sources in the wealth management, advisory and banking industries in Nicosia say Russian depositors are typically smaller savers and entrepreneurs. Fiona Mullen, a British economist in Cyprus, said Russians she encounters tend to be buying 300,000 euro homes, not the palaces favored by oligarchs in London.

"There is a lot of Russian business done through Cyprus," she said. "It's so difficult to do business in Russia, you've got to bribe so many people, that it's easier to do it through Limassol. It's kind of the back office for Russia."

A business adviser said of his Russian customers, "Clients would be well off, but not the private jet kind." Most did not use Cypriot banks to keep money but as a conduit for funds.

Cyprus charges foreigners no tax on dividend income and capital gains. A double taxation treaty with Russia provides attractive incentives for Russians to use Cypriot banks. Even on Thursday, with Nicosia in crisis, one adviser said he had had two new requests from abroad to set up Cypriot shell companies.

http://www.themoscowtimes.com/mobile/article/cypriot-crisis-endangers-russian-financial-flows/477348.html

Bond crash dead ahead: tick, tick ... boom!

SAN LUIS OBISPO, Calif. (MarketWatch) – InvestmentNews latest cover is so powerful you can actually hear sirens atop a flashing neon billboard, megawarning in huge bold type: “Tick, Tick ... Boom!”

Yes, they do expect the bond bomb to explode and are publishing “a special report on the impending crisis in the bond market.”A warning: InvestmentNews wants to make damn sure its readers, the 90,000 professional financial advisers who rely on timeliness and accuracy of every INews forecast, understand: “What will your clients’ portfolios look like when the bond bomb goes off?” Get it? Not if but when it happens.

Yes, you heard them. “Tick, Tick ... Boom!” Wake up, it’s an “impending crisis,” dead ahead. And to punctuate their message, InvestmentNews added an alarming photo of an alarm clock with huge bells, wired to rolled-up bonds looking like a stack of dynamite sticks. “Tick, Tick ... Boom!”

InvestmentNews is not staffed by a bunch of alarmists, quite the opposite — conservative, trustworthy and methodical. They know the 90,000 registered investment advisers that rely on them are in turn responsible for advising millions of Americans and managing trillions of retirement assets. Yes, their audience demands reliable forecasts.

So listen closely, we’ll summarize Andrew Osterland’s lead article “Fear Rising With Rates,” along with an interview with Bond King Bill Gross. And INews editorials on “repositioning client money” with “strategies for rising rates.” And a couple of opposing portfolio suggestions: “The case for, and against, stocks.”

The bull says we’re on “the verge of an even bigger run-up. The bear warns, if your “goal is to avoid losses, stay out of equities altogether.”

Either way, the INews report reads like a Stephen King horror story, and in the background you hear the ticking ... ticking ... louder ... louder ... Boom!”

http://www.marketwatch.com/Story/story/print?guid=911B07CE-90C2-11E2-8A9D-002128040CF6

BCG: Wealth Tax in US may be as high as 25%

A Program for the United States

The situation in the U.S. is different from that of the euro zone and, in a way, would be less complicated  to resolve.  The U.S. has all the levers with which to address the crisis and would not need to coordinate 17 countries with divergent interest. But some facts would need to be acknowledged before decisive action could be taken:

• In spite of massive intervention by the Fed and the US government, growth remains anemic
• The deleveraging of private households will have to go on for many years
• The real estate market has not yet stabilized. About 11 million US households suffer from negative equity (their mortgage outstanding is higher than the value of their home). And the supply of homes is still in excess by 1.2 to 3.5 million (depending on the data used to estimate this number).
• The US government deficit is not sustainable and will need to be brought to acceptable levels, which will slow growth and amplify the problems of the private sector.
• In spite of a significant weakening in the dollar, the U.S. is still running a trade deficit that cannot be blamed on China alone. It reflects a lack of competitiveness in some key markets and the low proportion of manufacturing in the U.S. economy compared with countries such as Germany and Japan.
• There is a striking similarity between the US and Japan in the development of stock and real estate prices (See chart below). A correlation does not mean causality, but it is a sobering picture should Ben Bernanke and his team fail to reflate the economy.
• The interventions of the Fed, notably the programs designed to buy financial assets, have created a monetary overhang that could be the basis for sizable inflation in the future.

Addressing the debt overhang.

The US would also  need to reduce the debt overhang of the government, of consumer loans besides mortgages, and of non-financial corporate sector in the same way as in Europe. As exhibit 2 shows, the total debt overhang in the US equals $11.5 trillion or 77% of GDP. In the somewhat unlikely event of the US following the same path that Europe might pursue, a one-time wealth tax of 25% of financial assets would be required. As in Europe, this would also require the following initiatives.

• Cleaning up the banking sector by calculating the losses and recapitalizing as needed – even if it means wiping out existing shareholders.
• Additional taxes on real estate, including an increased capital-gains tax to offset the support for the real-estate market.
• Creating an incentive for corporations to invest in R&D and new machinery by taxing profits not reinvested.
• A commitment by the government to restrict its debt level and to prepare for the increasing costs of an aging population by either limiting benefits or raising the retirement age.

Addressing the fundamental issues of the US Economy.

We have argued for a long time that the US economy needs to address some fundamental issues in order to become globally competitive again. In putting an end to muddling through, the government might also embark on a major restructuring of the economy:

• Reindustrialize and grow the share of the manufacturing sector from the current low of 12% of GDP to 20% of GDP . This might then allow a rebalancing of trade flows.
• Revisit income distribution.  Most U.S. families cannot make up for their income shortfall with increased credit – and 41 million Americans are officially considered to be below the poverty line.
• Take action to reduce dependency on imported oil by investing in new technologies and modernizing existing infrastructure.
• As in Europe, an administration that truly bit the bullet would take a long-term view and invest more in education.

All this is still speculation. But history shows that the US economy, like no other, is capable of adjusting and implementing quite radical changes. And in our view, some of the actions described above might be pursued by the US government if things do not improve soon.

BCG_Back_to_Mesopotamia_Sep_11[2]


http://www.zerohedge.com/news/muddle-through-has-failed-bcg-says-there-may-be-only-painful-ways-out-crisis

National planning Cyprus-style solution for New Zealand

The National Government are pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts, the Green Party said today.

Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.

“Bill English is proposing a Cyprus-style solution for managing bank failure here in New Zealand – a solution that will see small depositors lose some of their savings to fund big bank bailouts,” said Green Party Co-leader Dr Russel Norman.

“The Reserve Bank is in the final stages of implementing a system of managing bank failure called Open Bank Resolution. The scheme will put all bank depositors on the hook for bailing out their bank.

“Depositors will overnight have their savings shaved by the amount needed to keep the bank afloat.

“While the details are still to be finalised, nearly all depositors will see their savings reduced by the same proportions.

“Bill English is wrong to assume everyday people are able to judge the soundness of their bank. Not even sophisticated investors like Merrill Lynch saw the global financial crisis coming.

“If he insists on pushing through this unfair scheme, small depositors can be protected ahead of time with a notified savings threshold below which their savings will be safe from any interference.”

Dr Norman questioned the Government’s insistence on pursuing Open Bank Resolution when virtually no other OECD country uses it.

http://www.scoop.co.nz/stories/PA1303/S00306/national-planning-cyprus-style-solution-for-new-zealand.htm 

US Deposits In Perspective: $25 Billion In Insurance, $9,283 Billion In Deposits; $297,514 Billion In Derivatives

Earlier today [4], the American Banking Association reminded Americans that there is absolutely nothing to worry about when it comes to the sanctity of US deposits: after all there is a whopping $25 billion in the FDIC insurance fund which means "insured depositors are safe and their deposits are protected by a strong FDIC fund....The FDIC insurance fund has over $25 billion in reserves and the banking industry " Obviously supposedly "insured" depositors in Cyprus also though there was nothing to worry about, until they woke up on Saturday with a haircut between 6.75% and 9.9% on their money in the bank. Sadly, it may be the case that the ABA is being just modestly disingenuous in its statement. Why? Instead of explaining it in detail, here is a snapshot that does more than thousands of words ever could.

Chart drawn to scale.

 [5]

The $25 billion in touted deposit insurance is supposed to preserve and protect (granted not in their entirety) some $9,283 billion in total US deposits. A far bigger problem, however, is when one considers the "asset" side of the US banks' ledger: remember deposits are unsecured liabilities. And for US banks, sadly, over the counter derivatives represent the vast majority of "off the books" assets. According to the latest OCC quarterly report [6], the total derivative notional outstanding of the Top 25 holding companies is $297,514 billion, or nearly $300 trillion. In other words there are 32 times more notional derivatives than there are total deposits, while the ratio of gross derivatives to deposit insurance is a concerning 11,900-to-1.

And with that, we hand it back to the ABA to comfort all US depositors that Cyprus could never possibly happen in the US.

Steve Forbes: Here's Why Cyprus Is Bad For All Of Us!

What in the world is going through the minds of European officials with their crazy, destructive demands with Cyprus? Seizing a portion of peoples’ bank deposits is the kind of thing one would expect from Argentina or other kleptocratic third-world governments. It sets an awful precedent shredding the rule of law, which is the bedrock of a free and vibrant society. The fact that Cyprus is small is irrelevant. The germane fact is that it was Western Europe, supposedly a strong believer in the rule of law, that engaged in this Hugo Chavez-like move. Now, it’s not inconceivable that President Obama or somebody with a similar ideology could propose seizing and integrating people’s 401K plans into Social Security. And in a panic, Congress would go along...

http://www.forbes.com/sites/steveforbes/2013/03/18/for-whom-does-the-cyprus-bell-toll-alas-all-of-us/  

Factbox: Cyprus Contagion – Who’s Looking Poorly?

1. Cyprus bailout sets levy on bank deposits. Should euro zone depositors be worried? 2. How big is the levy? 9.9% on deposits over €100k; 6.75% on smaller deposits; Deposits under €20k may be exempted; Levy intended to raise €5.8bln 3. News sent euro zone bank stocks as much as 4% lower as investors fear precedent is set... 4. So how exposed are the euro zone strugglers? Total Bank Deposits: Italy: €2,437.1bln. Spain: €2,297bln. Greece: €252.5bln.

Why Cyprus matters to US Investors

Wall Street is heavily invested in bank debt across the European Union. If banks begin falling as a result of the Cyprus 'bailout,' investors in the U.S. will feel the loss.

By Cyrus Sanati

FORTUNE -- The terms of the Cypriot "bailout" announced late Friday are simply atrocious and should be revised to protect small depositors to avoid potentially crippling bank runs from popping up across Europe. Forcing bank losses on account holders who believed their money was protected by government-backed deposit insurance violates one of the most sacred of trusts between a bank and its customers. As such, the agreement, if it stands, threatens to crash the entire Cypriot banking system, which could have dangerous effects for banks across the European Union, as well as for investors on Wall Street, who have bet billions of dollars backing EU banks and sovereign notes.

End of Systemic Trust - the beginning of the end of financial system

How about in the US?  Could the US declare a bank holiday and unilaterally devalue the currency in one swift move?  I will get over 9,000 responses saying this could never happen in the good ol’ US of A but of course it could.  In fact it has already been done before during FDR’s first 100 days in office.  The template already exists.  Electronic banking only makes the process that much easier.

Technically, since the Fed has been running a policy of monetary inflation since about 1920, the government here already has been quietly taxing the savings accounts of its citizens without their permission for decades.  The subtle difference between what Europe is doing in Cyprus and what the Fed does every day to American citizens is that the Cyprus theft is happening in one discrete event while the Fed’s theft drips in slowly over years.

But no matter which way you look at the situation, expect things to deteriorate from here.
Did you or your firm stash a bunch of money off-shore in some tax-friendly haven that probably has a favorable relationship to the British Crown?  Best of luck with that.  Tax havens are nothing more than legal arbitrages.  With the value of law moving to zero, the value of your account approaches the same.

http://www.zerohedge.com/print/471569 

The Botching of the Cyprus Bailout: Worse Than Lehman Brothers

Everyone now agrees that Treasury Secretary Hank Paulson badly botched the Lehman Brothers crisis of 2009. But at least he had an excuse. Panicked by the speed of Lehman’s meltdown, he had no time for second thoughts. By comparison the German-led group of EU officials who  engineered this weekend’s Cyprus bank bailout don’t have a leg to stand on. Although they had years to consider their options (Cyprus’s problems are closely related to those of Greece and have long been almost as obvious), they have opted for a “solution” that amounts to probably the single most inexplicably irresponsible decision in banking supervision in the advanced world since the 1930s.

As my colleague Tim Worstall has pointed out in a well argued contributionyesterday, they have weakened – perhaps catastrophically – the principal pillar supporting modern banking. This pillar is deposit insurance. Ordinary savers who had received a solemn assurance that deposits up to 100,000 euros were safe are now being asked to take a haircut. This raises questions about deposit insurance throughout the EU and invites runs on banks not only in the most “financially-challenged” nations such as Greece and Spainbut even in Italy and France.

http://www.forbes.com/sites/eamonnfingleton/2013/03/17/the-botching-of-the-cyprus-bailout-worse-than-lehman-brothers/ 

EU plan to seize bank accounts causes markets to sell off

NEW EU PLAN: STEAL BANK ACCOUNTS...
Island set to seize personal savings...
Plan moves ahead as vote delayed...
Putin: 'Unfair,' 'Dangerous'...
FT: Here come bank runs...
Germany: Not our idea...
Italy to follow?
Markets rattled...
Euro tumbles...
Dow drops...
LIVE...