Cyprus - The high price for a rescue

[Broomstick]

I thought they were allowing a small amount to be withdrawn from ATM's on a daily basis? Of course, that might have changed over the last week, and in any case you would need to get to an ATM before all the cash was withdrawn by other people.

[Murazor]

Are they seriously trying to cause a continent-wide bank run?

The European Parliament will demand that big savers take losses if their banks run into trouble, a senior lawmaker told Reuters, adding momentum to a policy unveiled as part of a Cypriot bailout.

Although some policymakers have sought to portray Cyprus and the losses suffered by depositors at two of its banks as a one-off, many experts believe it marks a dramatic change in tack in how Europe deals with troubled banks, to spare taxpayers who have been on the hook for previous bailouts.

Jeroen Dijsselbloem, head of the Eurogroup of euro zone finance ministers, said on Monday that in future, the currency bloc should first ask banks to recapitalise themselves, then look to shareholders and bondholders and then "if necessary" to uninsured deposit holders.

Now the likelihood is rising that tough treatment of big depositors will be written into a new EU law, making losses for large savers a permanent feature of future banking crises.

"You need to be able to do the bail-in as well with deposits," said Gunnar Hokmark, an influential member of the European Parliament, who is leading negotiations with EU countries to finalise a law for winding up problem banks.

The European Parliament has an equal say alongside EU countries when deciding who must bear the brunt of future bank failures such as those now being seen on Cyprus.

"Deposits below 100,000 euros are protected ... deposits above 100,000 euros are not protected and shall be treated as part of the capital that can be bailed in," Hokmark told Reuters, adding that he was confident a majority of his peers in the parliament backed this line.

The law, which will also introduce means to impose losses on bondholders, is due to take effect at the start of 2015. Germany wants provisions for bailing in bondholders and others in the same year, though that may be delayed.

The European Commission wrote the first draft of the law but left it to member countries and the parliament to decide whether and when savers should face losses, when a failing bank is being salvaged or shuttered. Earlier on Tuesday, it said only that such a step was possible.

Hokmark urged savers to check their banks' health before taking the risk of depositing money.

"If you put your money in Royal Bank of Scotland ... or Deutsche Bank, depending on how that bank is working you are taking a risk," he said. "You need to be aware that you are taking a risk.

"I want us to legislate in a way that makes investors aware of the risk," said Hokmark, adding that savers should be asking whether their bank is solvent. "The bail-in instrument is creating thousands and thousands of supervisory authorities."

Cypriot President Nicos Anastasiades agreed in a last-ditch deal to close down the second-largest bank, Cyprus Popular, and inflict heavy losses on big depositors, many of them Russian, after Cyprus's financial sector ran into trouble when investments in Greece went sour.

"The markets may be shocked but some principles have to be laid down," said one EU official, speaking on condition of anonymity, adding that it would be "unfair" for the new EU law to take a different approach to that used in Cyprus.

[Thanas]

No, what is going to happen is what should happen anyway - people will put their money in safe banks, not banks who gamble.

[fgalkin]

Well, some of our partners in Russia, legitimate companies that produce TV content are now unable to receive their licensing fees due to being based in Cyprus. Somehow, they considered evil tax-dodgers, yet our company, based in Switzerland, is not

Have a very nice day.
-fgalkin

[aerius]

Looks like the Russians have slipped an unknown amount of money out the back door. It's claimed that it's only millions and not billions, but I think they're they're just covering their asses.

http://www.reuters.com/article/2013/03/ ... 3920130325

Excerpt:

(Reuters) - As new President Nicos Anastasiades hesitated over an EU bailout that has wrecked Cyprus's offshore financial haven status, money was oozing out of his country's closed banks.

In banknotes at cash machines and exceptional transfers for "humanitarian supplies", large amounts of euros fled the east Mediterranean island before and after Cypriot lawmakers stunned Europe by rejecting a levy on all bank deposits.

EU negotiators knew something was wrong when the Central Bank of Cyprus requested more banknotes from the European Central Bank than the withdrawals it was reporting to Frankfurt implied were needed, an EU source familiar with the process said. "The amount the Cypriots mentioned... on a daily basis was much less than it was in reality," the source said.

Confusion over just how much money was pulled out of Cyprus' banks is illustrative of the confusion surrounding the negotiations as a whole. Representing just 0.2 percent of the euro zone economy, Cyprus nevertheless threatened to reignite the bloc's debt crisis. Cyprus' problems began in Greece - it is heavily exposed to the euro zone's first bailout casualty.

No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis - Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus - have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors.

While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.

Companies that had to meet margin calls to avoid defaulting on deals were granted funds. Transfers for trade in humanitarian products, medicines and jet fuel were allowed.

Chris Pavlou, who was vice chairman of Laiki until Friday, said while some money was withdrawn over a period of several days it was in the order of millions of euros, not billions.

German Finance Minister Wolfgang Schaeuble said the bank closure had limited capital flight but that the ECB was looking closely at the issue. He declined to provide figures.

BIG DEPOSITORS BURNED

Big depositors, including wealthy Russians and Britons, whom the Cypriot president had sought to shield from a levy of any more than 10 percent on their holdings, will end up being far more severely burned - if their money is still there.

[Lord of the Abyss]

No, what is going to happen is what should happen anyway - people will put their money in safe banks, not banks who gamble.

Any bank potentially subject to this kind of levy is, by definition, not safe. And the rhetoric being used certainly makes it look like there are no safe banks in the EU.

"If you put your money in Royal Bank of Scotland ... or Deutsche Bank, depending on how that bank is working you are taking a risk," he said.

And there's also the problem that even if your characterization is true, it doesn't matter. What matters is the psychology of the thing; people and organizations who fear they are going to lose their money will remove their money from a bank, regardless of whether or not that's a reasonable fear. And if enough of them do that, it becomes a self fulfilling prophecy. The EU authorities should be trying to calm people down, not whip up panic.

[Thanas]

No, what is going to happen is what should happen anyway - people will put their money in safe banks, not banks who gamble.

Any bank potentially subject to this kind of levy is, by definition, not safe. And the rhetoric being used certainly makes it look like there are no safe banks in the EU.

Germany for example has banks whose deposits are guaranteed by law. Unsurprisingly, they don't pay out high interest rates - but they keep your money 100% safe.

[Thanas]

German reports are saying that now Cyprus will take 40% of the money over 100.000 EUR.

Should have accepted the German plan.

[Lord of the Abyss]

No, what is going to happen is what should happen anyway - people will put their money in safe banks, not banks who gamble.

Any bank potentially subject to this kind of levy is, by definition, not safe. And the rhetoric being used certainly makes it look like there are no safe banks in the EU.

Germany for example has banks whose deposits are guaranteed by law.

The original proposal for Cyprus involved ignoring their supposed legal guarantees as I recall. In the highly unlikely event something like this was imposed on Germany, there's no reason to assume that those doing so wouldn't just handwave away those German guarantees just as they handwaved away Cypriot ones.

[Thanas]

Can't do that, considering the constitutional protections on that. Won't ever happen.

[aerius]

German reports are saying that now Cyprus will take 40% of the money over 100.000 EUR.

Should have accepted the German plan.

Hard to say. If they went with the original plan you get riots in the streets, the government falls, and the country likely goes up in flames. With the current plan they should be able to keep enough people from rioting and toppling the government, at least for now. Give it a few months for everyone to yank their money out of Cyprus and they're just as screwed.

[Grumman]

Germany for example has banks whose deposits are guaranteed by law.

So does Cyprus - 100% of the first 100,000 Euro. Fat lot of good that did them.

[Thanas]

Germany for example has banks whose deposits are guaranteed by law.

So does Cyprus - 100% of the first 100,000 Euro. Fat lot of good that did them.

No. This is not comparable to Cyprus. Not at all.

[K. A. Pital]

No. This is not comparable to Cyprus. Not at all.

The official guarantee for ordinary depositors is 100 000 Euro last time I checked though.

[Darth Tanner]

No. This is not comparable to Cyprus. Not at all.

Why not? As Grumman said Cypriot law expressly guaranteed the first 100,000 euros in deposits. The German/EU proposal expressly broke this law, only its rejection by the Cypriot parliament prevented that.

The obvious implication is that the legal guarantee on that deposit is worthless now as the EU and national governments can simply ignore such protection to protect the banks/bonds holders.

[Simon_Jester]

Thanas appears to be arguing that German bank deposits are protected by constitutional law, not just by ordinary federal laws that their parliament can make and unmake at will. And that therefore they are inherently secure, even when the Cypriot bank deposits' guarantee is proved worthless by events.

Since he hasn't expanded on this claim, or substantiated it, so far we're taking his word for that.

[Dr. Trainwreck]

No. This is not comparable to Cyprus. Not at all.

You don't have debt problems yet, there's the big difference. But it still is an absolute, ironclad guarantee that Europe ignores things such as laws, constitutionality, and its own people. So Germany is not immune, not even slightly resistant, it's just that there but for fortune go you.

[Thanas]

Thanas appears to be arguing that German bank deposits are protected by constitutional law, not just by ordinary federal laws that their parliament can make and unmake at will. And that therefore they are inherently secure, even when the Cypriot bank deposits' guarantee is proved worthless by events.

Since he hasn't expanded on this claim, or substantiated it, so far we're taking his word for that.

Well, it is a bit hard to explain, but here is the link in German. Some special banks, like the savings banks, have always had backup security mechanisms like a giant fond which pays out if they are in danger of bankruptcy or losing their money.

Even more, Art. 14 of the constitution explicitly prohibits seizure except when there is a) compensation and b) the legal process has been exhausted. So any such measure would have to pass years of legal challenges and then also repay the people involved.

[Fingolfin_Noldor]

Soooo what would happen if Cyprus had similar laws... would the EU trample them over as well?

[Murazor]

Even more, Art. 14 of the constitution explicitly prohibits seizure except when there is a) compensation and b) the legal process has been exhausted. So any such measure would have to pass years of legal challenges and then also repay the people involved.

Does it state explicitly the nature, terms and deadlines for compensation?

Because in Spain, there have been various legal changes that pretty much allow our equivalent of the deposit insurance fund to pay with bonds or certain financial products (I have heard even claims to the effect of them now being allowed to pay with shares of nationalized banks, but cannot vouch for the accuracy of these in the specific) which essentially destroys the key idea behind a deposit insurance fund.

[Thanas]

Does it state explicitly the nature, terms and deadlines for compensation?

It doesn't, but case law says it would have to be market value. The market value of 1000 EUR is...1000 EUR.

[Murazor]

It doesn't, but case law says it would have to be market value. The market value of 1000 EUR is...1000 EUR.

A feeble line of defense, then, considering the number of ways in which "market value" can be conveniently abused.

If this spreads to Germany (and it very well may, German banks remain highly exposed to assets and Southern European debt) do not particularly count on that particular piece of regulation saving the day.

[Thanas]

Nah. The way the German courts have ruled on this in the past is really quite consistent.

[Enigma]

Can someone break this down for me? Is he talking out of his ass or is what he's saying true?
The Telegraph editorial

Cyprus has finally killed myth that EMU is benign
The punishment regime imposed on Cyprus is a trick against everybody involved in this squalid saga, against the Cypriot people and the German people, against savers and creditors. All are being deceived.
If Cyprus tries to claw back competitiveness with an 'internal devaluation', it will drive unemployment to Greek levels (27pc) and cause the economy to contract so fast that the debt ratio explodes Photo: AP
Ambrose Evans-Pritchard

By Ambrose Evans-Pritchard

7:55PM GMT 27 Mar 2013

It is not a bail-out. There is no debt relief for the state of Cyprus. The Diktat will push the island’s debt ratio to 120pc in short order, with a high risk of an economic death spiral, a la Grecque.

Capital controls have shattered the monetary unity of EMU. A Cypriot euro is no longer a core euro. We wait to hear the first stories of shops across Europe refusing to accept euro notes issued by Cyprus, with a G in the serial number.

The curbs are draconian. There will be a forced rollover of debt. Cheques may not be cashed. Basic cross-border trade is severely curtailed. Credit card use abroad will be limited to €5,000 (£4,200) a month. “We wonder how such capital controls could eventually be lifted with no obvious cure of the underlying problem,” said Credit Suisse.

The complicity of EU authorities in the original plan to violate insured bank savings – halted only by the revolt of the Cypriot parliament – leaves the suspicion that they will steal anybody’s money if leaders of the creditor states think it is in their immediate interest to do so. Monetary union has become a danger to property.

One can only smile at the denunciations of Eurogroup chief Jeroen Dijsselbloem for letting slip that the Cypriot package is a template for future EMU rescues, with further haircuts for “uninsured deposit holders”.
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That is not the script. Cyprus is supposed to be a special case. Yet the “Dijssel Bomb” merely confirms that the creditor powers – the people who run EMU at the moment – will impose just such a policy on the rest of Club Med if push ever comes to shove. At the same time, the German bloc is lying to its own people about the real costs of holding the euro together. The accord pretends to shield the taxpayers of EMU creditor states from future losses. By seizing €5.8bn from savings accounts, it has reduced the headline figure on the EU-IMF Troika rescue to €10bn.

This is legerdemain. They have simply switched the cost of the new credit line for Cyprus to the European Central Bank. The ECB will have to offset the slow-motion bank run in Cyprus with its Emergency Liquidity Assistance (ELA), and this is likely to be a big chunk of the remaining €68bn in deposits after what has happened over the past two weeks.

Much of this will show up on the balance sheet of the Bundesbank and its peers through the ECB’s Target2 payment nexus. The money will leak out of Cyprus unless the Troika tries to encircle the island with razor wire.

“In saving €5.8bn in bail-out money, the other euro area countries will likely be on the hook for four to five times more in contingent liabilities. But, of course, the former represents real money that gives politicians a headache; the latter is monopoly central bank money,” said Marchel Alexandrovich, from Jefferies.

Chancellor Angela Merkel will do anything before the elections in September to disguise the true cost of the EMU project. It has been clear since August 2012 that she is willing let the ECB carry out bail-outs by stealth, as the lesser of evils. Such action is invisible to the German public. It does not require a vote in the Bundestag. It circumvents democracy.

Mrs Merkel can get away with this, provided Cyprus does not leave EMU and default on the Bundesbank’s Target2 claims, yet that may well happen.

“I wouldn’t be surprised to see a 20pc fall in real GDP,” said Nobel economist Paul Krugman. “Cyprus should leave the euro. Staying in means an incredibly severe depression.”

“Nobody knows what is going to happen. The economy could go into a free fall,” said Dimitris Drakopoulos, from Nomura.

The country has just lost its core industry, a banking system with assets equal to eight times GDP, and has little to replace it with. Cyprus cannot hope to claw its way back to viability with a tourist boom because EMU membership has made it shockingly expensive. Turkey, Croatia or Egypt are all much cheaper. Manufacturing is just 7pc of GDP. The IMF says the labour cost index has risen even faster than in Greece, Spain or Italy since the late 1990s.

What saved Iceland from mass unemployment after its banks blew up – or saved Sweden and Finland in the early 1990s – was a currency devaluation that brought industries back from the dead. Iceland’s krona has fallen low enough to make it worthwhile growing tomatoes for sale in greenhouses near the Arctic Circle.

If Cyprus tries to claw back competitiveness with an “internal devaluation”, it will drive unemployment to Greek levels (27pc) and cause the economy to contract so fast that the debt ratio explodes.

The IMF’s Christine Lagarde has given her blessing to the Troika deal, claiming that the package will restore Cyprus to full health, with public debt below 100pc of GDP by 2020.

Yet the Fund has already been through this charade in Greece, and her own staff discredited the doctrine behind EMU crisis measures. It has shown that the “fiscal multiplier” is three times higher than thought for the Club Med bloc. Austerity beyond the therapeutic dose is self-defeating.

Some in Nicosia cling to the hope that Cyprus can carry on as a financial gateway for Russians and Kazakhs, as if nothing has happened. RBS says the Russians will pull what remains of their money out of Cyprus “as soon as the capital controls are lifted”.

The willingness of the Cypriot authorities last week to seize money from anybody in any bank in Cyprus – even healthy banks – was an act of state madness. We will find out over time whether this epic blunder has destroyed confidence in the country as a financial centre, or whether parts of the financial and legal services sector can rebound.

Yet surely there is no going back to the old model, even though the final package restricts the losses to the two banks that are actually in trouble. Savers above €100,000 at Laiki will lose 80pc of their money, if they get anything back. Those at the Bank of Cyprus will lose 40pc.

Thousands of small firms trying to hang on face seizure of their operating funds. One Cypriot told me that the €400,000 trading account of his father at Laiki had just been frozen, leaving him unable to pay an Egyptian firm for a consignment of shoes.

The Cyprus debacle has taught us yet again that EMU has gone off the rails, is a danger to stability, and should be dismantled before it destroys Europe’s post-War order.

Whether it marks a watershed moment in the crisis is another matter. Italy, Spain, France and Portugal have their own crises, moving to their own rhythm.

The denouement will arrive when the democracies of southern Europe conclude that recovery is a false promise and that the only way to end mass unemployment is to break free of EMU’s contractionary regime.

It will be decided by Italy, not Cyprus.

[Murazor]

Can someone break this down for me? Is he talking out of his ass or is what he's saying true?

There is some alarmism there, but is completely accurate in a number of points. Others, I simply don't know enough to say.

Is this the end of Cyprus as a major financial center? Ayup.

Will the Russians pull their money as soon as they can? Almost certainly.

Is the touristic sector of Cyprus at a competitive disadvantage against non-EMU countries? Most definitely.

Do the capital controls break the EMU? For all intents and purposes, yes, at least as long as they exist.

Was Iceland's ability to control its own monetary policy one of the key factors in its reasonably robust recovery from their own crisis? Very much so.