Monday, March 18, 2013

The Cypriot Crisis?

Eric Reguly of the Globe and Mail reports, World markets roiled as radical Cyprus bailout deal stall:
A small bailout in a small state has roiled the global financial markets and triggered a political backlash as far away as Russia.

The bailout of Cyprus, one of the smallest members of the euro zone, was stalled Monday morning over reports that the minority Cypriot government lacked the support to pass the proposed €10-billion ($13-billion U.S.) bailout package, which is to impose a “haircut” on bank depositors.

None of the euro zone’s sovereign and bank bailouts, from Ireland to Greece, has insisted that bank depositors finance part of the bailout bill. The prospect of rich and poor bank customers losing up to 9.9 per cent of their deposits triggered near panic in Cyprus.

Bank customers, some of who called the bank raid “daylight robbery,” were lining up to withdraw cash from cash machines, many of which had run out of euros, and the Cyprus state broadcaster CYBC reported that a man drove a bulldozer into a bank branch in Limassol, the island’s financial centre, to protest the levy.

In Moscow, Russian president Vladimir Putin called the levy “unfair, unprofessional and dangerous.” Cyprus is one of the biggest offshore banking centres for wealthy Russians and Cyprus is the source of most of the foreign investment in Russia. Various reports said that Russians had stuffed between €20-billion and €26-billion in Cypriot banks.

In Europe, the renewed threat of crisis contagion sent the major European stock indices down, along with the euro. Bond yields in struggling euro zone countries rose sharply.

Greek 10-year bond yields rose 62 basis points (100 basis points equals 1 percentage point). Portuguese yields were up 20 basis points, Spain’s 10 and Italy’s 8. Fears that Italy faces a renewed crisis were especially acute because the country lacks a government after an inconclusive election last month. Italian bond yields are up 28 basis points in one month, to 4.67per cent.

In Cyprus, president Nicos Anastasiades defended the bailout, arguing that bankrupt banks and a deep recession, or worse, were the alternative. He also said that the bank deposit levy “avoids taking other tough measures such as wage and pension cuts that were put on the negotiations table.”

The reasons behind the decision to go after depositors to finance the bailout were never made clear. It appears that, minus the deposit levy, the euro zone leaders feared opening themselves to accusations that they were protecting Russian millionaires and billionaires in a banking system known for money laundering.

In a note, Guy Foster, head of portfolio strategy at Londons’s Brewin Dolphin, said “the widespread belief that a meaningful pool of the deposits in Cypriot banks comprises proceeds from Russian money laundering made the idea of bailing out the Cypriot banks particularly unappealing.”

But the bailout, which does not demand sacrifices from sovereign bondholders, violates the principle that deposits up to €100,000 are to be covered by the European Union deposit scheme. Savers with deposits of less than that amount are to take a 6.75 per cent hit; those with deposits higher than that amount are to lose 9.9 per cent.

The bailout bill would rise to about €16-billion from €10-billion if the levy on depositors were not imposed.

On Monday, as the vote to approve the package was delayed until Tuesday, and possibly later in the week, negotiations were under way to reduce the burden on small depositors. One proposal would see the levy fall to 3 per cent on deposits of less than €100,000 and increase it to 15 per cent on deposits of €500,000 or more. But the Cypriot government appears just as worried about going after the rich as the poor. If the wealthy are forced into a higher levy, Cyprus could lose its status as a successful offshore banking centre.

In Germany, finance minister Wolfgang Schaeuble said that his government did not care if the levy split were changed as long as the overall €5.8-billion target – the amount to come from depositors – were achieved.
Patrick Donahue of Bloomberg also reports, Cypriot Outrage Over Tax Could Derail Euro-Area Bailout:
European policy makers signaled flexibility on the application of an unprecedented bank tax in Cyprus, seeking to overcome outrage that threatened to derail the nation’s bailout. European shares and the euro fell.

While demanding that the levy raise the targeted 5.8 billion euros ($7.6 billion), finance officials said easing the cost to smaller savers was up to Cyprus. A vote on the tax, needed to secure 10 billion euros in rescue loans, was delayed for a second day. Banks may not reopen tomorrow after a holiday today, state-run broadcaster CYBC reported.

“If the government wants to change the structure of the solidarity levy for the banking sector, the government can decide as such,” European Central Bank Executive Board member Joerg Asmussen said today in Berlin. “What’s important is that the planned revenue of 5.8 billion euros remain.”

While Cyprus accounts for less than half a percent of the 17-nation euro economy, the raid on bank accounts risks triggering new convulsions in the financial crisis that began in 2009 in Greece. Moody’s Investors Service said that the move is a significant step toward limiting support for bank creditors across Europe and shows that policy makers will risk financial- market disruptions to avoid sovereign defaults.

The tax is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future,” Joachim Fels, chief international economist at Morgan Stanley (MS) in London, wrote in a client note.
On Line

Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm since the ECB’s pledge in September to backstop troubled nations’ debt. With no government in Italy, Spain in the throes of a political scandal and Greece struggling to meet the terms of its own bailout, more turmoil could hamper efforts to end the crisis.

The Euro Stoxx 50 Index fell 1.9 percent and the euro slid as much as 1.9 percent; the currency was trading at $1.2960, down 1 percent at 11:45 a.m. in Frankfurt.

Borrowing costs in other debt-strapped nations rose. Italian 10-year bond yields climbed 9 basis points to 4.69 percent. The rate on similar-maturity Spanish yields jumped 10 basis points to 5.02 percent. Germany led gains among higher- rated nations’ securities.
Traders ‘Aghast’

“Traders and investors are aghast as these measures,” Michael McCarthy, a chief market strategist at CMC Markets in Sydney, told Bloomberg Television.

Russian President Vladimir Putin called the tax “unfair, unprofessional and dangerous,” according to a statement posted on the Kremlin website. Russian companies and individuals have $31 billion of deposits in Cyprus, according to Moody’s Investors Services.

Cypriot banks had 68.4 billion euros in deposits from clients other than banks at the end of January. Of that, 21 billion euros, or 31 percent, were from clients outside the euro area, 63 percent were from domestic depositors, and 7 percent were from other nations within the euro region, according to data from the Central Bank of Cyprus

Cypriot President Nicos Anastasiades exhorted political factions to support the deposit levy, which he pledged is a one- off measure that will avert a collapse of the financial system that in turn would have led to the country’s exit from the euro.

“A bank collapse would cause indescribable misery,” Anastasiades said in a televised address yesterday. He called the crisis the country’s worst moment since the 1974 Turkish invasion that has left the island divided.
Depositor Swap

In a bid to ease a run on banks, depositors who keep their account for two years will receive securities linked to future revenue from the country’s gas reserves, the president said.

He said he would also seek to soften the impact on savers. The potential changes include taxing deposits less than 100,000 euros at a 3 percent rate, while setting the levy at 10 percent between 100,000 euros and 500,000 euros and at 12 percent for deposits greater than that, Antenna TV reported, without saying how it got the information.

The levy -- as of now 6.75 percent of all deposits up to 100,000 euros and 9.9 percent above that -- whittled the euro- area’s bailout of Cyprus to 10 billion euros, down from an original figure of about 17 billion euros, near the size of the nation’s 18 billion-euro economy.

“Obviously, people would have preferred to pay nothing, but it’s a better deal than it could have been,” said Marshall Gittler, head of global foreign-exchange strategy at Limassol, Cyprus-based IronFX. “It’s unusual to ask depositors to take a hit, but if they hadn’t then the hit would have fallen uniquely on Cypriot taxpayers, so in a sense it’s fairer.”
Ministers’ Call

German Finance Minister Wolfgang Schaeuble said euro finance ministers would discuss modifying the terms of the tax in a telephone conference today. They met for 10 hours overnight in Brussels into March 16 to agree to the 10 billion-euro bailout.

The bank tax was the alternative to imposing losses on bondholders in a so-called bail-in. That step was opposed by the Cypriot government, the European Commission and the ECB, German Finance Minister Wolfgang Schaeuble said on ARD television last night.

“It’s up to them to explain it to the Cypriot people,” Schaeuble said. “Clearly, the taxpayer should not be asked” to rescue banks from insolvency, he said, adding that Cyprus faced a “very difficult time” unless it accepts the tax.

Anastasiades, whose minority government took office less than three weeks ago, holds 20 seats in the 56-seat legislature. The third-biggest faction, Diko, which supported him in his February election, holds eight seats. Cyprus’s communist Akel party, with 19 seats, plans to vote no.
Road to ‘Chaos’

Afxentis Afxentiou, the governor of Central Bank of Cyprus from 1982 until 2002, told the state-run broadcaster CYBC that failure to enact the legislation “opens the road to chaos.”

The ECB’s pledge to buy bonds should prevail over market panic, though the tax on deposits brings the euro area into “uncharted territory again,” Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note.

“Given the fragile state of the banking systems, especially in Greece and Spain, anything that can impede the needed rebuilding of confidence in these banking systems can potentially cause financial and economic damage,” he said.
Another thing people should keep in mind is the origin of this crisis and how Cypriot banks were basically coerced by corrupt ministers into buying Greek sovereign debt, another scandal that receives little attention. Hot money flows inflating property prices exacerbated the problem. Some think the property scandal will prove far more costly to Cyprus than having to swallow Greek’s sovereign debt write off.

So will the Cypriot contagion spread across Europe and spur yet another euro crisis or worse still, World War III as the Russian navy dispatches a permanent fleet to the Mediterranean?

Of course, I'm being overly dramatic but if you read the weekend comments over at Zero Edge, you'd think capitalism has just been dealt a death blow and the world is coming to an end all over again.

Even informed economists are over-dramatizing the Cypriot bank bailout. Yanis Varoufakis writes Cyprus' stability levy is just another sad euphemism, noting the following:
They called it a ‘stability levy’, when they meant a tax on Cypriot depositors (including the savings of poor widows and small children) so that they spare holders of Cypriot government bonds (including hedge funds who are now having a party in Mayfair and New York) as well as minimise potential long-term losses by the European taxpayers. In effect, faced with the prospect of lending to Cyprus a sum equal to its GDP, so as to bail out its banks Ireland-style, the Eurozone balked.
They realised, post-Greece and post-Ireland, that something has to give (beyond the minimum working conditions and social welfare provisions of common folk) in order to minimise the size of the aggregate loan. And they chose to hit depositors directly (at a rate of 9.9% if their deposits exceed 100 thousand euros and 6.75% for smaller deposits) before the oncoming austerity-driven plague eats into them instead (as it did in Greece, Ireland and Portugal were savings were used up by stressed household in the daily struggle to survive after jobs and benefits disappeared).

What was astonishing is that, while the peoples of Europe are sick and tired of the gross inequities and regressivity of austerity-fuelled bailouts, they did not set a threshold below which poorer depositors would be untouched. And that they left unaffected the banks’ bondholders (even though the sums involved in these bonds were small, it was utterly unprincipled to spare them). I have no doubt that this decision will haunt them/us for decades.

What alternatives did the Eurogroup ministers have? Several, is the answer. In the context of their own accounting-like logic (i.e. of ‘hitting’ depositors) they could discriminate between bank accounts that are insured by Cypriot law and those which are not: So, any account by a citizen of an EU-member state with less than 100 thousand euros (the maximum account insured by the Cypriot state; the equivalent of the FDIC deposit insurance protection) should be left alone.
All the other accounts could then be hit by a percentage that would deliver the sum of six to seven billions EU finance ministers wanted to reduce the bailout loan sum by. If Berlin was serious about its willingness to curtail Cyprus’ banks money laundering activities, while avoiding a tax on the hard earned savings of the poorer Cypriots (that a Lutheran German should see as an ally in restoring puritan ethics), that is what they would have done. But, it is now clear, they were not serious about their own ethics (indeed, had they been serious about Russian money laundering, they would have raised questions about Latvia’s banks, which are awash with mafia funds).

Of course, while hitting uninsured deposits only (as suggested by the previous paragraph) would have been preferable, it would still not be a solution to the Cypriot drama. The Cypriot economy is in the familiar tail spin that we witnessed in Greece, Portugal, Spain, Ireland and now unfolding in Italy. Even if the bank levy, or bail in, were fairer, the recession would still be fuelled by large scale public expenditure cuts and substantial tax hikes which, taken together, will most certainly lead Cyprus to a dead end. But none of this is specific to Cyprus. In this sense, an alternative strategy for dealing with the island’s fall from grace must involve a Gestalt Shift that will allow Europe a different approach throughout the monetary union. Precisely the Shift that Europe seems unwilling to contemplate, thus resorting to ill-conceived decisions like the recent one on Cyprus.
And Andreas Koutras writes Europe welcomes the new Coco deposits, concluding the following:
For the second time Europe has shown that it is not mature enough to even keep the basic fundamentals tenets of an advanced modern state. Banks are not allowed to collapse and senior debt holders as yet are shielded from taking losses. On the other hand violating the sanctity of retail deposits is ok. I wonder what the Eurogroup would force upon the Italians and the Spanish. EU keeps surprising us in a negative way.
A good friend of mine who is running a fund with significant holdings in Cyprus, and will lose money on this deal, shared some more measured and candid comments with me:
...keep your powder dry, let other perma bears talk about the non-existent panic....I  have spoken to at least 10 people that I deal with, ranging from my chauffeur to the head of a major accounting firm, there is no panic.
Left-wing reporters are angry, there are no people on the street, they talk about panic, and their news reals show 5 to 6 old lethargic, meek-looking people lined up in an orderly manner to withdraw from their ATM, seen the same clip on BBC and Sky News.
This is a brilliant deal for Cyprus. There is NO increase in VAT, NO cuts to pensions, No immediate cuts to government employees, corporate tax went from an absurd low of 10 to 12.5, they promised to sell off some state assets, and bring down the banking sector (get rid of Russian deposits) by 2018.. They did not mortgage their natural gas, nor have they mortgaged their future, they addressed the problem by raising 5.8 billion in cash (out of the 10 billion)......people like me and the Russians are bearing the brunt of this bailout, hate to disappoint the perma bears......longer term this is terrible for the euro, but that is another story.
Not sure if this is "terrible for the euro" but keep the above comments in mind as you watch the drama unfold on CNBC and other financial news networks covering the "crisis in Cyprus."

Below, Brewin Dolphin Head of Portfolio Strategy Guy Foster discusses the crisis in Cyprus. He speaks with Mark Barton on Bloomberg Television's "Countdown."

And the Graduate Institute’s Charles Wyplosz discusses what he considers to be a total disaster in Cyprus and its contagion effect. He speaks on Bloomberg Television's "Bloomberg Surveillance."

Finally, Bloomberg's Michael McKee reports on the possible impact for the markets on today's "The Real Deal," on Bloomberg Television's "In The Loop."