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Friday, March 22, 2013

Full circle in Cyprus

Update 13:15 22/03/2013:

Thinking about the plan in more detail, it occurred to us that this may amount to trying to burn the larger depositors twice. As we noted in today's press summary, the plan essentially is to move all the bad assets to a bad bank, along with the large uninsured depositors (€100,000+). These assets would then be wound down or sold off at a large discount with the depositors footing the bill (and taking losses of 20% - 40%). This, along with the merging of Bank of Cyprus and the good bank, is how the recapitalisation costs will be reduced by €2.3bn.

So, the large depositors will take significant losses here and yet may still face a large deposit tax as well? That seems to be pushing the boundaries to us, although it is not impossible. Cyprus would not recover as destination for foreign investment for some time. One way to structure this could be for the tax only to be applied to depositors above €500,000 (as we suggest below) and the bad bank to apply to all uninsured deposits. Obviously, the bad bank scheme also only applies to Laiki bank, but as the second largest Cypriot bank it is still likely to account for a large amount of big deposits.

Still this could see larger depositors taking up to 50% hits in some cases. We can't imagine Moscow would take that one lying down, especially given comments earlier in the week...

****************** Original Post *********************

It now seems we have come all the way back round to the deposit levy as a solution in Cyprus. Overnight, the EU/IMF/ECB Troika rejected the plans for a Cypriot solidarity fund, particularly one based on pension assets and gas reserve revenues (which German Chancellor Angela Merkel specifically spoke out against).

The bank restructuring plan does seem to be holding water for now, so this has at least reduced the money Cyprus needs to raise by €2.3bn. Unfortunately, though, that still leaves €3.5bn to be found. As we noted a week ago, there are few options for doing it – and it slightly worries us that Cyprus and the eurozone are only just realising this.

Inevitably, that has led us back to a deposit levy. Fortunately, with the amount of money needed reduced, a new version can focus on larger depositors – which is reportedly what was originally proposed by the Troika last week. Barclays has a useful table on the breakdown of deposits (via @FGoria):

Going from these figures, a 12.2% tax on deposits above €500,000 would yield the €3.5bn necessary. A 9.46% tax would also be sufficient if applied to all depositors over €100,000.

Either of these options would probably be acceptable to the Cypriot parliament. Sources suggest that the Democratic Party (DIKO, Cypriot President Anastasiades's junior coalition partner) has indicated its support for such proposals, which would bring the government up to 28 votes – so potentially needing only one more.

There are plenty of pitfalls left, but we may get a vote this evening. That said, noises from the Troika earlier suggested they could take the weekend to review the bank restructuring deal.

As has been the case for the whole of this week, uncertainty seems to be the order of the day. One thing we can take away is that a deal may be inching closer…


Rik said...

Points everybody seems to forget is that the larger (>100K) accountholders in one bank already face a 40% haircut. This means 40 plus say 10% (or around 50% combined).
This is simply a big bank going bust, considerably worse for your reputation (what is left of it) than a 12.5% levy iso a 9.9%.

Still difficult to see how the will structure that re their obligations out of their taxtreaties. OECD model (used 90% of the time) doesnot allow that as far as I can see it.

Jesper said...

The debacle should have highlighted a couple of more things:

-Banking union can only work if legislative rights regarding banking assets/liabilities are also conferred to the union. If not, then the guaranteed amount is not really guaranteed (as shown by the Cypriotic government).

-Banking union with a common deposit insurance can only work if there are no exceptions to the guaranteed amount - nothing more and nothing less allowed. It is surprising that it is even discussed to protect 100% of all deposits, if that were to happen then the banking system would be destabilised (bonds would never get sold again & markets would never penalise poor bankers).

A banking union with a common insurance fund would be a common resource controlled by economists.
The tragedy of the commons:
"The metaphor illustrates the argument that free access and unrestricted demand for a finite resource ultimately reduces the resource through over-exploitation, temporarily or permanently. This occurs because the benefits of exploitation accrue to individuals or groups, each of whom is motivated to maximize use of the resource to the point in which they become reliant on it, while the costs of the exploitation are borne by all those to whom the resource is available (which may be a wider class of individuals than those who are exploiting it)."

Risky bets would be made and the winnings would be kept while the losses would be put to the common resource (deposit insurance).

& there are more things about the banking union which most would find unacceptable. One example, can there be different bankruptcy regimes in a banking union? If not, which should be used across europe?

Banking union isn't a precursor to a full fiscal union, it is something that comes AFTER the introduction of a full fiscal union.

Banking union is a bad idea and should be abandoned.

jon livesey said...

Quoted from Reuters.

"The meeting was contentious, participants say. Schaeuble, Dutch Finance Minister Jeroen Dijsselbloem and negotiators for the ECB, EU and International Monetary Fund broke off several times to talk separately with the Cypriots. Other ministers hung around in the corridors, playing games on their mobile phones."

Remind me again about all eurozone members being equal, and it not being run by Germany?

Alex said...

If they'd originally gone for 15% (or whatever) on >=100,000 and nothing for <100,000 then they might have got away with it. It's surprising that the decision-making is so fragile that they accidentally proposed taxing the insured depositors (isn't that simply illegal?), which was guaranteed to explode in their face. But now if they revert to taxing >=100,000 it's too late in that no-one will fully trust the <100,000 guarantee any more. Capital flight here we come.

Incidentally, establishing the term "tax" for the proposed levy is a pretty cheeky piece of subterfuge in itself. A "6.75% tax" doesn't sound so bad, but of course taxes aren't conventionally retrospective: you know what the tax regime is and you arrange your affairs accordingly. Obviously no-one would have put money in these banks if they'd known that they'd be "taxed" on whatever happened to be in their accounts on some random Friday. (Pity the person who momentarily had a high bank balance because he's in the middle of selling and buying a house.)

Unknown said...

I am personally affected by the levy. I am a Cayman Islands resident so not a tax evader (as there is no income tax in my country), nor a money launderer, nor have I made any risky investments as I have not invested with one of the troubled banks, but with the properly cashed-up Piraeus bank.

Therefore I would have supported the solution to levy the bank accounts of ALL Bank of Cyprus and Popular bank customers with 20+ % as indicated this morning, as ultimately you must either have been stupid to stay with them - or greedy, as due to their situation they had offered good interest for the last few years.

And it is a common rule of investing - the higher the risk, the higher the possible gain OR loss.

However, to punish customers of all other banks is just wrong and continues to send the wrong message.

It is a preview of what will happen to deposits, real estate, and everything else politicians can get their hands on for the next few years in Europe.
To punish Cyprus is a joke in itself form the beginning - the only reason why Cyprus is in trouble is because of an earlier EU - decision to haircut 80% of Greek bonds which cost Cyprus about 5 billion Euros and was the cause of all the trouble.

So the EU decides on the haircut to save Greece and puts Cyprus into trouble - and then decides to be much harder on Cyprus than on Greece. This does not make sense.

I am in the banking sector. Last week alone, a 10 digit amount was received in Cayman and BVI banks from European and Russian investors - many form Italy, Spain, and other European countries that are afraid that politicians will rob them too.

The introduction of the Euro was the beginning of the end of democracy in Europe. The people who still try to convince people that they are safe should be prosecuted.

Also, if anyone expects rich Russians with billions of $ in Cyprus bank accounts to let the responsible people who robbed them of 20% of their money to live a healthy and peaceful life - keep dreaming.

The vengeance will be visible and not nice.