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Monday, March 18, 2013

How might a revised Cypriot bailout deal look?

Update 11:00 GMT 18/03/2013

Sources told Spanish news agency EFE that the Cypriot government and the Troika have agreed to cut the levy on depositors with less than €100,000 to 3% and and increased the levy on those with more than that to 12.5%, but we haven't seen this confirmed by anyone else so treat with care.

Update 09:15 GMT 18/03/2013:

The WSJ is reporting that Cyprus could seek a further division amongst uninsured depositors (which @MatinaStevis tweeted already yesterday). According to the paper, the Cypriot government is pushing for 3% on below €100,000, 10% on between €100,000 to €500,000 and 15% on €500,000+. There are no clear figures on how much each individual levy will raise, although Germany is said to be open to the idea as long as the total of €5.8bn remains.

The Cypriot parliament will vote on the deal at 2pm GMT, with eurozone finance ministers due to have a teleconference at some point later this afternoon.

Original post

As we reported yesterday, the Cypriot government is now scrambling to renegotiate the deal which has created such an outcry in Cyprus. Germany and the IMF will not budge on the headline figure or that the money must come from a deposit levy (the only option to raise this sort of cash anyway), however, they do not mind which depositors pay it or at what rates.

This has led to suggestions that the rates could be adjusted to increase the cost on large uninsured depositors and reduce the impact on smaller insured depositors – this would probably be both legally and politically more acceptable.

So how could it be structured? Well, Cyprus has around €30bn in insured deposits below €100,000 and €38bn of uninsured deposits above €100,000. See table below for potential structures (click to enlarge):

Option 1 seems to be what is currently under discussion. Option 2 might be politically popular, although the impact on business and investment could be significant. One thing that is clear, as we have repeated over the weekend, is that this deal remains in flux.


Anonymous said...

Does this option include an EU-wide bank run or not?!

I find it hilarious that the Eurozone's solution to the ongoing financial problems depends on whether or not there is an election going on in Germany or not!

Wolfgang Schauble - yet another German-manufactured economic disaster.


Jesper said...

The constant in all this flux seems to be that the Cypriotic government have to raise x billions. Their first proposal (set up for rejection?) to raise the x billions seems to be all but rejected now.

The alternative that will be accepted in the end might not have been accepted if the first proposal had not been so scary.
Maybe (unlikely) we'll see a law that circumvents the protection for the bonds issued under UK law?

The situation should have been well known, it might be that politicians did not know about the situation and that is why we're seeing proposals that are so poorly thought through. Wouldn't want that quality of leaders for me.

Jesper said...

An article from a couple of weeks ago:
"No broad "bail-in" for Cyprus depositors, ECB says"

The broad 'bail-in' is likely to be a local initiative. Might be that I'm a bit paranoid about the close relationship between local politicians and local wealthy people. That kind of close relationship exists (I believe) in all countries and even more so in countries where Freedom of Information is weak.

Rik said...

Still strange while >90% of the financial media (unlike OE) still completely miss the plot.
This is not macro, this is international politics with huge conflicts of interest. And will go by these rules and not some economic theory.

As expected somewhere in the process the ones with money take the position the ones with money usually have. Somebody will have to pick up the tab and it clearly looks like the Northern electorate doesnot really care much about growth or not growth in the South, not if the alternative is more cuts at home.
And remember this is only the beginning of this, there have not been real cuts in the North as a consequence of the bail outs everything is OBS (Off Balance Sheet). All present cuts is becuase of local bankrescues, the crisis, the bad local economy and aging and the blown up local welfarestate.

Imho this is mainly important as a political sign: Conditions will get worse, restructure things or face the music later on.
EU politiciuans are no rocketscientists, but they will have noticed before that 6 Bn was a small price to pay for the economic fall out of this. Like with Greeks PSI they simply need this at home.
They clearly took also political issues into consideration.
A Finn government doesnot want to be dumped to save Cypriotic savers.

Another point missed by the Macros. This likely makes at least another rescue possible politically. Bailing Russian oligarchs out might have been the end of the line. Which will be seen by many as a pro.

Rik said...

Only the UK can do that. That is why people like UK law bonds or other legal relations. Probably great PR for the UK legal profession and the City.

I donot see why Schauble would not tell the truth on this btw. Hardly anything to gain unlike the other parties involved.

Jesper said...


debt that can't be paid back won't be paid back - it really doesn't matter if the debt is bonds issued under UK law.

Sure, there'll be some buyers of distressed debt trying to make a profit on the deal & lax regulation UK will, when it suits some, be all for enforcing the law.... Years of legal action a la Argentina & the Argentinian default to follow.

Will UK help out the people of Cyprus by changing the law? Or will it silently side with the buyers of distressed debt, aka vulture (hedge) funds?

Jesper said...

Exchange a couple of words from this story and then the issue with bonds issued under UK law might become clearer:

Unintended(?) consequence: Lawyers and bankers love that they have the option of refusing debt discharge through bankruptcy.

UK law can be changed if the UK parliament so wishes. Consequences may or may not be to UK liking but the choice is there.