Have Cypriot deposits finally hit bottom?

Last year, we covered the Cypriot crisis extensively, and the steep decline in Cypriot deposits in particular. As we reported back then, the problem was likely to continue for some time, and did.

But now, just over twelve months on (data from end of April), Cypriot deposits may have hit bottom after increasing by €266m in April - the first increase since December 2012.

• As the graphs above show (click to enlarge), the increase was driven by money flowing in from monetary financial institutions (MFIs) from the Rest of the World (i.e. outside the eurozone), but mostly in euro currency.
• Given the well-established links between Russia and Cyprus, it is possible that some Russians could have begun moving small amounts of money back into Cyprus amid the threat of economic and financial sanctions on Russia. Of course, this is speculative, since the data is not detailed enough to see conclusively, while the continuing existence of capital controls would make moving large amounts almost impossible.
• Domestic deposits continued their slow creep downwards. As the economy continues to struggle, this is likely to continue as wages fall and people eat into their deposits.
• The headline figures remain bad. Total deposits are 34% below the level in December 2012. Given that much of this has fled the country and/or been written off, it is unlikely to return anywhere close to that level anytime soon.

European Commission forecasts fragile recovery in the eurozone

The European Commission today released its autumn 2013 economic forecast. The EC broadly sees a

recovery in the eurozone, but does highlight that it remains fragile and that unemployment is expected to increase while further austerity also seems likely. The key figures have been widely covered so we won’t rehash them here. Below we pick out a few key points from some key countries which caught our eye.

CYPRUS
Not much new in what remains a dire forecast for Cyprus. In an otherwise sea of declining figures, net exports remains the one hope as a source of positive growth. Ultimately, any success in this area will be determined by the removal of capital controls. Until this is cleared up, significant uncertainty will remain.

FRANCE
France is facing low growth for this and next year (0.2% and 0.9% respectively). In the meantime, unemployment is going to increase slightly, as “the positive effects of the recent labour market reform are only expected to be visible from 2015.” Unsurprisingly, the Commission notes that most of the adjustment in France has so far come from tax hikes – and warns that “GDP growth significantly below potential and revenue shortfalls, which may be due to unusually low tax elasticity with respect to GDP, are having a negative impact on the nominal deficit.” Actually, the Commission already believes that, absent new measures, France will miss its deficit targets for 2014 and 2015.

GREECE
Despite a positive tone, the figures still make for difficult reading. The forecast recovery is reliant on jumps in exports and in particular tourism, something which is far from guaranteed particularly if the euro remains strong. Also, investment is expected to go from a 5.9% contraction in 2013 to 5.3% growth in 2014. Even from a low base, this looks like a heroic turnaround. Unemployment is also expected to begin dropping next year, over the course of the crisis forecasts on this front have proven misguided. The signs suggest it could still increase slightly or at least remain elevated.

IRELAND
Importantly, the adjustment in Ireland will become increasingly reliant on domestic consumption and investment, the outlook of which remains uncertain. Exports will continue to contribute but significantly less so than recently, while public spending will continue to be a drag on GDP.

ITALY
In line with the IMF, the Commission sees the Italian economy shrinking by a further 1.8% this year and then go back to limited growth next year. The Commission admits that its prediction “does not incorporate the benefits from the full implementation of the adopted structural reforms, as they could take more time to materialise.” Interestingly, the report seems to suggest that the potential benefits of “projected moderate wage growth” in terms of price competitiveness could be offset by the appreciation of the euro vis-à-vis other currencies. As regards Italy’s gigantic public debt, the Commission believes it will begin to fall only in 2015.

PORTUGAL
Again a familiar story, with a tentative turnaround off the back of increasing investment and exports. However, the Commission highlights an important downside risk from the interventions of the Portuguese Constitutional Court, which have already threatened to derail Portugal’s bailout programme. EU Economic and Monetary Affairs Commissioner Olli Rehn reiterated this point in his press conference.

SPAIN
Despite some positive signs, the Commission is quite clear that “still large adjustment needs will constrain the strength of the recovery” in Spain. Furthermore, “financing conditions for households and companies remain relatively tight, in particular for smaller borrowers.” Confirming our previous analysis (see here and here), the Commission notes that the recent decline in Spanish unemployment “was largely driven by a contraction of the labour force and some seasonal factors.” On the deficit side, the Commission has no good news for Spain. Without additional measures, the deficit is expected to increase to 6.6% of GDP in 2015. Remember, Spain has already been given two extra years to cut its deficit and bring it below 3% of GDP by 2016.  

SLOVENIA
Along with Cyprus, the only country forecast to contract next year. Reliant on exports to limit this contract as domestic demand, investment and public spending collapse. The key will be the upcoming bank recapitalisation which the Commission forecasts will cost 1.8% of GDP (as we have noted before, this cost could end up being higher). Whether the government can afford this without external help remains to be seen.

GERMANY
Unsurprisingly, Germany is in a better shape than its eurozone counterparts – with its economy projected to grow by 1.7% and 1.9% in 2014 and 2015 respectively and the unemployment rate expected to keep going down to 5.1% in two years’ time. According to the European Commission, “After a temporary deceleration in 2013, growth in wages and compensation per employee is set to reaccelerate, so Unit Labour Cost growth would remain above the euro area average” – which should help the rebalancing. Interestingly, the Commission’s own figures also show that Germany is breaching the threshold of 6% of GDP for current account surplus. Will Germany get some sort of official warning for this?

A few interesting points then, but as is often the case with these forecasts, they raise as many questions as they answer. Next week’s assessment of the macroeconomic imbalances may provide a bit more meat to the European Commission’s analysis and given the recent political uproar, its view of current accounts could make for interesting reading. In any case, it’s clear that the EC continues to see this as a very fragile recovery.

Cypriot deposit update - stabilisation but concerns remain

The latest Cypriot deposit data is out and it shows some stabilisation in bank deposits in Cyprus. According to the data total deposits decreased by around €460m in August, although much of this was down to the conversion of 10% of unsecured Bank of Cyprus deposits into equity.

As we have always said, the real test will occur when the capital controls are finally removed, which is due to happen at the start of next year according to the Cypriot government. There is also one other concern (in terms of bank deposits, there are many concerns when it comes to Cyprus generally) – as deposits have fallen the Cypriot banks loan to deposit ratio has jumped (as the graph below from the IMF shows).

This is not unexpected, but does represent a potential risk for the banks and highlights that their reliance on ECB and ELA funding will remain for some time. That is at least until they manage to deleverage significantly and (we’d imagine) write down some of their bad loans.

Greece appeals to Russia over natural gas prices

As we reported in today’s press summary, there were some interesting reports circulating in the Greek press this morning about Greek Prime Minister Antonis Samaras sending a letter to Russian President Vladimir Putin to request assistance with cost of Greek gas – namely the gas which Greece imports via Gazprom.

Looking at the data it’s clear why the Greek government is concerned about this:

As the graph shows, in the second half last year, Greek gas prices were the highest in the EU not including taxes and third highest including taxes. This is very problematic for Greece for a few reasons:

• Obviously in the depth of a deep recession very high energy prices can act as a significant drag on the economy (both on supply as it impacts business and consumption as it eats into the spending power of consumers).
• Greece is completely reliant on imports for much of its energy supply, particularly gas and oil. This makes it vulnerable to future price shocks and gives it little control. Incidentally it also makes its current account adjustment (moving to a surplus) more difficult since it has an almost permanent deficit from energy imports.
• Surprisingly, Greece has so far managed to keep fairly low electricity prices. This is positive for consumers but problematic for the producers facing very low margins. Usually, this might be an easy problem to balance out, however, with the government looking privatise the sector it makes investment look much less appealing. Partly in response to this, the government has allowed prices to be pushed up further squeezing the standard of living.

Even though the request may be understandable then, it treads on unsteady ground for the EU. 

As we noted during the Cypriot crisis, Russian influence in the region (particularly in relation to energy) is a very dicey issue, which brings out conflicting goals in various EU member states.

Natural Gas Europe reported last week that negotiations between Gazprom and Greece have been on-going for some time but are at somewhat of an impasse with the former offering price reductions of around 10% and the latter requesting up to 20%.

Any favour on gas prices from Gazprom (via Putin) is unlikely to come for free. The EU (and the US for that matter) will likely be mindful of ceding further influence over an EU member to Russia, especially one in as strategically important position as Greece. Gazprom has also widely been mooted as the likely buyer of DEPA, the Greek gas monopoly which is being privatised, although it did refrain from bidding earlier this year. Still the prospect for increasing Russian presence in Greece and the Greek energy market is clear, while hope of Greece tapping into 'vast' reserves under the Mediterranean are still a pipe dream to a large extent.

All that said, its clearly early days and we shouldn't get ahead of ourselves. But we’re certain other EU leaders will be watching this one closely.

Is Cyprus eyeing up an exit from its capital controls?

As expected the Cypriot government has finally reached a deal with the EU/IMF/ECB Troika over the final stage of the restructuring of the Bank of Cyprus (BoC).

As we noted in today’s press summary this was not an easy decision to reach, and has dragged on since Spring, for a couple of reasons:

• The Cypriot government was keen to limit the haircut and insisted that the BoC only had to reach a tier one capital ratio of 9% at the current point in time.
• The Troika however insisted that this 9% target applied to the end point of the bailout (2016) and therefore the bank needed a ratio of 12% currently since it will deteriorate overtime.
• As the Cyprus Mail notes the Memorandum of Understanding signed by both sides clearly fits the Troika view. Unsurprisingly it won out (as always) but the Cypriot government is still seemingly bitter about the whole affair (which doesn’t bode well for the many, many interactions between the two sides yet to come).

In the end the two sides settled on a 47.5% haircut for uninsured deposits over €100,000 – although these funds will not be completely lost but converted into shares of the bank. This is above the original target of 37.5% but below the potential limit of 60% (for the most part).

The most interesting part of this whole deal might be the following though:

“Following the recapitalisation, 12% of deposits that were previously blocked will be released (5% in total).

The balance will be split evenly into three separate time deposits of six, nine and twelve months, respectively. BoC will have the option to renew the time deposits once for the same time duration. These deposits will receive a rate of interest which will be higher than the corresponding market rates offered by the BoC.”

Of the remaining frozen deposits 12% will be released then, while the rest will first be converted to time deposits, meaning people may not have access to their money for between 6 and 24 months. There are likely a couple of motivating factors here:

1. Firstly, this eases the funding transition for the bank as it looks to return to normal operations since it locks in part of its deposit base.
2. Secondly, and more importantly, it locks in a large amount of deposits which would be liable to flee the country as soon as the capital controls are removed (not least because they tend to belong to rich and/or foreign depositors who would likely find it easier to shift their funds).

These funds are only likely to be worth around €6bn, so not a huge amount in a country with a deposit base still around €50bn and far from enough to settle the question of capital flight once the controls are removed.

But it suggests that both Cyprus and the Troika are planning for an exit from capital controls and looking for ways to stem the potential outflow. The quicker this can be done in a managed way the better for the Cypriot economy. As we have noted before, as long as the capital controls apply the hope of a recovery is slim to none in Cyprus and the euro continues to look incredibly fragmented.

(Note: the blog has been updated with new calculations. Previously it suggested the total coverted to term deposits would be €2bn, however, it is likely to be closer to €6bn). 

Cypriot deposit leakage continued in June

The latest Cypriot deposit statistics seem to be out and there are some strange goings on.

We say seem to be, since there has been no press release but the July data release (which corresponds to June data) is up on the website in the usual place.

As the graphs below show, the outflow has continued, but there are some questions as to the extent of the outflow.

• Firstly, the headline stock figures show a further outflow of €5.3bn, this is shown in the top left graph. However, all the flow figures suggest an outflow of €1.5bn. This is similar to the amount seen last month (although this data has been updated and there seems to be some mismatch between the exact spread of outflows, which adds to the confusion).

• Tucked away in the chronology of the data packet is the following paragraph which explains the differences in figures:

"July 2013: The data for loans and deposits for June 2013 reflect the provisions of the “Sale of Certain Operations of Cyprus Popular Bank Public Co Ltd Decree of 2013”. As from June 2013 Cyprus Popular Bank Public Co Ltd is not considered a Monetary Financial Institution for statistical purposes and therefore, its remaining balances (which were not transferred to Bank of Cyprus Public Company Ltd) are excluded from the outstanding amounts. However, according to the statistical guidelines of the European Central Bank this should not be considered a financial transaction and therefore an adjustment to remove its impact is included under “reclassifications adjustments” with a negative sign."

• So, this round of data finally includes the merger of the good part of Cyprus Popular Bank (Laiki Bank) into the Bank of Cyprus and the hiving off of the bad bit. There is a big drop in the headline stock of deposits since the Laiki depositors which will be written down have been moved to the bad bank. This bad bank no longer exists as a financial institution. Therefore the money has exited the deposit base since it is no longer part of the financial system. This reduces the stock of deposits but doesn’t show up as a flow since it was simply reclassified.

• The total amount which has been moved to the bad bank and disappeared into the ether is €3.8bn (i.e. the difference between the headline €5.3bn change in deposit stock and the €1.5bn in monthly deposit outflows). A move which was expected but has been very poorly explained (we attempted to contact the Central Bank of Cyprus to confirm all of the above but it seems they close at 2.30pm during the summer!).

• All that aside, the outflows are pretty similar to last month in both size and breakdown (split between domestic residents and the rest of the world). Ultimately, money continues to leak out despite the capital controls or people continue to rapidly wind down their savings. Neither presents a pleasant prognosis for the future of the Cypriot economy.

As we have said before the real test will come when the capital controls are finally removed, although that does not seem to be on the horizon in the near future.

The new Eurobarometer is out. Here's what you won't find in the European Commission's press release

The latest Eurobarometer is out, and as per tradition, the European Commission does its best to spin the findings of a survey that, particularly since the eurozone crisis broke out, hardly makes for happy reading.

The press release accompanying the latest Eurobarometer carries the headline, "A greater dose of optimism", which is justified by the fact that "those saying they are optimistic about the EU's future outnumber those who say they are pessimistic in 19 out of 28 countries".

Now, here are a couple of findings from the same survey that you won't find in the European Commission's press release (but are available here):

• The number of those who "tend not to trust" the EU is again at 60% - a +3% increase from the previous survey. The total figure includes 83% of Cypriots (+19% from the previous survey), 80% of Greeks (-1%), 75% of Spaniards (+3%) and 71% of Portuguese (+13%). To be fair, the level of confidence in national governments/parliaments in these countries is even lower - but that shouldn't be of great consolation.

• On the question "do you feel a citizen of the EU?", a majority (62%) of respondents agree, although in three countries more people disagreed than agreed with this statement. That this includes the UK may not be a big surprise, but that Greece and Cyprus are on there as well shows how badly the crisis management has tarnished the EU's reputation.

• A relative majority of Europeans have a neutral image of the EU (39%, =), and the proportion of respondents for whom it conjures up a positive image continues to be just higher than the proportion for whom it is negative (30% positive, unchanged; 29% negative, unchanged). Again, in Greece, Cyprus, Spain and Portugal a majority (sometimes relative, sometimes absolute) of respondents have "a negative image" of the EU.

• Two-thirds of Europeans say that their voice does not count in the EU (67%), a 3-point increase taking this score to its highest level since autumn 2004 when the question was first asked. This proportion has increased almost continuously since spring 2009, from 53%. Only just over a quarter of respondents (28%, -3) agree that their voice counts in the EU.

• 49% of total respondents don't think the EU "makes the quality of life better in Europe", compared with 43% who think it does.

• On the euro, public opinion is hugely divided with only a 9% net approval rating - 51%, support it and 42% oppose it. In countries that are euro members approval stands at 62% (down 4% since Autumn 2012) but only at 29% in non-euro countries. 

Cypriot deposit outflows continue but slow in May

As we reported last month, the outflow of Cypriot deposits has continued apace despite the continuation of capital controls (even once the impact of the bank restructuring is stripped out the outflows have totalled around €3bn for each of the last two months).

Judging from the above graphs (click to enlarge), there seems to have been some improvement in May with the outflow slowing to €1.4bn. This remains a sizeable amount given the continuation of the capital controls.

Of the outflows taking place it seems fairly evenly split between domestic depositors and those from the rest of the world. The outflows also seem to be split fairly evenly across sectors. It’s hard to draw any stark conclusions from this set of data. It seems that both households and firms are continuing to draw down their deposits at a rapid pace and those foreign firms which can withdraw money are still doing so, albeit in small amounts.

The question remains, with Cypriot growth prospects looking so bleak, when and where will this outflow stop?

Full letter from the Cypriot President to the Troika slamming Cypriot bailout

As we reported last week in our press summary and which the FT is today reporting on (and presenting as a bit of a scoop), Cypriot President Nicos Anastasiades has sent a scathing letter to the EU/IMF/ECB Troika slamming the terms of the Cypriot bail-out/bail-in package and calling for it to potentially be re-examined.

Below we post the letter in full, courtesy of the Cypriot website StockWatch, which published it over a week ago (added emphasis ours):

I am writing to update you on the economic and banking system developments in Cyprus following the Eurogroup decisions of last March and to request your support regarding a number of very pressing issues which need to be addressed the soonest.

1. The Cypriot economy is adapting to major shocks

The Cypriot economy is adapting to major shocks. Substantial private wealth has been lost and a significant number of Cypriot firms have lost their working capital at the two systemically important financial institutions which were subject to the bail - in. Restrictive measures, including capital controls, are seriously hampering the conduct of business and confidence in the banking system has been shaken. As a result the economy is driven into a deep recession, leading to a further rise in unemployment and making fiscal consolidation all the more difficult.

2. Application of bail-in was implemented without careful preparation

It is my humble submission that the bail-in was implemented without careful preparation. Its form was changed drastically within a week. Originally designed as a general bail-in across the banking system, it eventually became focused on the two distressed banks, the Laiki Bank and the Bank of Cyprus (BOC). There was no clear understanding of how a bail-in was to be implemented, legal issues are being raised and major delays in completing the process are being observed. Moreover, no distinction was made between long-term deposits earning high returns and money flowing through current accounts, such as firms' working capital. This amounted to a significant loss of working capital for businesses. An alternative, Ionger-term, downsizing of the banking system away from publicity and without bank-runs was a credible alternative that would not have produced such a deep recession and loss of confidence in the banking system.

3. Cyprus was forced to pay the cost to ring-fence Greece but no reciprocity has been granted

Another feature of the current solution was that deposits at the branches of Laiki and Bank of Cyprus in Greece were spared from a haircut to prevent contagion. These deposits amounted to €15 billion. The wish to avoid contagion to Greece was also evident in the Eurogroup's insistence that Cypriot banks sell their Greek branches. In addition and as a result of the sale, the Cypriot banks have lost their Greek deferred tax assets. As understandable as ring-fencing may be, this was absent at the time of deciding the Greek PSI in relation to the Greek Government Bonds which cost Cyprus 25% of its GDP (€4.5 billion). The heavy burden placed on Cyprus by the restructuring of Greek debt was not taken into consideration when it was Cyprus' turn to seek help.

4. Imposition of Laiki's ELA liability to Bank of Cyprus

The implementation of the sale of the Greek branches of the Cypriot banks, as urged by the Eurogroup, resulted in Laiki selling assets that were pledged against its ELA liability to Piraeus Bank, without Piraeus assuming the corresponding ELA liability. As such, Laiki was left with the related ELA liability but without the aforementioned assets. The ELA liability which was left "unsecured" as a result of the sale amounts to around €3.8 billion and was imposed on Bank of Cyprus as a result of the Eurogroup decision. It is worth reminding that a substantial part (in excess of €4 billion) of Laiki's ELA liability was required in the first place in order to cover deposit outflows experienced by Laiki's Greek branches.

Bank of Cyprus itself has a total ELA liability of around €2 billion. By taking an additional €9 billion from Laiki, which was accumulated over the course of the last year under very questionable circumstances, BOC has substantially increased the vulnerability of its own funding structure, with its cumulative ELA liability reaching a very high €11 billion. BOC was called to pledge its own assets to cover for the collateral shortfall for the €3.8 billion liability carried over by Laiki. Such a high amount of ELA liability hinders BOC's funding sources as the room for obtaining additional ELA is limited. The imposition of Laiki's ELA liability on Bank of Cyprus is the main contributor to the liquidity strain Bank of Cyprus faces.

5. Urgent need for Troika to provide a long-term sustainable and viable solution to the liquidity issues Bank of Cyprus is facing as a result of the Eurogroup decisions

Instead of addressing the issue of severe liquidity strain on Cyprus' mega-systemic bank through a long-term sustainable and viable solution, the Troika partners seem to have chosen the path of maintaining strict capital restrictions. Artificial measures such as capital restrictions may seem to prevent a bank run in the short term but will only aggravate the depositors the longer they persist. Rather than creating confidence in the banking system they are eroding it by the day. Maintaining capital restrictions for a long period will inevitably have devastating effects on the local economy, will also affect the country's international business and will have an adverse impact on GDP. Under such scenarios spill over effects will no doubt register on other local banks through higher non-performing loans as a result of dampened economic activity. In addition, increased deposit withdrawals from other local banks, as fear of lack of liquidity of the only systemic bank will have a domino effect on the entire banking system.

I stress the systemic importance of BOC, not only in terms of the banking system but also for the entire economy. The success of the programme approved by the Eurogroup and the Troika depends upon the emergence of a strong and viable BOC. It is for this reason that I urge you to support a long-term solution to Bank of Cyprus' thin liquidity position. Such a solution will re-instate depositor confidence in the banking system and will allow the full functioning of the economy away from restrictive measures and capital controls. It will also facilitate the attraction of foreign direct investment in Cyprus.

My Finance Minister has alerted the Troika Mission Chiefs in writing on 19 May 2013, in relation to the need to implement a long-term viable solution to Bank of Cyprus' liquidity position. No response has been received yet.

A possible long-term solution could be the conversion of part of Laiki's ELA liability into long term bonds and the transfer of these bonds and corresponding assets into a separate vehicle. Another solution could be the reversal of the Eurogroup decision in relation to the merger of Good Laiki (carrying the €9 billion ELA liability) into Bank of Cyprus. In any case the BOC should exit resolution status without any further delays and should be granted eligible counter-party status by the ECB. Of course more options need to be examined. I should mention that an interim Board and an interim CEO is already in place at BOC and the final asset valuation is progressing according to schedule.

I urge you to review the possibilities in order to determine a viable prospect for Cyprus and its people. The new government of Cyprus, despite its expressed disagreements, has abided by the Eurozone decisions and remains determined to implement the programme fully and effectively. I am personally determined to lead Cyprus out of this dire situation and towards a path of sustainable growth and development. We are also fully committed to re-establishing Cyprus's stance as a credible EU partner. However, at this crucial juncture, we are calling upon you for active and tangible support.

Very strong stuff indeed. We can't imagine the Troika will take to it too kindly.

Cypriot deposit developments

Update 31/05/13 09:40: As we noted below, it seems that the figures do include some of the write-downs of deposits under the bank restructuring (but not all). Apologies for the confusion. As the Central Bank of Cyprus notes the initial write down for Bank of Cyprus depositors is included. This totals around €3.2bn. This means the actual outflow was around €3bn, similar to the previous month.

This is still fairly significant, although we expect much of this may be domestic and due to people and businesses running down their cash reserves. This also likely reduces some of the concerns over the workings of the capital controls. The data does give some feeling for who might be losing from the bank restructuring - US Dollar depositors and foreign NFCs are probably a large share. The concerns over the bank deleveraging and increasing reliance on central bank financing also remain (since they were already well established).

The real test of the deposit flight will come, firstly once the bank restructuring is complete (by end of July) and secondly once the capital controls are removed (who knows when).

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Yesterday saw the release of the latest data on the state of bank deposits in Cyprus – which always makes for interesting reading.

The headline figures are pretty terrible. Overall deposits declined by €6.346bn (10%) in April, almost double the level seen in March (when the crisis was in full swing) - despite stringent capital controls being in place for the entire month. However, given their importance, these figures deserve delving beyond the headlines.

The charts above (click to enlarge) raise some interesting points:

• First, it’s clear that the deposit flight is continuing despite the strict capital controls. This is concerning, since it shows the Cypriot government’s inability to enforce the rules, particularly on the financial sector. It also means that capital controls continue to hamper the functioning of the Cypriot economy, but are failing to stop an outflow of money (though admittedly it could have been much larger without them).
• Second, the outflows are split between domestic residents and those in the rest of the world (ROW). ROW deposits are unlikely to return for some time. Cyprus could hold out hope that domestic residents are just stashing cash due to concerns over the economy and banks, meaning this money may eventually return. Unfortunately, given the bleak outlook this is unlikely to happen anytime soon.
• Third, a surprisingly large amount of the withdrawal (€3.2bn) has come from deposits held in US dollars. This money might also have moved abroad and is unlikely to return, suggesting both domestic and foreign investors are moving money away from Cyprus.
• Lastly, much of the withdrawal has been by non-financial corporations (NFCs) and households. This was perhaps more predictable, but again raises concerns about the future of investment and consumption in the economy. The underlying data shows especially strong withdrawals from ROW households and NFCs which have been a big source of economic growth for Cyprus in recent years. It could also peak concerns over the impact the capital controls are having, as firms and households are forced to eat into their cash reserves (although they still remain at a decent headline level).

One important point to keep in mind concerns the losses for some uninsured depositors under the bank restructurings. It is not clear from the Central Bank of Cyprus figures whether this has already been accounted for in the data above, although this looks unlikely since the process is still continuing. That said, if it has been, then the actual withdrawals are smaller - though still high. The overall economic impact also remains similar.

What does all this mean for Cyprus and the eurozone?

• Much of it confirms what many people feared in the aftermath of the crisis. In particular, it paints a bleak picture for future growth in Cyprus as money flows out of the economy. It also raises questions over whether such outflows were accounted for in the overly optimistic assumptions about Cypriot growth.
• Another problem will be bank financing. Cypriot banks are locked out of the markets and may well be for some time. With deposits falling they will be forced to access more ECB liquidity and possibly the Emergency Liquidity Assistance (ELA). This is something which the ECB has notoriously been trying to avoid in Cyprus, and more generally. Not least because under any future restructuring/default/euro exit scenario the ECB would face larger losses.
• But it’s also important to remember that there is a limit to how much Cypriot banks can access through these facilities since they require assets to be posted as collateral. Even if they are able to, it is clearly possible that this pressure could force them to increase the already rapid pace of deleveraging. This would undoubtedly further hamper lending to the real economy and in turn economic growth.
• As noted above, from a wider perspective it will increase already pressing concerns over the enforcement of the controls and more generally over regulation of the financial sector in Cyprus.

Cypriot parliament narrowly approves bailout deal but plenty of hurdles yet to overcome

The Cypriot parliament has officially approved the bailout deal that the government agreed with its eurozone partners and the IMF. (See here for our previous thoughts on the deal).

A rejection of the deal would probably have led to a Cypriot exit from the eurozone. Given such serious consequences it was an incredibly close run vote with 29 in favour versus 27 against (often for such votes politicians shy away from risky decisions).

We’re yet to get the final breakdown of the votes but here are the early predictions (we will update this with final figures when we have them):

The government is likely to breathe a sigh of relief but it should not view this as the end – it is surely only the end of the beginning at best.

As we have noted at length before, the prospects for Cyprus are bleak. Growth is set to crumble over the next few years, while capital controls remain in place, keeping it at the edge of the eurozone (with close to a separate currency since Cypriot euros are clearly no longer worth the same as euros elsewhere). As recently as last Thursday, the controls were extended for 16 days and despite being eased at points, there is no clear plan for how or when they can be removed (strangely the responsibility for the rules seems to have switched from the Central Bank to the Ministry of Finance while the lengths of the extensions have ranged from 3 days to 16 days at random intervals – not effectively a decisive or clear policy approach).

Despite the vote being approved it is also clear that politics in Cyprus remains fractured. 29 MPs feel strongly in favour of the bailout programme and the associated actions, while 27 MPs were effectively willing to see Cyprus leave the euro rather than implementing the bailout deal. Meanwhile, the rift between the Central Bank and the government shows little signs of abating.

Surely, effective reform and governance will be tough in the future, especially as the anti-austerity feeling amongst the general public rises.

For a taste of this just see the quote from Green MP George Perdikis after the vote:

“A 'yes' from Cyprus's parliament is by far the biggest defeat in our 8,000-year history. Its democratically elected representatives have a gun to their head to agree to a deal of enslavement.” 

The Cypriot government has negotiated a large hurdle but the biggest challenges may yet be to come.

Public support for the EU drops by 16% in one month: is popular support for the euro in Greece finally about to wane?

As we've noted in the past, a factor that will determine whether the eurozone can hang together in the long term is the extent to which the public in the South begins to see the euro and EU austerity as synonymous.

For example, despite everything that has taken place in Greece, this has not been the case, with a majority of Greeks consistently in favour of remaining inside the euro. The choice is instead perceived as being between austerity or some form of alternative. This is why we rightly predicted that Greece would remain inside the euro following its hectic dual elections last year (at a point when many analysts were predicting an imminent Grexit).

But is this now starting to change? 

Possibly.

A new Public Issue poll shows that 66% of Greeks now have a "negative opinion" about the EU. For a country that has traditionally has been staunchly pro-EU, that's bad enough. But extraordinarily, when the same question was asked only a month ago, 'only' 50% of respondents said that had a negative opinion  about the EU- a massive 16% increase in only a month, possibly owing to the handling of the Cypriot bailout and the renewed Troika push for civil service cuts in Greece. Those with a positive view dropped from 48% to 31% in the same space (see the graph below).

A separate poll by Marc for Alpha TV asked the question, “In case it’s not possible to improve the conditions of the loan agreement, what do you think we should do?” 53.8% answered "remain in the EU and the euro", while 41.3% said they wanted to "leave the EU and return to the drachma" (4.9% don't know). Note that this was a question about leaving the EU, not only the eurozone. Whilst still a majority in favour of sticking around, to our knowledge, there has been no Greek opinion poll to date with such a large share in favour of leaving the euro and the EU.

Incidentally, the Public Issue poll also asked who respondents wanted to see as Prime Minister. Top candidate? “None”. (see graph)

We're not drawing any firm conclusion from this, although if this trend continues it will be significant. Currently a majority of Greeks believe that things "would be worse" outside the euro. It's worth listening to our interview with leading German economist Hans-Werner Sinn, which we published today, on the prospects for Greece in the euro. One thing is clear: this won't be easy.

Aufstand im Bundestag: Who are Germany's most rebellious MPs?

On Thursday, the German Bundestag is expected to vote on the Cypriot bailout. The package is likely to be approved with a clear majority - the opposition SPD and Greens will mostly back it. In addition, the symbolically hugely important "chancellor's majority" - the threshold for the government to get an absolute majority with only the votes of its own MPs - is likely to be reached as well. Only around 12 MPs from the coalition parties (CDU, CSU, FDP) are likely to vote against. This is not particularly surprising. Remember, the bill for this rescue package was largely passed on to Cypriot depositors, and therefore enjoys much greater support in Germany.

Still, with the eurozone bailouts remaining ever-so contentious - and with a new anti-euro party on the German political scene - we thought we'd see how many coalition (CDU, CSU and FDP) MPs have so far rebelled on the various eurozone bailout votes. 

As the table below shows (click to enlarge), according to our calculations, at least 36 MPs have rebelled against Merkel on at least one occasion. Four MPs - Klaus-Pieter Willsch & Manfred Kolbe (CDU), Peter Gauweiler (CSU) and Frank Schäffler (FDP) - have a 100% record in rebelling on eurozone votes - for the rest, there's a surprising spread.

Are Cypriots really wealthier than Germans? And is there some great hidden wealth that southern Europe can tap into?

Yesterday, the ECB released its first survey on household wealth, which produced some surprising results – not least that Germany (on paper) seems to have one of the lowest levels of median wealth, below that of bailed out countries such as Cyprus and Greece. With the German anti-bailout mood on a high, this kind of stuff is poltically quite explosive - and it was all over German press this morning.

But what about the actual survey? Undoubtedly an important effort to increase the level of data on this aspect of the eurozone economy (important for spotting future crises) but the survey itself suffers from some serious flaws.

Much has been written about this already so we won’t regurgitate all the arguments but here are the key flaws as we see them:

• Much of the data comes from 2010, with some even going back as far as 2008. This makes cross country comparisons tricky (due to distortions from the crisis) but also means that the fall in wealth in the non-core eurozone countries will not be picked up by the data.
• Households are much larger in the southern countries – particularly with more working adults living under the same roof.
• The key distortion comes from the huge disparity in home ownership, it reaches levels around 80% in southern countries compared to 44% in Germany. Not only have house prices fallen significantly since 2010 in the southern countries but they have much further to fall. The point being that these prices remain inflated from the bubble (partly due to bank forbearance and slow adjustment), meaning that the ‘wealth’ they represent is not really there (see more on this below).
• As Luxembourg and Cyprus demonstrate the influence of large financial sectors and huge foreign investments can also have a significant distortionary effect on the figures.
• Various levels of wealth inequality across the economies also skew the figures.

Even with those points in mind though, some have argued that this survey demonstrates that there is huge wealth in the southern countries and that they should not therefore be receiving bailouts.

So why can't this 'wealth' in southern economies simply be tapped to help fund struggling governments? Well, it may not be that simple. Consider the below:

• A government decides it wants to tap into the ‘wealth’ of its citizens. Since much of this is home ownership, the best way to do this would be a property tax on the value of homes (this could equally be extended to other assets as a wealth tax) – say around 5% for illustrative purposes here.
• The government institutes the tax, but people struggle to pay because, as the survey showed, despite high ‘wealth’ they are struggling with income and cash flows. Many households are also heavily indebted and in negative equity on their mortgages.
• People across the country rush to sell their houses to avoid the impact of the tax. There is little new demand (foreigners certainly don’t want to invest), so the influx of supply cause house prices to crash.
• The tax instantly fails to receive much revenue, but the knock-on effects are worse. Many people are pushed into insolvency and default on their mortgages and other loans.
• Domestic banks (large in many of these countries) are hit hard by this and see their losses spiral. They reduce lending further, harming economic growth and forcing business to lay off more workers.
• Some banks may even need to be recapitalised, something which the government can ill afford and may possibility prompt a bailout request (what we were trying to avoid in the first place).
• Added uncertainty and depressed economic outlook push up government borrowing costs.

Admittedly, this is an extreme scenario (it also works best applying it to a country such as Spain). But it serves to highlight the point that, much of this ‘wealth’ is left over from from the previous boom. This has long been clear to many, including us, who have predicted house prices will fall further in countries such as Spain (which the Commission also said today in its report on macro-economic imbalances) – thereby eroding this wealth. Tapping into such ‘wealth’ is incredibly difficult, since when you move to catch it, it evaporates.

That banks in many of these countries have been pushing forbearance (delaying foreclosure) is further evidence – if this wealth existed in the housing market surely they would have been better of forcing foreclosure and seizing the assets (admittedly some legal questions but the broad point stands). Furthermore, public assets sales such as those pursued in Greece look like great revenue sources on paper but in practice have produced limited success, partly due to lack of demand.

There are plenty of arguments against taxpayer-backed bailouts - moral hazard, political divisiveness, debt sustainability problems, inefficiency and unfairness (to name but a few) - without over-reading this survey.

Cyprus bailout: What are individual EU member states on the hook for?

Now remember, contributions via the European Stability Mechanism (ESM) are loan guarantees, not upfront cash. But here's the break-down of how much each EU country is on the hook for in the Cyprus bailout:



Update 05/04/2013 12.10: 
By popular request, we've been asked to put together a quick explainer/refresher of how this money will be provided. ESM loans do not require direct cash from countries but are based off loan guarantees which the eurozone countries give to the ESM. The ESM then issues debt on the market to raise the actual cash to provide the bailout loans. So, not extra cash contribution on the back of this bailout. That said, the ESM does require paid-in capital (€80bn), the payouts of which should have been factored into eurozone government budgets and certainly has been included in the bailed out countries. Also due to a eurostat ruling, each eurozone member's share of ESM bailouts will not count towards its national debt. As for the IMF, the funds usually come from the IMF's general reserve fund which countries will have already contributed their subscription (see here for more details). Again, in a sense, no new cash.

Where will Cypriot growth come from?

This is now emerging as the key question for Cyprus following the severe mishandling of its bailout. The financial services sector, along with real estate and related businesses, which accounted for around 30% of Gross Value Added in the economy is now essentially gone as a source of growth.

Cyprus’ main trading partners, Greece in particular, remain mired in recession. Its two largest banks – key employers – will be restructured and unemployment will undoubtedly rise. Meanwhile, the government will be cutting spending and raising taxes, laying off public sector workers and embarking on some strict labour and product market reforms – as part of the standard Troika bailout package. Many of these reforms are needed but as we have seen across Europe, when combined with other impacts mentioned above, a downward spiral can be created.

The key hope for growth remains tourism. However, with the euro remaining strong and the prospect for political and social unrest in Cyprus still high, it is difficult to see a huge boost in this area. It will continue to truck along but is unlikely to fill the gap left by other areas of the economy shrinking. As we have discussed before, the prospect of growth from large gas revenues remains a pipe dream for now.

With all of this in mind we have put together a comparison of some of the previous growth estimates, along with the implicit ones included in the latest troika report and some of OE’s initial (optimistic) projections (click to enlarge).

All of this remains uncertain, depending on when capital controls are removed and how investors respond but it does not make pretty reading. All previous hopes for the economy are off the table and expectations need to be severely adjusted. The Troika's estimates are very optimistic, particularly in terms of returning to rapid growth in 2015 and 2016. Furthermore, if the growth estimates included in the bailout prove to be overly optimistic it means Cyprus will, just as Greece did, require further financial assistance.

Details of Cypriot bailout agreement filtering through

The package is coming together. The IMF has officially announced that it will take part in the Cypriot bailout, providing €1bn of the total €10bn in loans - that gives a UK share of around €50m (see our thoughts here on UK IMF shares). That leaves €9bn to be provided by the eurozone, likely through the ESM. Below we breakdown the country shares (click to enlarge):

Other details of the Memorandum of Understanding (MoU) filtering through include:

• 2.5% interest rate on the loan, with a 10 year grace period on repayments, it will then be repayable over a 12 year period (repayments start in 2023 and finish in 2035).
• 4.5% in cuts/savings to be found before 2018 (on top of the 7% already scheduled by 2015) to drive Cyprus from a 2.4% primary deficit now to a 4% primary surplus in 2018 (two years later than previously envisaged).
• The figures given in the MoU leaked yesterday (which reports suggest are the same in the final agreement) imply an 8% contraction in GDP this year and 3% next year. This seems optimistic and could be closer to 10% and 5% respectively, if not worse, but ultimately depends on how long the capital controls are in place for.
• Eurozone officials will review the agreement tomorrow, with a final proposal to be presented on 9 April, which eurozone finance ministers are expected to approve at an informal Eurogroup meeting in Dublin on the 12 April.
• The Bundestag could vote on the deal around the 15 April. IMF board expected to approve the deal in early May.
• First tranche of bailout funds expected in early May, ahead of debt maturing at the start of June which Cyprus needs to pay off.

A few hurdles left to jump then in terms of approval from national parliaments – which is no mean feat given that the figures underpinning the bailout are likely to come under some well-deserved scrutiny.

A turbulent Easter in Cyprus

Uncertainty continues to reign in Cyprus. Cypriot Finance Minister Michalis Sarris resigned this afternoon, seemingly confirming the earlier (denied) rumours that he had previously tried to resign and bringing to a close what must be one of the shortest stints as finance minister in recent history (35 days). To add fuel to the fire, initial reports suggest he resigned due to the on-going investigation into people moving funds out of Cyprus ahead of the bailout. Fortunately, unlike other aspects of the crisis, the Cypriot government has wasted no time in appointing a successor with Labour Minister Haris Georgiadis already lined up to fill the role.

Meanwhile, as we noted in today’s press summary (and have repeatedly suggested) the capital controls look set to last for much more than a week.We also highlighted some interesting comments by the President of the Cypriot Parliament Yiannakis Omirou who said:

“I would like to send a message to the Cyprus people that there is no other way, there is no alternative apart from freeing (the country) from the troika’s and the memorandum’s bonds…by leaving the troika and the EMS behind us, we will ensure our national independence, our national sovereignty, our moral integrity and our economic independence…If we remain bound by the Troika and the memorandum Cyprus’ destiny is already foretold and there will be no future.”

Clearly not one to mince his words.

Furthermore a draft version of the loan agreement between the EU/IMF/ECB Troika and Cyprus (the Memorandum of Understanding) was leaked yesterday. It drove home another point which we have flagged up before. Despite all the talk about depositors and banks, Cyprus is still getting a €10bn bailout, that will mean undergoing the fiscal consolidation and structural reforms (widely referred to as ‘austerity’) witnessed in the other bailout countries. The key points of the agreement confirm this:

• 7.25% of GDP in fiscal consolidation between 2012-2016.
• Freeze in public sector pensions and a two year increase in the retirement age.
• Implement a four-year plan as prepared by the Public Administration and Personnel Department aimed at the abolition of at least 1880 permanent posts over the period 2013-2016.
• Increase the statutory corporate income tax rate to 12.5%.
• Increase the tax rate on interest and dividend income to 30%.

These are but a few of the measures and the document remains incomplete. The impact on GDP is likely to be significant, while youth unemployment is already at 31.8% (total at 14%) – this is likely to rise substantially.

To add to all this, reports continue to abound about outflows of deposits before the bailout, while the banks were closed and people now trying to skirt the capital controls. Significant questions are being asked about the enforcement and implementation of all these rules. With a decision on whether to extend capital controls expected on Wednesday evening or Thursday morning the uncertainty is likely to continue.

The Great European Bank Run that never was?

Journalists were descending on banks across Cyprus this morning to monitor whether Cypriot depositors would rush to withdraw their cash as the country’s banks opened after being closed for 10 days. So far, however, there have been virtually no dramatic scenes of desperate people flocking to ATM machines and banks. There’s a feeling of calm. Those who expected Northern Rock style scenes have been left disappointed. However,  a couple of points:

• First, there’s no hard data available yet for deposit withdrawals in March, so everything is based on anecdotal evidence. There have been numerous press reports speculating about withdrawals in the run up to the bailout and even while the banks have been closed. Unfortunately, these are unlikely to be confirmed or disproved for at least a month (when data is expected).
• Remember, there are limits on what people can withdraw and/or transfer electronically. People may not be too bothered about waiting at banks if they are subject to strict limits.
• Obviously, in this day and age, much banking is done electronically so the number of people at the actual bank branches may not reveal the true level of transactions taking place behind the scenes. This is particularly true for Cyprus given the high level of foreign depositors who would have to bank electronically.

In the meantime the latest data on deposits in Cyprus in February was released this morning. Total deposits fell from €68.4bn to €67.5bn – a 1.3% fall, but not exactly as disastrous as some may have expected.

At the same time, as we predicted, depositors elsewhere in Europe – in particular Spain and Italy – have so far shown zero inclination to see themselves as next in line. There has been, however, a drop in banks shares in the wake of comments by Eurogroup Chief Jeroen Dijsselbloem.

So not the big collapse of everything that some expected, but, the capital controls are likely to play a role in mitigating this. As we have pointed out, the real challenge comes when the Cypriot government looks to remove capital controls and once the data on electronic transactions out of Cyprus becomes clearer.