Interpreting Middle East Economic News and Analyzing Market Trends

Dubai Group’s investment in Cypriot bank goes from €1.4 billion to zero in record time

There were not many winners in Cypriot banks recently, certainly not Dubai Group.  The death of the financial system in Cyprus was cheered by EU leaders who fought hard to have Cyprus close loopholes for wealthy Russians.  Many of the seized uninsured bank accounts were thought to be Russian own, but later word got out that a lot of Russians took their money out before the bank closures in Cyprus or during the closures via the banks’ international branches.

 

In another interesting twist, it turns out that the President of Cyprus tipped off his buddies ahead of time so that they can get their money out.  Parliament decided to investigate the “leakage” of money since it seems to be a lot… so much so that now they are starting to wonder if they need to steal more of the remaining uninsured deposits in order to cover the amount required by the Trioka.  What’s the amount now, 40%, 50%, or even as high as 80% according to The Wall Street Journal.  The bottom line is wealthy depositors will have little if any money left after this legal theft takes place.

 

Once Parliament realized the extent of the leakage, they wanted to know who was tipped off earlier and took their deposits out.  Well, it turns out that, yes, some Russians took their deposits out via branches in London or Moscow, but 132 other firms and individuals took their money out ahead of time as this list shows.  So the answer to Parliament is that a lot of people knew.  Someone tipped them off and the word spread.

  

So who are some of the other losers in this deal?  It turns out that Dubai Group, the investment arm of the Dubai government lost nearly all its investment in Laiki Bank.  The remaining 0.5% that is left will be lost or written off soon.

Cyprus Popular Bank – which trades under the brand name Laiki Bank, and was previously known as Marfin Popular Bank, has had its share price collapse since 2007, when Dubai Group valued its stake at €1.425bn (Dh6.7bn).

Once the largest shareholder in Cyprus Popular Bank, it currently holds a 0.2 per cent share in the bank after being massively diluted by a rights issue last year. Dubai Group held an 18.6 per cent stake prior to that point.

Cyprus Popular Bank said last week in a statement to the Athens Exchange that the central bank of Cyprus had appointed a special administrator to split up the bank.

As part of the plan, the bank is to be split in two: its branches will be divided between Bank of Cyprus and Greece’s Piraeus Bank, preserving deposits under €100,000. A “bad” bank, which is to be wound down, will hold any deposits exceeding that limit.

Dubai Financial Group, a subsidiary of Dubai Group, said it invested €625 million in Marfin Popular Bank between May 2006 and the end of that year and had intended to take its shareholding to 30 per cent. It valued its stake at €1.425bn as of March 2007.

The bank’s shares have lost 99.5 per cent of their value since peaking later that year and last traded at 4.5 euro cents each, before their suspension last month. Dubai Group’s stake was heavily diluted as a result of a €1.8bn rights issue, in which the Cypriot government was the biggest subscriber.

Dubai Group, an arm of Dubai Holding, entered negotiations with lenders in 2010 over US$10bn (Dh36.73bn) in liabilities.

Dubai Group “has no meaningful stake any more” in Cyprus Popular Bank and the lender’s administration would have little impact on its debt restructuring talks, said a person familiar with the matter who spoke on condition of anonymity.

Read the full story from The National.

 

The EU and ECB say there is no fear of contagion as a result of these actions in Cyprus, however, Greece has already been complaining that contagion has spread there.  In a recent report, it stated that 1,600 Greek businesses have been crippled as a result of events in Cyprus.  Time will also tell whether depositors in other EU countries begin taking out their deposits from weaker banks.  Our guess is that they have already started.