Interpreting Middle East Economic News and Analyzing Market Trends

EU and IMF ask Cyprus to steal from its depositors in return for bailout

Euro zone finance ministers agreed yesterday on a long-awaited bailout package for Cyprus.  The country has been asking for a bailout of its banking system for a while, but the EU, as you can imagine, has had larger problems to deal with.  Cyprus was asking for $17 billion to shore-up its banking system, equal to its annual GDP.  However, EU finance ministers had a better idea; give Cyprus less than it was asking for, steal up to 10% of depositors money and raise corporate taxes. The theft will take place on Tuesday.  Banks will be closed on Monday so that the theft can take place without a hitch first thing Tuesday morning.  There are so many things wrong with this ‘package’, but first here’s a report from Reuters:

  

The euro zone agreed on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion), but demanded depositors in its banks forfeit some money to stave off bankruptcy despite the risk of a wider run on savings.

The eastern Mediterranean island becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial help during the region’s debt crisis.

In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across the country – euro zone finance ministers forced Cyprus’ savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.

Parliament was due to meet on Sunday to vote on the measure, and approval was far from assured.

The decision prompted a run on cashpoints, most of which were depleted by mid afternoon, and co-operative credit societies closed to prevent angry savers withdrawing deposits.

Almost half Cyprus’s bank depositors are believed to be non-resident Russians, but most queuing on Saturday at automatic teller machines appeared to be Cypriots.

 

Just to be clear, bondholders who shoulder a lot of the responsibility along with the banks in getting into trouble will not take any losses.  Depositors (the savers) who had no part in this debt debacle will take losses.

President Nicos Anastasiades, elected three weeks ago with a pledge to negotiate a swift bailout, said refusal to agree to terms would have led to the collapse of the two largest banks.

Isn’t one of the objectives of the bank regulator to protect depositors?  Let the banks fail, punish the guilty and protect the depositors…. or is this thinking too extreme?

“On Tuesday … We would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis,” Anastasiades said in written statement.

In several statements since his election, he had previously categorically ruled out a deposit haircut.

 

Politicians lie.  There’s no surprise here.

“My initial reaction is one of shock,” said Nicholas Papadopoulos, head of parliament’s financial affairs committee. “This decision is much worse than what we expected and contrary to what the government was assuring us, right up until last night,” he told Reuters, without saying whether he would back the measure or whether he thought it would pass.

Papadopoulos is vice-chairman of the Democratic Party, a partner in Cyprus’s centre-right ruling coalition and whose support in parliament will be crucial to pass any haircut.

Parliament was expected to convene from 1600 local (1400 GMT) on Sunday to discuss the emergency legislation. Without parliamentary approval, a haircut cannot take place.

 

There’s still a chance to save depositors, but….

‘THEFT, PURE AND SIMPLE’

The bailout was smaller than initially expected and is mainly needed to recapitalise Cypriot banks that were hit by a sovereign debt restructuring in Greece.

The deposit levy – set at 9.9 percent on bank deposits exceeding 100,000 euros and 6.7 percent on anything below that – will take place on Tuesday after a bank holiday on Monday.

To guard against capital flight, Cyprus took immediate steps to prevent electronic money transfers over the weekend.

 

The ‘levy’ (theft), is scheduled to take place on Tuesday.  ATMs are already out of cash.  To make sure depositors don’t rush to take out their deposits on Monday (as any rational person would do), banks will be closed.

At one cashpoint in the capital Nicosia, a pensioner couple said they had visited several automatic teller machines without success. “We are trying to pull as much as we can,” one told Reuters, reaching for a wallet containing four debit cards.

“I’m extremely angry. I worked years and years to get it together and now I am losing it on the say-so of the Dutch and the Germans,” said British-Cypriot Andy Georgiou, 54, who returned to Cyprus in mid-2012 with his savings.

“They call Sicily the island of the mafia. It’s not Sicily, it’s Cyprus. This is theft, pure and simple,” said a pensioner.

The levy breaks a euro zone taboo by hitting depositors.

It prompted Spain, considered the next most likely state to seek a sovereign rescue though supported recently by a European Central Bank promise to buy government debt if necessary, to deny savers in other countries risked being similarly penalised.

 

What is to reassure depositors in other EU countries that they will not suffer the same fate?  Spain is already denying it, but then a gain, politicians lie.  This is why there will be a run on other banks in other EU countries, beginning with the weakest.  Spain, you’re next.

The bailout was specific to Cyprus and its bloated banking sector and “could not be extrapolated to any other country,” an economy ministry source in Madrid said.

In Brussels, Dutch Finance Minister Jeroen Dijsselbloem said it would not otherwise have been possible to save Cyprus’s financial sector which, compared with national economic output, is more than twice as big as the EU average.

“As it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders,” Dijsselbloem, who chaired the ministerial meeting, told reporters.

The island’s bailout had repeatedly been delayed amid concerns from other EU states that its close business relations with Russia, and a banking system flush with Russian cash, made it a conduit for money-laundering.

In return for emergency loans, Cyprus agreed to increase its corporate tax rate by 2.5 percentage points to 12.5 percent. This should boost revenues, limiting the size of the loan needed from the euro zone and keep down public debt.

Read the full story from Reuters.

 

Nothing good will come out of these actions.  Even if the Cypriot parliament were to vote down these terms, the door is now open for depositor theft across the EU.  Here are two other takes on this developing story:

 

This Crazy Cyprus Deal Could Screw Up A Lot More Than Cyprus… 

Contagion-Begging Actions; Expect Bank Runs Following Cyprus Idiocy; Have Money in a Spanish Bank? Take It Out Now!

UPDATE:

Parliament postpones vote on bailout until Tuesday.

UPDATE:

Cyprus to keep banks closed until Thursday to prevent depositors from taking out their money.