Interpreting Middle East Economic News and Analyzing Market Trends

Last-minute Cyprus deal approved without vote, offshore finance industry killed in the process

The President of Cyprus reached a last-minute deal with EU technocrats representing the European Union, the European Central Bank and the International Monetary Fund, known as the Troika.  The deal calls for stealing deposits from the wealthiest depositors in the two largest banks.  Depositors at smaller banks are saved for now.  The President’s friends are safe since he instructed them to take their money out of Cyprus last week.  In the end, the Troika gets its two wishes; 1. collect money for its clients (EU banks and investors), 2. kills Cyprus’s offshore financial center.  In the process, Cyprus snubs Russia and Turkey.  Here’s more from Reuters:

   

Cyprus clinched a last-ditch deal with international lenders to shut down its second largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a 10 billion euro ($13 billion) bailout.

The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.

Swiftly endorsed by euro zone finance ministers, the plan will spare the east Mediterranean island a financial meltdown by winding down Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a “good bank”.

Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki’s debts and recapitalize Bank of Cyprus through a deposit/equity conversion.

The raid on uninsured Laiki depositors is expected to raise 4.2 billion euros, Eurogroup chairman Jeroen Dijssebloem said.

Laiki will effectively be shuttered, with thousands of job losses. Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution.

An EU spokesman said no across-the-board levy or tax would be imposed on deposits in Cypriot banks, although the hit on large account holders in the two biggest banks is likely to be far greater than initially planned. A first attempt at a deal last week collapsed when the Cypriot parliament rejected a proposed levy on all deposits.

German Finance Minister Wolfgang Schaeuble said lawmakers would not need to vote on the new scheme, since they had already enacted a law setting procedures for bank resolution.

Read the full story from Reuters.

The exact amount taken from bank accounts over 100,000 euros is still unknown.  Estimates range from 20% to as high as 40%!   What would you do if one day your bank takes 40% of your money?  This high level of theft primarily from wealthy offshore depositors (Russians and well as Middle Easterners) is what kills the country’s financial center.

The problems for Cyprus and he rest of the EU are far from over.  This last ditch effort to avert a melt-down in Cyprus was done in typical EU fashion.  It was a mere band-aid and does nothing to solve the key problems facing the EU.

Russia

President Anastasiades upset EU officials when he flew to Russia after the parliament voted against the original plan to steal from all depositors.  The EU was insisting that depositors take a hit in this case for the first time.  Russia has a direct interest in Cyprus, much of the billions being held in Cypriot banks are Russian.  Russia has also been eying the country’s natural gas reserves and strategic location in the Mediterranean.  When President Anastasiades returned from Russian without a deal, he quickly jetted off to Brussels to kiss and make up to get a deal done.

While the average person in Cyprus will spared theft of their deposits, the banking industry in Cyprus is shattered.

Turkey

Turkey also has a vested interest in Cyprus, not only does it control northern Cyprus, it also is trying to take a stake in the country’s natural gas reserves.  Turkey even offered to allow its southern neighbor to use the Turkish Cyprus Lira and dump the euro…. in return for agreeing to the UN reunification proposal from 2004.  Turkey must be asking itself now if it ever wants to pursue joining the EU given the fact that joining the Eurozone is a fast-track to bankruptcy.

What’s next?

The outcome of this bail-in is obvious; the EU gets short-term satisfaction that it saved the day again and saved EU banks.  EU finance ministers are busy today patting themselves on the back for a job well done.  However, once the ink is dry on this deal you will see Russians and all other foreign depositors and investors rush out of Cyprus as fast as they can.  Depositors in other EU countries will start to wonder if they will be next (they will).  Countries with the most stress on their financial system (Spain, Italy, Portugal, Slovenia)  will see depositors flee, especially the largest depositors.  Switzerland is an obvious choice for them, but also Germany and safer EU countries.  This will only put more stress on these countries and their financial institutions.  What the EU doesn’t realize (or doesn’t want to admit) is that they have done more damage to EU banks than any other event or bail-out so far.  The results of these actions will be catastrophic in the years to come and studied in academia in the future.