Saturday, March 16, 2013

The Cyprus Conspiracy II

The title of this post comes from an excellent book TMM would recommend to anyone interested in the rather large historical geopolitical importance of the tiny island of Cyprus. And in TMM's minds, this morning's announcement from the Troika merits a new chapter for this book. For once again, the people of Cyprus have been truly stitched up by foreign powers. TMM issue a passionate plea to the government & peoples of Cyprus to "JUST SAY NO" to this utterly idiotic, stupid idea of haircutting depositors between 6.75% & 9.9% of their money.

TMM believe that this is the worst policy action that European policymakers have come up with to date in this crisis. It simply must be stopped before the upfront wealth hit exacerbates Cyprus' already severe recession as households slash spending in order to repair the hit to their balance sheets (colloquially known as "theft") from this action.

Whenever this policy has been attempted (in Asia in 1997/8, and in Germany in 1919-25) is has failed, either by eventually not being implemented (in the former case), or in total economic catastrophe (in the latter). TMM do not believe the example of the early/mid-1990s in Italy counts here, as it was both negligible (at just 0.6%) and also accompanied by a large devaluation which cushioned the blow and restored competiveness. This is clearly not the case for Cyprus: it is taking the upfront wealth hit that a devaluation would incur, but not gaining any competitiveness as exports become cheaper. This is a clear economic failing in this plan, and will merely result in more of the same as the recession deepens, forcing government debt higher. Reportedly, the Cypriot team were forced into this as the IMF & Germany threatened a haircut of 40%, as would occur in a Euro exit. TMM don't believe this threat: the Troika know just as well as the rest of us that a Euro exit of ANY country brings the Euro down through contagion.

This also fails to consider that many Cypriots have external assets as well, which would provide some cushion in a Euro exit (though TMM are not advocating such a drastic action). TMM believe that Cyprus is about to experience capital flight of a degree not seen by a country since the Emerging Markets crises of the 1990s. The confiscated portion of deposits is being frozen, but now there is no reason why households would wish to hold very much capital in the country - if they can steal from you once, they can steal from you again. And one thing TMM has learned over the years is that you *cannot stop domestic currency outflows*. The Troika have just shouted "FIRE!" in a crowded room: money held in Eurozone banks is not safe, even if it is below the insured limit (more on this below).

Now, onto the implications of this policy action, which TMM believe are far reaching. The Europeans are obviously using the old "this is a one off" line, and a precedent is not being set, but the market, media and population are getting more used to this now. The general approach is to make the borrowers pay in order that French & German banks don't have to take losses. In this respect, TMM cannot understand why bank bondholders have not been restructured. This position is not sustainable, and TMM believe the Cypriot parliament will force this (again, more below). This is a clear repudiation of the legal precedent for creditor hierarchy: *insured deposits sit at the top of the creditor structure* (with only employee salaries & a couple of other minor things higher). The Troika have unilaterally torn up the rule book on this. While attempting to label this as a "tax", it is a clear manipulation of the law, and TMM expect lawsuits both against the banks & government, as well as in the European Court of Human Rights.

More importantly, *de facto, there is no longer a deposit protection scheme in the Eurozone*. This, in TMM's view, will lead the capital flight out of Cyprus to spill-over as contagion to the rest of the iPIGS, with nervous households seeing the news from Cyprus that their money is *NOT* safe in a Eurozone bank. The Troikia & government are trying to put a spin on the move that the money will be exchanged for bank equity, but this just seems to us like smoke & mirrors to try and make this look less like theft- Cypriot bank equity is worthless given its deposit base is about to leave the country.

One idea TMM have had is whether the depositors (as senior creditors of Cyprus' banks) can form a creditor committee to seize the banks (which are demonstrably insolvent) and put them into administration. Such a move would provide protection under bankruptcy law for the banks' assets (including from the tax authorities), and may well result in a greater return to depositors than under the haircut scenario.

TMM strongly urge Cyprus to say "NO!" to the Troika. This is a truly awful deal that will merely serve to seriously exacerbate the recession, spark massive capital flight from Cyprus & probably spark contagion elsewhere in the Eurozone. Of course there are losses that have to be taken, and a tab to be paid. But this is NOT the way to do it.

TMM believe Cyprus instead should default on its external debt, place its banks in administration (and threaten to restructure their repurchase agreements with the ECB unless the Troika ease off), negotiate a loan extension/reduction with the Russian. Or at least go back to the Troika and threaten to the above. The solution the Troika have imposed entails a good portion of the pain that a Euro exit would involve, but without the positive impact a devaluation would provide in terms of competitiveness gains. Given the circumstances, radical actions are required. Cyprus should not allow the Troika to impose a reparation-like punishment on its citizens for the crime of its banks (with the reported encouragement of the Central Bank of Cyprus [i.e. - the ECB]) in buying Greek Government Bonds. Given depositors in Cyprus have not exactly been able to move their deposits to foreign banks over the past 8 years (lack of banking competition), it is hardly fair to argue that depositors, as lenders to Cyprus' banks, should have known better. So much for consumer protection and in particular the insured deposit limit. The fact that this is occuring without bank bondholders being hit is a complete affront to the rule of creditor preference in law and a CLEAR example of the Germans & French applying one law for themselves and another one for everyone else.

The clear conclusions to TMM are that the Troika have gone too far, and Eurozone deposit insurance is now worthless. The Troika have let the cat out of the bag, and TMM do not think it likely that this will eventually be implemented as it is likely to result in protests, serious rioting, and possible assassinations (given the alleged involvement of the Russian mafia). The market reaction to this is likely to be rather bad.
[TMM apologise for ranting.]


Leftback said...

This is appalling for the people of Cyprus. As cpmppi points out, it's like the old overnight currency devaluation without any of the benefits, so it will be locally deflationary.

I think now we understand something that LB was watching all last week, and commented thus:

"In other action, the US 10y responded to the "hot inflation news" today by.... falling from 2.05% to below 2.00% !!!"

In fact, good US economic news last week was met by buying of USTs, Bunds and Gilts. After midday Friday, Spanish yields went for a little walk uphill for no apparent reason. Someone always knows....

It's hard to predict what Monday will look like, but we can probably guess a few things:

1) EURUSD will cliff dive.
2) Schatz will go bid and go to 0.00% this week.
3) Treasury shorts will be wearing brown undies.
4) European equity beta will be incinerated.
5) DX will spike higher this week, perhaps to 84.
6) Disorderly unwind will reverse carry trades.
7) Growth to value rotation in US equities.
8) Mr Margin might be calling punters this week.
9) Volatility sellers may not have their finest hour.
10) Even Betty might catch a safe haven bid.

Anonymous said...

C Says
Based upon the business that I did in Cyrpus over many years.Upon the close relations I had with a couple of theri elected reps I have to say this piece is pure rant with little to redeem it.

Go skiing.

Anonymous said...

TMM is 100% correct. This is a staggeringly stupid idea that violates the most basic, tried-and-true idea in economics. I am, frankly, shocked and, suddenly, find myself utterly pessimistic about the European project. I imagine that Beppe Grillo will react to this in a predictable fashion and rightly so. With "friends" and "partners" like these, what peripheral country needs enemies.

Anonymous said...

C Says
LB, you have no idea about Cypriot citizens and probably even less idea about the scale of deposits there and who they really belong to.No offence,but I really do know about those issues and they will not be what you expect at all.

9 years ago I had a conversation with a member of the Cypriot cabinet of that time about Cyprus and Europe.They wanted Europe because of Turkey. Years later they wanted the Euro because they had seen what it had done for Ireland. The fact is these fuckers think they are the smartest 'traders' on the planet.Pure Levantine bullshit served up with a smile. Whatever they say you never ever equate that with what they are truly thinking and even less so with what they will eventually do.
Cyprus is an economic and political cesspit without any legal framework that makes it suitable for European inclusion.To that degree if no other Europe has contributed to the problem in failing to understand that.

I can see that there may be some braindead inividuals out there who cannot see what the special circumstances are in Cyprus that demanded a solution like this and are in front of their banks doors on Monday somewhere in Europe. I'd hope they are a minority.

Anonymous said...

C is right

EU trying to kill two birds with one stone. A rescue and a little reminder to offshore money that the times they are a-changin

We for one will not shed any tears on Russian dirty money being haircut by a few percent.

As for, ahem, UK pensioners, one would have thought they learned their lesson with Iceland.


Leftback said...


LOL. LB lived among London's Cypriot community for a few years - this is going to have an impact.
The "brain dead" LB here, who indeed has no idea of the large scale of Greek, Turkish and Russian oligarch deposits in Cyprus etc... Not really sure that pissing off Russian criminals (and by extension their protector, Putin) is a brilliant idea, is it?

I do think, C, that the "little people" of Cyprus who saved their cash for years deserve some legal redress, and that this act is not merely a convenient way of stealing from international criminals to pay the bills but an attack on the people of a nation.

This is going to be trouble, believe me. Incidents in small out of the way places have a way of spreading around the world. There are strong links between Cyprus and Greece, Turkey (obviously) and the UK.

Every nut job on ZH is probably already saying: See! The banks are going to confiscate your account... this is going to cause some nervousness in places like Greece, Hungary, Slovenia and many others.

Anonymous said...

Great post TMM.

A couple of oligarchs with dirty hands might get slammed but stretching it out to every small deposit sets a worrisome precedent. Generalizing it as a one timer would indicate that the mass media and politics brainwashing are doing their jobs. Give a little finger and you lose the hand. This in effect nullifies the deposit guarantee program.

Poor Cyprussians, just living in the wrong place at the wrong time. If it can happen in one part, it should now be able to happen in other parts too. And this policy won't be helping the recession hit peripheries one bit.

Hard not to see a craptastic future for the Union. Now much more sensitivity for capital outflow from even a hint of more socializing and only bad sides of devaluation happening locally if this becomes an ordinary policy. Not forgetting cooling down Russian relations and the Mafia looking for some heads to roll. Hope they pick them well, atleast from the average EU-citizens point of view...

Anonymous said...

TMM's outrage is even more surprising in light of their recent "The Fat Cat and the Mousewife" post, which this commenter believes would have been a more appropriate commentary about the Cyprus situation


Polemic said...

This is getting pitchfork politics on both sides. Serves the dodgy money russians, seems to be a theme. But the pitchfork politics should be the otherway. Its the innocents getting slaughtered in collateral damage due to carpet bombing EU policy that is appaling. You have everyone from ruskies to local farmers to grannies savings to overseas UK servicemen s pay which has to go through a Cypriot bank a/c being hit. And this is coming from the EU.

DD , fat cats and mousewife synergies are apt at one level but the divorce settlement the EU are advocating prescribes drowning the pets and torching the kids.

Anonymous said...

We are terribly old-fashioned in this that we believe that kids get the short stick in a "divorce" anyway. For the common man, what really is the difference between this and protecting the rentiership through pointless austerity.

The broader point to us is that there might be reasons to object (precedents, capital flight risk from Cyprus but also from other periphs etc etc) but the high moral ground we are hearing here and there is not one of them and frankly unappealing.

We also suspect those using the standard bondholders vs. depositors argument haven't checked the agg amount of senior unsecured outstanding. You probably wouldnt be able to pay off Steve Cohen's SEC fine with a haircut on those.


Anonymous said...

What are the probabilities of the Cyprus people revolting against this action?

What are the probabilities of deposit flight spreading to other countries?

Anonymous said...

C Says
Years ago Cyprus was a fairly boring little island with a reasonable standard of living based primarily on tourism. It enjoyed a modest amount of offshore activity attracting sunshine retirees that in general boosted the economy because they were self sustaining eocnomically as you might imagine given their age and socio economic demographics.
Then Cyprus got frightened once again of the Ottoman who appeared to growing in wealth and power.The North/South issue remained unresolved and more importantly unforgiven,or forgotten by both sides.
Cypriot politicians took the easy sell to reach for the European comfort blanket.Europe unknowing ,or caring never realised how different Cyprus really was in terms of it's commercial culture and legal framework.
The EU entry and the prospect of an Euro entry sparked a greed frenzy.Unless you were a goatherder bedding down in a tent then over this entire period being simply being in Cyprus gave you a free luch to so called wealth completely unearned other than by your presence there.
How,or where the free lunch was coming from didn't matter. Driving up fro Nicosia into the split before you enter Nth Cyprus you pass through Prostitute alley run by Russians,but who cares. In Limassol post Soviet wideboys own so much you need two languages ,but who cares.Everybody wins.That shitheap of a falling down wreck in a village halfway up the mountain is already a bigger pension pot than the local who owns it could ever aspire to from the proceeds of their day job.
The retirees happy and can't wait to tell you how little he is paying in tax living in the sun.Wishes he had his deeds,but who cares he is sure he'll get them some day.

The influx of hot money into Cyprus gave even the little guy the legup that enabled him to keep on voting for govts that would keep that music playing for them.

Finally we arrive at that point that always comes after the meal.Cheque please.And no one wants to pay,surprise surprise.

When you effectively give people something that they implicitly have not had to work for they are never going to be happy to give some part of it back. In effect we are seeing that here in the UK where we squandered billions expanding a public sector that we cannot afford. Nearly 3 years into a payfreeze with headline inflation that as run above 5% the overall effect of that has been to erode their stored capital value by double figures.It was a similar outcome to Cyprus just a different method to deriving it.Albeit this process takes a little seeing so it will escape the attention of many.

While you bleed for the little guy bear in mind the question who benefitted.There are imo no innocents in that respect.Virtually everybody got a piece of the skim from being in the game.Now they pay some of it back.Not all mind you,just some of it.

Europe has behaved though no differently from RIO,BHP,RBS, etc etc etc.
They have overseen an expansion of their entity without true regard for content and fit.Deception from wouldbe entrants has been rife making that process even more inappropriate.
Europe never gave itself the chance to truly try and consolidate the growth that had taken place over 30 years beofre embarking on ever greater expansion. It appears nothing has changed in that respect.If they had learned anything from some introspection they would completely freeze expansion at this point until they had completed the resolution of their journey to date with all it's attendant problems.However,self interested fuckwits don't learn that well because they just don't know how to listen.

In conclusion,I would reserve my sympathy for a cause and some people who truly deserve it. This isn't it.

Anonymous said...

oh and Cyrpus isn't a "few oligarchs" my friend. A veritable horde of Russians bought and paid for Cyprus post glasnost...when the senior partner of a major acctncy groups spends half his working month in Russia and has more russian clients than cypriots you better rethink what you think you know.

cp said...

I have to say, I am rather disappointed by the Schadenfreude expressed in some of the comments here. Certainly there are few innocents, but this is a question of degrees of severity:

The primary reason that Cyprus' bailout is so large as a percentage of GDP is due to the losses that banks made buying Greek Government Bonds (many of them bought in 2010). These decisions were taken by a handful of people and almost certainly taken with the ECB being informed and likely with its implicit blessing (recall the criticism of ex-ECB governor Orphanides who many hold responsibld fof this).

Without these losses, Cyprus' bailout would likely be similar in magnitude to the rest of the iPIGS. Neither the local population, local elites nor the Russians benefited from this. There were two primary beneficiaries: the Greeks and the Germans (who had fo stump up less cash for Greece).

The Russian money laundering propaganda merely eminates from German domestic politics. They had no more to do with Cyprus' boom than corporate deposits in Ireland did with its. It was bank lending decisions. And, as above, the largest part of that was the GGBs. I fail to see how the average guy on the street is culpable for that. Especially when senior debt has not been burned first.

Cyprus' best play now is to default on its external debt, place its banks into administration and again reatructure foreign creditors - Cyprus as a financial centre is finished, there is nothing to be gained by taking the entierty of the pain domestically. And certainly not to give in to German bullying.

Anonymous said...

I don't understand this.

You can argue about the principle of senior unsecured not being hit, but as a matter of practicality, the arithmetics simply don't work. By a long, long, long mile.

You can argue about small depositors being hit. But then again, being the policy tourist that we are, there might have been legal considerations forcing to have everybody involved.

But the concern for the "little man in Nicosia" is puzzling. Why is this solution that much more unfair than previous bailouts elsewhere, where the local taxpayers foot the entire bill? We would argue this is a better deal for the "little man in Nicosia" that it was for the Irish for instance.

There is definitely expropriation and aggressive realpolitik at play, but we don't quite see the immorality (relative to previous PIIGS developments)


Anonymous said...

C Says
CP,your disappoinment aimed at me is only refkected by my disappointment in your lack of knowledge of Cyprus and the historic pathway Cyprus has followed. All implict in your erroneous remark re Russia and Germany.
You have not really seen inside the wrapper we call Cyprus and I can tell that much.On a public forum I am unwilling to illuminate much further than I already have done other than to say you are throwing your sympathy in the wrong direction.

Anonymous said...

C Says
Indeed I will refrain from any more posts on this subject.I'll be in danger of exhibiting my frustration which is simply based upon I know what you don't know.That shouldn't be a basis for ansgst.

Anonymous said...

We have had thoughts in this space about "activity" vs. "assets" (call it income vs wealth or any other form of the same), and that the day would come when the latter would have to pay a little bit more, and the former a little bit less.

This is an interesting example of that process unfolding, helped by the fact that the "assets" in this case have an interesting provenance - hence the populist case in favor of seizing some is more easily made than in other cases.

One should not be surprised by such developments.

Now ... what's the trade?


Charles Butler said...

DD - exactly.

Anonymous said...

So what do we think is top trade here ?

MoreLiver said...

One commentator suggested that the German and IMF suggestion to cut the depos over 100k by 40% later dwindled to 10%, and also included depos below 100k mark because Cyprus wanted it. They did not have the balls to haircut the Russian depos, so they instead fucked up the deposit guarantee and their own citizens...

Your post included in my Cyprus linkfest

Anonymous said...

Surely the issue here is whether the Cypriot parliament decides to call the EU's bluff and call for a referendum on leaving the €. A bank holiday on Monday is likely to be followed by two further days of bank closure on Tuesday and Wednesday while the matter is debated. Tempers and language are likely to be unconstrained. Will Cyprus leave ? Probably not . Will bulge bracket market commentators have a field day talking about the p[ossibility of Spanish and Italian account holders facing haircuts? Probably.
The Monday morning meeting should be fun.

Anonymous said...

Anon 5.13: top trade for now is to check whether you still know where the digipass is for that Jersey bank account.


Leftback said...

It's certainly been a busy weekend of comment. Look, I am defending cp again here, b/c the idea this is justice is plain wrong. Surely, it's completely obvious that most of the crooked Cypriots (aka "the rich") will have moved most of their money into gold, CHF or Swiss banks long ago, just as the Greek crooks (aka "the rich") did last year before the shit hit the fan.

I really doubt that the smarter Russian crooks are dumb enough not to diversify their holdings too. There are plenty of other dodgy banking systems to hide in, the Arabs are known not to ask too many questions and then who know what goes on in Africa?

So who does that leave as the victim? Yeah, that leaves the little guy in Nicosia, the butcher, the baker and the candlestick maker, who probably hasn't benefited from the boom the way the john john builder, developer, loan shark and banker did. It also leaves Granny, who carefully banked the money Stavros sent home from London where he works his arse off doing tiling and painting until he can afford to buy a place to retire to.

Anonymous said...

"Stavros sent home from London where he works his arse off doing tiling and painting until he can afford to buy a place to retire to"

Stavros is on a winner then ,because any small loss he takes here is going to be exceeded by quite some measure by the price reduction on that retirement property he wants to buy.

Leftback said...

Anyway enough of the morality of this, and on to the trade. I think "buy dollars, yen, Schatz, Treasuries and Swissy" is it. Havens, baby....

Early FX action is being steadfastly ignored by the mainstream media, but TMM's favourite risk barometer, EURJPY, is going South in a big way.

In the interests of full disclosure, we might add that we are long JPY and US fixed income, and short EURUSD, AUDUSD and CADUSD, as well as the EEM.

You can just imagine the John-John trading LNKD on margin waking up and wondering what on earth a bank run in Cyprus has to do with the price of social media stocks? Another lesson is about to be learned. Macro isn't Dead, it was just sleeping, and you'd better not be around when it gets out of the wrong side of bed. Can you say, disorderly unwind?

Anonymous said...

What bondholders?

There are essentially zero bonds at cypriot banks to bail in. So can we get our facts straight before having a brain anurism over this.

Anonymous said...

C Says'

LOL..exactly! No one find it a little odd that an economy like this with a banking system of the order of 7 to 8 times GDP is so overwhelmingly liquid (cash heavy).
Place is just one large black bag to go.
You should have seen it running up to July 2005 ;) rats and sinking ships.Fortunately, they found plenty of Russian lifeboats for the crew and they are hoping about now those have not now sprung a leak.

When I think of Cyprus and it's banks I always think of the following from that classic film;

"Butch Cassidy: Ready? OK, when we get outside and we get to the horses, whatever happens, just remember one thing... hey, wait a minute.
Sundance Kid: What?
Butch Cassidy: You didn't see SCHAUBLE out there, did you?
Sundance Kid: SCHAUBLE? No.
Butch Cassidy: Oh, good. For a moment there I thought we were in trouble.
[They both run out of the building, only to be met with gunfire from all sides from the Euro army]
Eurocrat police commander: ¡Fuego!
[a volley of shots is heard]
Eurocrat police commander: ¡Fuego!
[another gun volley]
Eurocrat police commander: ¡Fuego!
[Butch and Sundance die off screen from the guns]

Anonymous said...

anon 6.54, C

1.7b of bank claims - and no subs to talk of among all that
as we have been saying above, you can argue the principle, but there is no universe in which the maths work

as for the Limassol bakeries, sorry, but is the 2010-201x PIIGS depressionomics a better solution for them? we would argue it isnt.

again, with wealth even more unevenly distributed than income, we are surprised that people are surprised (and surprised such asset grabs havent occurred sooner)

as for the trade, hopefully our long gamma trades will stop bleeding, but we wouldnt be surprised if this were again a headfake and much hysteria about nothing (thats what having been beaten up over the past couple of weeks does to your 'amygdala' I suppose)


Gus said...

"Cypriot President Nicos Anastasiades said those who keep deposits in Cypriot banks for two years will get half of the value of the levy in securitized gas revenues."

Gus said...

"It was the position of the German government and the International Monetary Fund that we must get a considerable part of the funds that are necessary for restructuring the banks from the banks owners and creditors - that means the investors," German Finance Minister Wolfgang Schaeuble told public broadcaster ARD in an interview. "But we would obviously have respected the deposit guarantee for accounts up to 100,000. But those who did not want a bail-in were the Cypriot government, also the European Commission and the ECB, they decided on this solution and they now must explain this to the Cypriot people."

Nico G said...

juicy gap on Eurostoxx

as much as i thought Germany and Russian were increasingly best friends, Merkel is doing a monster power play here

let's forget the 'small' accounts they will probably revise the deal to 3 & 13%

so what it looks like from 20000ft is.. Merkel forcing some Russians to pay some money that Greece took from Cyprus banks

...even if some were careful to deposit in Cyprus branches of foreign banks (think SogGen)

so this week we will see how easy it is to mess with Russian money

like LB i thnk... NOT

Secret.Sauce said...

I should have thought that the readership here was clever enough to ignore tag lines like "dirty Russian money laundering," although I realize that bear baiting is great & ancient sport in Britain. Such monies have likely found a much nicer home since then (a good chunk in UK real estate and other assets, no doubt). Do you not think that those with the wherewithal to accumulate gajillions can find better investments than deposits in EU banks?

(Having said that, the upperish-middle class Russian Diaspora that has taken over large swaths of Cyprus is likely to suffer mightily.)

This is about protecting creditors, with a dash of domestic German & French politics thrown it. I share TMM’s hope that parliamentarians will reject this profane proposal. (Anyone know what time the debate/vote is?) Great article TMM – one minor quibble tho – the trampling of seniority precedent was actually set 4 years ago, just ask holders of Chrysler/GM senior debt.

Anonymous said...

SS, I can tell you unequivocally a great deal of Russain money found it's way into Russian banks.That by the way is not a guess.It's not an opinion. It is simply a fact that I know.Was it the only destination,of course not.Was it all "dirty",probably not,but who cares at this stage.Same could be said for other offshore money.It's not always there for illegitimate reasons though we can be sure that some is.In the game of probabilities though what tilts the field is why so much of it remains in cash rather than other forms.

Anyway,it's all a bit academic really.Stepping back from the furor the underlying picture is a trend that displays an ongoing destruction of political credibility across the board and that's a real issue as we have already seen this year ,because it may yet lead to highly chaotic outcomes.

Anonymous said...

Sorry for the typo..."Russian banks" is obviously Cypriot banks.
By the way had it not done so and stayed then Cyprus banks would have been struggling badly,because the EU Savings Directive of July 2005 effectively closed down fairly big parts of their former offshore business.

Anonymous said...

C says'
By the way I a not at all sure this is anything to do with "Russians" .If I had to specualte I would say it is a combnation of factors.The first is the shortage of bondholders to negotiate with as DD suggested. The second though is actually an old issue now.Since early post millenium Europe have been on a mission to basically shutdown offshore activity,and I think this was yet another opportunity to take a pot at that trend.
Merkel doing a bit of political homecrowd pleasing as well seems rather minor.

Secret.Sauce said...

I agree that large amounts of illicit Russian funds went there; my point is only that they didn’t stay for long once they were cleansed – they found greener pitches. Also, such flows have been less the past several years, in part due to economic conditions, in part due to the accessibility of other jurisdictions and structures, as well as a more discerning consumer. I also agree that the Russian angle to this story is exaggerated.

In point of fact, customer deposits at Cypriot banks have declined precipitously for many quarters now, both in Cyprus and Greece. BTW, I would expect Cypriot bankers to be none too happy about deposit expropriation. Historically, deposits have dominated the funding structure. If remaining deposits decamp, these guys could be out of business, much to the chagrin of other EU banks, no doubt. Why bite the hand that feeds you? These banks just got hit with a triple whammy of massive impairment/provisioning, a shrinking deposit base and narrowing spreads – does anyone have a NIM>2%?

Still, by all accounts, the depositor base is fairly diversified in terms of type and size. One group that has taken up some of the slack is the Diaspora I mentioned. Originally, you had wealthy Russians going there, and then a bunch of service industries (real estate agents etc.) grew up around them. Now, you have a lot of people that have done OK in Russia simply moving there to live. For example, a decent (not great) 3-bedroom in a decent area of Moscow will set you back 1 MM – in Cyprus, a little less. As a result you have schools, stores, TV and massive Russian-language support structure there. That’s a lot of revenue, from say, 15% (a guestimate) of the population.

Of far more importance today (and historically) is the Russian-Cypriot double tax treaty and the lack of capital gains and dividend taxes in Cyprus for foreigners. This no doubt hides some illegal activity, tho probably more insider trading & corporate raiding than laundering.

Anonymous said...

SS 8.05
Again if I may dare ask, where are those creditors we are talking about *in this particular case*?

Secret.Sauce said...

Mostly holders of sovereign debt, i.e. Cyprus will default if it has to recapitalize the banking sector w/out external help. Also, central banks, the ECB, repo counterparties.

Again, deposits are the by far the biggest source of funding. Debt financing is very limited, at least at the publicly traded banks.

Anonymous said...

So yeah, basically, haircutting bank debt (math don't work), haircutting the sov (which is held by the banks in the first place IIRC), official sector handout and/or ESM (i.e core EU losses under another name, impossible for obvious political reasons). So what's left that could have realistically worked. Indeed, the ginormous deposit base!

There is a dangerous precedent in hitting the uninsured portions of the deposit base.

But we don't see the argument that this is indeed a very unique situation as being without merit.

And once again, for all those concerned by the little man and the poor pensioners, it is not entirely clear to us that this a worse deal that the one the Irish got.

We would also welcome data on deposit concentration. We don't have the data handy but we remember seeing number on UK/US. Simply put, the bottom half of the income distribution has little to no deposit to speak of. So again, from a concern for the little man point of view, this is better than say, a sales tax.

We are going to repeat ourselves but really the outrage is lost on us.


Charles Butler said...

The Bank of Spain capped 1 year TD yields at 1.75%. The one that just matured paid 4.5. What's the diff?

Agree with DD, in other words.

Nico G said...


most of the Russian money funneled to Cyprus was to start Cyprus-based operations through Cyprus registered companies that bank with Cyprus banks

this money was put at work, and disrupting this will disrupt a lot of business on that tiny island

Nance Jaman said...

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