Cypriots Stunned by Forced Savings Cuts

[don]

Re: Cypriots Stunned by Forced Savings Cuts

Mood Darkens in Cyprus as Deadline Is Set for Bailout

By LIZ ALDERMAN

NICOSIA — Cyprus faces a hardened deadline of next Monday to secure a new agreement on an urgently needed bailout, after the European Central Bank said Thursday it would shut off access to crucial low-cost bank funding if an accord were not reached by that time.

Meanwhile, the mood turned sour on the streets of Nicosia, the Cypriot capital, where people flocked to cash machines Thursday morning to withdraw as much money as possible after the government declared that banks would remain closed until next Tuesday to give officials time to renegotiate the bailout deal.

Cyprus’s president is due to present international lenders with a revised plan later Thursday with the goal of raising enough money to satisfy creditors while also passing muster with Parliament. Cypriot lawmakers voted down a bailout proposal on Tuesday containing a controversial tax on bank deposits that had been negotiated with Cyprus’s European Union partners over the weekend.

The European Central Bank gave Cyprus until Monday to reach an agreement with the European Union and the International Monetary Fund if it wanted to continue to receive the low-interest loans that are essential to keeping its banks afloat.

From that point onward, the E.C.B. said it would only consider a fresh influx of emergency funding, as requested by Cyprus, “if an E.U./I.M.F. program is in place that would ensure the solvency of the concerned banks.”

Cypriot banks, which have been closed since Saturday, will remain closed through a national holiday Monday, the government announced late Wednesday, hoping to avoid a bank run while the bailout is being renegotiated.

But at branches of Laiki Bank and the Bank of Cyprus in downtown Nicosia, where lines had virtually disappeared over the last three days, there was an air of exasperation, anger and anxiety Thursday morning as people hoped that funds would still be on hand by the time it was their turn to make a withdrawal. Only one of two cash machines at each bank branch was working.
“Time is up — we want our cash,” said Maria Melitou, an accountant.

“Our friends in Europe brought us to this point,” she added. “We expected more.”

Irena Margilou, 32, the 13th person in an 18-person line at Laiki Bank’s cash machine, spoke in an embittered voice. “We don’t know what the future holds,” she said.

She questioned what she said was German insistence that the Cypriot government skim money from people’s bank accounts to secure a €10 billion, or $13 billion, bailout. “It’s like you’re telling us to just leave our money in our mattress,” she said. “What is happening to European solidarity?”

After the Cypriot Parliament on Tuesday rejected a plan to impose a one-time tax on bank deposits of 6.75 percent for accounts under €100,000 and 9.9 percent for amounts above that, the government on Thursday was planning to propose nationalizing pension funds from state-run companies and conducting an emergency bond sale to help raise the €5.8 billion the indebted country needs to secure the bailout.

The proposals are meant to sharply reduce the amount of money that would be raised by the tax on bank deposits, which was a condition of the original bailout deal negotiated with Cyprus’s three international lenders — the E.C.B., the I.M.F. and the European Commission, known collectively as the troika.

But even the revised plan contains a bank tax that, while much smaller than originally proposed, might still not be palatable to Parliament.

Under the new plan, all Cypriot bank deposits of up to €100,000 would be hit by an immediate one-time tax of 2 percent. Deposits above that threshold would be subject to a 5 percent levy.

The fallback was being cobbled together as Cyprus’s finance minister pressed his case in Moscow on Wednesday in hopes of securing additional aid from Russia, many of whose wealthiest citizens have big deposits in Cypriot banks.

Representatives of the troika were in Nicosia on Thursday but were not certain to sign off on Cyprus’s latest plan.

Cypriot banks have frozen all accounts in a financial crisis here that risks tipping the country into default and sowing turmoil across the euro zone.

The authorities have ordered Cypriot banks to keep automated bank machines filled with cash as long as their doors remain shut. But that has been of little help to the thousands of international companies who do banking in Cyprus, which cannot transfer money in and out of those accounts to conduct business.

Melissa Eddy contributed reporting from Berlin (!).

[Chomsky]

Re: Cypriots Stunned by Forced Savings Cuts

I liked this piece from Krugman mostly because of the headline, but there's some interesting analysis in it, too.

March 21, 2013, 8:15 am 13 Comments
Cyprus: The Sum of All FUBAR

At this point the Cyprus situation is pretty clear — and clarity does not bring reassurance. In fact, it looks as if Cyprus has managed to combine in one place everything that has gone wrong elsewhere.

1. Runaway banking. Cyprus has a huge banking system — assets around 8 times GDP — based on a business model of attracting offshore money with high rates and good opportunities for tax avoidance/evasion.

I’ve done some asking around, and cleared up something that was puzzling me. Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. So we should think of Cypriot deposits as mainly coming from non-Cypriots, attracted by that business model.

And the business model only works until there’s a big loss somewhere; since Cypriot banks were investing in Greece and in their own domestic real estate bubble, doom was inevitable. Which brings me to:

2. Big domestic real estate bubble, Spain or Ireland-sized. Not yet fully deflated, which means lots more losses to come. And the combination of the real estate bubble and the income from dodgy banking also led to:

3. Massive overvaluation, with Cypriot prices and costs having risen much more than in the rest of the euro area. In 2008 the current account deficit was more than 15 percent of GDP!
What can be done? First off, Cypriot banks cannot honor their debts, which unfortunately overwhelmingly take the form of deposits. So a default on deposits is inevitable.

As I now understand it, the initial screwup was a joint error of the Europeans and the Cypriots. Europe didn’t want an explicit bank resolution, which would among other things have given clear seniority to small insured deposits; instead, it wanted this essentially fictitious tax scheme. Meanwhile, the Cypriot government still has the illusion that its banking model can survive, and wanted to limit the hit to the big overseas depositors. Hence the debacle of the small-deposit tax.

In the end this probably comes, in some version, to what it should have been from the start — a big haircut on deposits over 100,000.

But even then the situation is by no means under control. There’s still a real estate bubble to implode, there’s still a huge problem of competitiveness (made worse because one major export industry, banking, has just gone to meet its maker), and the bailout will leave Cyprus with Greek-level sovereign debt.

So then what? As a number of people have pointed out, Cyprus is arguably better positioned than Iceland to do an Iceland, because devaluing a reintroduced Cypriot currency could bring in a lot of tourism. But will the Cypriots — who haven’t even reconciled themselves to the end of their round-tripping business — be willing to go there?

Truly awesome stuff.

http://krugman.blogs.nytimes.com/201...-of-all-fubar/

[soliver]

Re: Cypriots Stunned by Forced Savings Cuts

here ya go guys and girls.........

On why the ECB is cutting off Cyprus on Monday

BY EDWARD HARRISON / ON 21 MARCH 2013 AT 08:11 /
1



Today’s daily commentary is on Cyprus again. The latest information on Cyprus is that the ECB has told the Cypriots it could no longer extend the ELA facility being used by the now bankrupt Cypriot financial institutions. Cyprus has until Monday to find the funds to support their recapitalization or they will be cut off after the jump I will explain what led to this decision and what alternatives Cyprus now has.
The Cyprus banking system recapitalization problem has been known since June ever since Greek sovereign creditors received haircuts of up to 75% on their Greek sovereign bond assets last summer. Cypriot banks were heavily damaged by this and needed to be recapitalized. The Cypriot government stalled, hoping that events would be favourable as they decided on a course of action.
However, by January, the ECB had had enough. The Cypriot banks were insolvent and being kept alive by the Cypriot central bank via liquidity under the European Central Banking System’s ELA program. The ECB threatened to cut the Cypriot banks off from the ELA emergency funding facility because they were insolvent. However, the ECB demurred because, after months of stonewalling by the Cypriot government, the ECB believed general elections in February would produce a government that was more likely to settle the issue than the outgoing left-of-centre communist-backed Cypriot government led by Stavros Malas.
[Content protected for Gold members only]
What are the options then?

• The bank levy option is limited now. I think touching insured deposits at all is going to be difficult politically. So Cyprus could just levy the deposits over 100,000 euros. But this would be rejected by the Russians and they might pull aid. As I mentioned yesterday, the concept that Cyprus is all about mob money is false; there is much legitimate Russian business in Cyprus. So this avenue is risky.
• Cyprus could find other ways to raise the money. One avenue that has been floated is raiding the social security kitty or nationalizing the private pension funds and raiding them. The Cypriot church has said it would make funds available as well, mortgaging its land for example. All of these measures sound draconian and are not liable to produce revenue in the time period allotted. The loans need to be in place to recap the banks so they can open for business. The best – and most likely alternative – is a solidarity tax. I expect the Cypriot government to announce something on this tonight (see BBC link).[Content protected for Gold members only]

So that’s my quick summation of what kind of options we have in Cyprus. None of them are good and there exists a real possibility that the stand-off in Cyprus could lead to eurozone exit. The reason Cyprus is important is that, despite the small size, it is an euro zone member. Everything that happens there is replicable anywhere in the euro zone. If Cyprus were to leave the euro zone, it would provide a template others could use, avoiding the pitfalls.
UPDATE 935 EDT: The option I flagged as the likely one seems to be a go. The Cyprus Mail reports that the government has agreed to a solidarity fund. I think this plan will work. More details will follow.
UPDATE 955 EDT: Note that none of this solves Cyprus’ longer term structural problems. Paul Krugman has a good quick and dirty analysis here – busted economy, banking model dead, huge sovereign debt. The potential for sovereign default down the line is still high given what Krugman outlines. It really is not looking good – and that’s one reason I believe an eventual euro zone exit is not entirely off the table.

[don]

Re: Cypriots Stunned by Forced Savings Cuts

FIRE's Trick Bag of Solutions . . .

Anastasiades chaired meetings throughout Wednesday with party leaders, ministers and officials from the troika of EU, ECB and International Monetary Fund lenders. The government said a "Plan B" was in the works.

Officials said it could include: an option to nationalize pension funds of semi-government corporations, which hold between 2 billion and 3 billion euros; issuing an emergency bond linked to future natural gas revenues; and possibly reviving the levy on bank deposits, though at a lower level than originally planned and maybe excluding savers with less than 100,000 euros.

With Cypriot Energy Minister George Lakkotrypis also in Moscow, officially for a tourism exhibition, speculation was rife that access to untapped offshore gas reserves could be on the table as part of a deal for Russian aid.

Finance minister Sarris said talks with his Russian counterpart, Anton Siluanov, would continue, but there had not yet been any offers, "nothing concrete."

http://www.reuters.com/article/2013/...92G03I20130320

[ProdigyofZen]

Re: Cypriots Stunned by Forced Savings Cuts

FIRE's Trick Bag of Solutions . . .

Anastasiades chaired meetings throughout Wednesday with party leaders, ministers and officials from the troika of EU, ECB and International Monetary Fund lenders. The government said a "Plan B" was in the works.

Officials said it could include: an option to nationalize pension funds of semi-government corporations, which hold between 2 billion and 3 billion euros; issuing an emergency bond linked to future natural gas revenues; and possibly reviving the levy on bank deposits, though at a lower level than originally planned and maybe excluding savers with less than 100,000 euros.

With Cypriot Energy Minister George Lakkotrypis also in Moscow, officially for a tourism exhibition, speculation was rife that access to untapped offshore gas reserves could be on the table as part of a deal for Russian aid.

Finance minister Sarris said talks with his Russian counterpart, Anton Siluanov, would continue, but there had not yet been any offers, "nothing concrete."

http://www.reuters.com/article/2013/...92G03I20130320

Guys, no one is thinking like a trader. The ECB is thinking like a trader.

Here is how it goes:

1) we know Cyprus needs capital/bailed out. This puts the trader at an advantage. This is the same in the bond market as a small money manager who has to buy a certain amount of bonds and those bonds are only available for sale at Goldman.

2) Goldman (the trader) aka the ECB (in this scenario) sets the price at an astronomical level aka the tax on bank deposits. They know full well the trade will not be done at that level. They fully expect the money manager to bid back and try to move the price more in line with the market.

3) Goldman (the trader) was actually shooting for something else. In this case a new way to bailout a politically insignificant nation like Cyprus while also keeping the Euro intact. This serves two ideas. It allows FIRE to take over Cyprus and get cheap assets as they, Cypriots, find different ways to pay instead of through bank deposits. Auctioning off land, gas reserves, other assets etc.

And the second purpose is to force the Eurozone into a greater fiscal and monetary union. This is all leading down that path most people just don't see it yet.

I mean the EU bailed out Greece and gave them 170 billion and they can't pay 8 to 10 billion for Cyprus?

This is all part of the plan to head toward a EU wide Eurobond issuance. The Europeans didn't go through the trouble of the last 50 years to create what we see now as the Euro to allow tiny Cyprus to derail that effort.

A viable alternative to the US Treasury Dollar IMS is coming....

[c1ue]

Re: Cypriots Stunned by Forced Savings Cuts

A different point of view:

http://johnhelmer.net/?p=8774#more-8774

By John Helmer, Moscow
The US, Germany, Turkey and the NATO allies think they have almost all the ordnance required to produce regime change in Syria, as they had in Libya. But they don’t appear to have the €5 billion required to do the trick in Cyprus, after the regime change the Cypriots themselves had voted into power a month ago. Saturday’s gambit, to seize this money from Russian and other depositors in Cyprus banks, appeared a safe bet in Brussels because apparently influential Russians – First Deputy Prime Minister Igor Shuvalov, Finance Minister Anton Siluanov – had signalled their willingness to go along.

But Shuvalov and Siluanov are clerks, no-counts politically. The one Russian who counts has now been presented by the western alliance with an opportunity to effect a strategic power shift in the Mediterranean at minimal cost upfront and little forward risk. It’s an object lesson in the greater value of money over arms in grand strategy.

It’s also a shift which the western powers and the Ottoman empire fought for three centuries to prevent. They succeeded against Empress Catherine II and Count Alexei Orlov’s fleet in 1770; he won the Battle of Chesme*; then betrayed the Daskalogiannis revolt against the Turks in Crete, and ultimately lost the war in the Med. The allies succeeded against Stalin between 1945 and 1949 because his priorities were further north. In 1974 NATO encouraged, and preserved the Turkish occupation of northern Cyprus, because Leonid Brezhnev’s Politburo couldn’t resolve its internal differences, feared to offend Turkey, and made one mistake of intelligence assessment after another.

The way this story is told in Greek history, the Hellenes remember – they are reminded often enough — that in their direst hour, Russian promises of help against the infidels don’t materialize. There is even a Russian name in Greek for this betrayal. The failure to arrive in time in Crete and the bloody Turkish reprisals of 1770 are known in Greek by Orlov’s name as Ορλωφικά.
Let’s see how much better Putin has it within his power to do: the new Ottomans have presented him an opportunity to counter-attack and win. But what are the concrete Russian interests now at stake, and are they large enough to stake on a grand strategy of sweeping the board?

The Russian media have been unusually slow in assessing the news from Cyprus, and the Kremlin unusually silent. The latter explains the former. Click here. Prime Minister Dmitry Medvedev didn’t allow breath to pass on the subject until after Putin issued his condemnation, the only head of government or state to do so in the world. After meeting with the board of Vneseheconombank (VEB) Medvedev said: “this looks like confiscation of someone else’s money. I don’t know who came up with this idea, but this is how it seems. Regrettably, we have been aware of this practice during the Soviet times, when money was exchanged with a coefficient and not returned to people in full. But Cyprus is a country with a market economy and is supposed to be a member of the European Union. Of course, we will have to draw certain conclusions from this because we have our own relations with Cyprus and we will continue the consultations. But we will have to make certain adjustments in our position even with the understanding that in general it would be better to keep the money in Russian banks.”

After the board finished its session, VEB’s chief executive Vladimir Dmitriev said there had been no discussion of the Cyprus situation after Medvedev’s opening remark. Asked what he or VEB thought of the position, Dmitriev ducked. “I’m not sure I can say it any better than the Prime Minister and the chairman of our Supervisory Board.”

An Uralsib bank report issued on Monday was sanguine. “At this point, risks to the Russian economy and businesses appear insignificant, provided that any run on banks in Cyprus does not result in a new full-scale European debt crisis.We highlight that among traded banks VTB has the largest exposure, while Novatek and Lukoil’s share buyback programs may be affected. Potential M&A activity of entities that are Cyprus residents may suffer.” The capital outflow that is likely to follow from Cyprus will take Russian money elsewhere: “Russia is unlikely to become a harbor for this money.”

The deposit levy itself would, if implemented to the 9.9% level initially proposed, be too small for a serious impact. According to the Uralsib research team, led by Konstantin Chernyshev. “The Russian banking sector would lose just 1% of their interbank-related assets (0.1% of the total sector’s assets), which looks rather immaterial.” The bigger risk for Russia, Uralsib calculates, would follow if the bailout fails altogether, and the Cyprus banks default. “There are indirect implications including the hit that Russian depositors could take (Cyprus banks hold $19 bln in non-banking Russian deposits according to Moody’s, or 2% of the sector’s total deposits). Also, with a final decision on the bailout still pending, the risk of bankruptcy in Cyprus is not completely out of question. In the worst case, the Russian banking sector risks payments on $40 bln of loans to Cyprus entities being suspended (6% of the sector’s corporate portfolio), with a chain reaction possible via rising NPLs ($40 bln in loans is 130% of total corporate overdue loans); this would stall lending and deposit activity and damage profitability. Roughly assuming that the sector would need to fully provision $40 bln of loans (though this is unlikely), it could end up with a net loss for the year (2012 net income amounted to $33 bln). Sberbank denies Cyprus-related lending, while other banks with the largest exposure according to Moody’s include VTB, Alfa-Bank and Gazprombank.”

Moody’s has issued a report by Evgeny Tarzimov, claiming the proposed deposit levy would trigger an outflow of Russian client funds from the Cyprus banks. That in turn might oblige Russian banks to resupply their Cyprus subsidiaries with cash. VTB, the second largest of the state lenders after Sberbank, appears to be exposed more than others through its subsidiary, Russian Commercial Bank (RCB); Moody’s reports it had assets of $13.8 billion and equity of $374 million at the end of 2011. There are unverified reports that VTB’s Cyprus deposits amount to $3 billion, with risk of loss up to $300 million, though no direct liability for VTB or RCB.

VTB has been playing down its concern, at least to protect its share price, which has dropped 9% so far this week. Whether it has been saying the same thing to Putin is another matter. According to the Uralsib report, “the Cyprus arm [of VTB] paid RUB2.8 bln ($100 mln) in dividends for 2011, with 60% of this going to VTB – meaning that even if the group completely loses its earnings from Cyprus, which does not appear to be the case for now, it will lose less than 2% of net income. VTB does not disclose the amount of loans to Cyprus-based corporates as well as interbank deposits, while holdings of Cyprus bonds are immaterial. The bank itself does not see a major threat from this situation and believes there is little reason for concern at this point.”

VTB’s board chairman, Sergei Dubinin, has announced a Soviet-style scheme of nationalization for rescue. Dubinin has been sacked twice already for presiding over financial disaster – the rouble collapse of 1994 and the government bond default of 1998. “The responsibility for the state of the banking business,” he said of Cyprus, “must lie primarily with those who took the risks of the business, that is, the owners and shareholders of the banks.” If they are obliged to cede control to the state, then, he implied, the Russian government may be in a position to refinance the Cyprus government, with sovereign security instead of commercial. To prevent a run on the banks, Dubinin also said Cyprus bank deposits should be split into portions subject to delayed withdrawal regulation.

An analysis by Ivan Tchakarov of Renaissance Capital, released on Monday morning, counted just $3.1 billion in Russian funds directly exposed to loss – $1.9 billion of non-bank Russian depositors in the Cypriot banking system, and $1.2 billion of Russian bank cash placed on deposit with Cyprus banks. Altogether, this sums to 0.24% of Russia’s 2012 gross domestic product (GDP) — “a trivial amount from a Russian macro perspective.”

But “the costs could rise to non-trivial levels (2% of GDP) if Cyprus imposed capital controls,” according to the RenCap report. “Strictly speaking, the USD40bn of outstanding loans should not be impacted by the deposit haircut as: 1) these are loans and not deposits; and 2) the loans are generally used for financing activities that are outside Cyprus and thus unrelated to the macro situation in Cyprus. Of course, if Cyprus were to impose capital controls, this would not be the case and Russian banks could face significant losses amounting to almost 2% of GDP.”

Uralsib assesses the impact on the major Russian metals companies as slight. “Almost all of them have subsidiaries registered in Cyprus, but the main trading operations are carried out through trading companies registered in other countries, especially Switzerland. Although the major beneficiary shareholders reportedly often own stakes in Russian metals names via Cyprus-registered off-shore companies, the ownership/registration structure is irrelevant at the operating level for the companies.”

The Uralsib analysts appear not to be aware of how much Cyprus banking (as well as Latvian) is done off the main Rusal accounts by associated companies. On the other hand, Rusal’s chief execuitive Oleg Deripaska spent last week publicly attacking Russia’s state banks for over-charging Rusal on interest rates. By something resembling a coincidence, the chairman of Rusal’s board of directors, Matthias Warnig, is also a director on the VTB board.

Deripaska appears now to be begging the state banks to refinance Cyprus bank debt. Another Rusal board member, Dmitry Afanasiev, who doubles as Deripaska’s personal lawyer, announced yesterday in Moscow that Vnesheconombank (VEB), the same state unit which saved Rusal in November 2008, should go to Cyprus’s rescue. He is quoted in a Moscow newspaper as urging VEB to secure its bailout loan with rights to Cypriot gas reserves, as well as real estate and bank stocks. “VEB could then issue securities backed with the assets. The plan is common for developing economies that seek to raise money”, Afanasiev said.

Other Russian corporate interests impacted by the proposed Cyprus exaction include Novatek, LUKoil, and TNK-BP now part of Rosneft). TNK-BP told Uralsib “the balance of Novy’s Cyprus accounts is negligible. It [Novy Investments Ltd.] appears to be an intermediate company, set up to minimize the tax on dividends received from TNK-BP Holding. There is no indication that the deposit tax will affect Rosneft’s purchase of TNK-BP…. We doubt that Lukoil has more than $2.5 bln in cash with a Cyprus bank, so in the worst case, it could lose $250 mln from the tax, or 1% of 2013E EBITDA.”

In Russia’s transportation sector, Uralsib reports that “Global Ports [owned by Nikita Mishin, Andrei Filatov, and Konstantin Nikolaev] and Globaltrans [same] are registered as Cypriot legal entities. The companies’ representatives have said that the impact from the deposit tax being imposed by Cyprus’s government will not be material for either company. Globaltrans and Global Ports maintain negligible cash positions in Cypriot banks, as their operating activities are outside Cyprus.”

One real estate company, AFI, may lose money, but not much. “AFI Development appears to be the most affected by the planned one-off tax on bank deposit. However, the company says that the size of its potential losses from the unexpected tax imposition in Cyprus looks to be very small, as it only has about $5 mln on its bank accounts in Cyprus. The rest of the money, which is booked as cash and cash equivalent, is classified as open bank facilities and therefore is not subject to the new tax initiatives. In the event that the new tax levy is approved by Cyprus’s parliament, AFI Development could lose $0.5 mln in the worst case, which is equivalent to 0.04% of its NAV”. AFI, though publicly listed in London, is controlled by Lev Leviev. He has appointed three Cypriot politicians to the AFI board; one of them, Michalis Sarris, is the current finance minister responsible for accepting the bank deposit levy.

Russian business media have reported Alisher Usmanov, who runs his personal asset holding Gallagher, as well as Mail.ru and Megafon holding companies in Cyprus, as telling Vedomosti — a business newspaper competing with Kommersant, which Usmanov owns — that he won’t lose a kopeck. Usmanov claims he keeps all his cash in Russian banks, the newspaper reported. According to Uralsib Bank, “Mail.ru Group uses subsidiaries in Cyprus to hold some of its assets, the company said that it only has limited cash exposure there.”

Sources in Cyprus report that in negotiations with the Cyprus government stretching back over several months, Gazprom and other Russian entities had offered to buy and recapitalize the Cyprus banks. But the Cypriots had refused to accept the Russian terms. “The Cypriots did not want a fair valuation of their loan portfolios nor fork out [offshore] gas blocks in advance,” says one Cyprus-based business source. He believes the local Cypriot businessmen, who have borrowed heavily from the Cyprus banks and cannot repay their loans as the value of the real estate has plummeted, are in favour of Russian depositors carrying the liability, relieving themselves. This is a powerful constituency for the President, Nicos Anastasiades, who has been in office for just one month.

“The German and Dutch move was well planned”, the Cyprus source believes. “They ambushed the new President. But he has been dishonest – he should have packaged the bank loans and assets and sold them at a discount. We have to see if Nicos still thinks Berlin and [Chancellor Angela] Merkel are his friends. His parliament and his people are not going with him on this. It could be the shortest presidency ever.”

Now the source says Cyprus sentiment is moving towards nationalizing the banks, leaving the Euro zone, and renegotiating an entirely different scheme with Moscow.

But if the financial exposure is relatively small, are there other, larger Russian strategic interests at this point?
One of them, acknowledged by Finance Minister Siluanov after Putin made his announcement on Monday and Siluanov had recovered his voice, is that the European Union (EU) terms had been delivered to the Cypriots without the advance notice and consultation promised with the Russians. If Siluanov and his anti-Cyprus deputy Anton Shatalov were told last week what was likely to be decided, and while they were concurring they blindsided Putin, they are now trying to protect their behinds. The upshot is that the EU plan is an intended strike against Russian interests. If the Kremlin were to be viewed to be as tame and submissive as Siluanov and Shatalov are by nature, Putin appears to have decided already that’s bad strategy for him. Monday’s verbal attack said as much. If Putin fails to follow through with action during the negotiations with the Cypriots today, he will compound the damage.

What of the money-laundering and tax evasion claims, and the Kremlin policy of de-offshorization? Putin’s statement of Monday, as amended by spokesman Dmitry Peskov, emphasized that saving the Cyprus banks and their depositors isn’t about protecting Russian law-breaking. Putin, followed by Medvedev, reiterated that they see the short-term solution in negotiated data transfer and accountability between Russian and Cyprus regulators; the long-term solution, improving Russian trust in Russian financial institutions.

Because the latter is a non-starter right now, Putin, plus everyone else, acknowledge that if the current EU attack succeeds in knocking out Cyprus, it will be beneficial for the biggest money-laundering centre in the world – London. The London newspapers which have campaigned hardest in their columns against Russia in Cyprus –the Financial Times and the Economist, both owned by Pearson – have been keeping their own interests hidden. Both have been exposed in Private Eye, the London investigative magazine, as laundering their profit and loss accounts and evading taxes through schemes licensed by the UK’s tax authority and based in Luxembourg. The media attack on Russian deposits in Cyprus is coming from fronts like Pearson Luxembourg Finance no.2 Ltd., Embankment Finance Ltd (Luxembourg), and Luxembourg Holdings SeNC.

What Putin does next isn’t going to go down well in London and Luxembourg. But if he has the opportunity to rerun the Battle of Chesme*, and this time rescue the Hellenes from sinking, along with Russian money, Putin will be doing more for the strategic Russian interest in the Mediterranean than Catherine and Orlov managed in 1770. More, too, than ordering a squadron of six frigates and cruisers out of the Black Sea to sail round the Mediterranean on a permanent patrol.

[Asterisk] The original painting, titled “Catherine II laying the trophies of the Battle of Chesme on the Tomb of Peter the Great”, was commissioned by the empress in 1791 from Andreas Caspar Huhne, a German. This image is one of several drafts made by Huhne. Catherine thought of the picture as a demonstration that she was following her predecessor’s foreign policy success. In fact, no ceremony of the kind took place, and as depicted Peter’s tomb was an invention.

[c1ue]

Re: Cypriots Stunned by Forced Savings Cuts

I liked this piece from Krugman mostly because of the headline, but there's some interesting analysis in it, too.

As usual, Krugman sounds nice, but in reality he doesn't know squat (or more likely, smooching up to his FIRE overlords).

The very first so called point says it all:

1. Runaway banking. Cyprus has a huge banking system — assets around 8 times GDP — based on a business model of attracting offshore money with high rates and good opportunities for tax avoidance/evasion.

I’ve done some asking around, and cleared up something that was puzzling me. Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. So we should think of Cypriot deposits as mainly coming from non-Cypriots, attracted by that business model.

And the business model only works until there’s a big loss somewhere; since Cypriot banks were investing in Greece and in their own domestic real estate bubble, doom was inevitable. Which brings me to:

If the majority of deposits are offshore, then why exactly should the Cyprus real estate bubble matter?

What is the size of the Cyprus real estate market? What is the composition of the purchasers of Cyprus real estate? As usual, Krugman fails to provide any useful information.

The Cypriot banks are in trouble because of bad loans - primarily real estate. Are these to Russians? Or are they to Cypriot 'investors'?

Ultimately the problems the Cypriot banks are having aren't due to having offshore money. They're due to bad loans made under the influence of FIRE.

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

Yet another interesting tidbit can be found here (not available on their english-language site yet):

In dem nun beschlossenen "Solidaritätsfonds" sollen staatliche Vermögenswerte gebündelt werden, unter anderem Gelder aus Rentenkassen und der Kirche. Über den Fonds sollen dann Not-Anleihen zur Staatsfinanzierung ausgegeben werden. Auch die zyprische Zentralbank soll mit ihren Goldreserven dazu beitragen. Damit könnten 4,8 Milliarden Euro zusammenkommen. Der stellvertretende Vorsitzende der Regierungspartei, Averof Neophytou, sagte, er rechne nicht damit, dass noch am Donnerstag über den neuen Plan abgestimmt werde.

my translation:

In the proposed "solidarity fund", government assets will be pooled with funds from, among others, pension funds and the church.

Even the Cypriot Central Bank is to contribute their gold reserves. This fund will then be used to issue emergency loans to finance the state. The total is expected to come to 4.8 billion Euros. The deputy chairman of the ruling party, Averof Neophytou said that he does not expect the plan to be vetoed on Thursday.

If there's one thing that can convince the Germanics to give way, it's having the loans it'll be making backed with Cyprus' gold reserves. Other parties may be interested in other state assets, perhaps land to build military bases? It looks like the "western" bid is taking shape, which contrasts nicely with Russia's bid in the previous post.

[don]

Re: Cypriots Stunned by Forced Savings Cuts

Great post - lots to think about.

The one certainty is Cyprus, in and of itself, is only a small bite out of the red-hot enchilada.

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

The Cypriot banks are in trouble because of bad loans - primarily real estate. Are these to Russians? Or are they to Cypriot 'investors'?

For the most part, neither.

They've made large politically-motivated loans to Greece's government to return the favor for supporting the official government against the north-eastern turkish puppet government during the civil war. The whole FIRE concept is a good model elsewhere, but it doesn't really apply here, at least not directly. This all goes back to the Greek/Turkish military struggle in the '60's.

As Greece has implemented haircuts, the Cypriots lost out. That's why they feel outraged against the EU that forced the haircuts, even though they're the ones who made the dodgy loans using even more dodgy deposits.

[ProdigyofZen]

Re: Cypriots Stunned by Forced Savings Cuts

Yet another interesting tidbit can be found here (not available on their english-language site yet):



my translation:



If there's one thing that can convince the Germanics to give way, it's having the loans it'll be making backed with Cyprus' gold reserves. Other parties may be interested in other state assets, perhaps land to build military bases? It looks like the "western" bid is taking shape, which contrasts nicely with Russia's bid in the previous post.

There is no way the EU allows the Russians to take Cyprus. They will work out a plan for them and keep them within the Eurozone.

I don't see a way that the Euro becomes a true viable real currency if any of the member states leave it.

[shiny!]

Re: Cypriots Stunned by Forced Savings Cuts

What would happen to Cyprus and the EU if Cyprus pulls an Iceland?

[ProdigyofZen]

Re: Cypriots Stunned by Forced Savings Cuts

What would happen to Cyprus and the EU if Cyprus pulls an Iceland?

Hey Shiny, Iceland was different because they had their own currency. Cyprus is under the Euro. FYI it seems Krugman advocated for Ireland, Spain etc to pull an iceland....

http://www.bloomberg.com/news/2011-0...e-iceland.html

"Iceland’s success in rebuilding its economy has been contrasted with the plight of euro member Ireland by economists including Nobel laureate Paul Krugman. Ireland, where most bank debt has been protected by a state guarantee since 2008, would have been better off using Iceland’s “bankrupting yourself to recovery” model, Krugman argued in a Nov. 24 New York Times column. Sigfusson says the advice could be dangerous, as European leaders try to agree on how investors share the cost of a second Greek rescue"

If Cyprus tries to leave the Euro and go back to their Cypriot Pound then there will be capital flight of Russian movies and other international monies.

Their exchange rate will be devalued and now they would own sovereign debt in a foreign currency.

It would not work out well for them.

[shiny!]

Re: Cypriots Stunned by Forced Savings Cuts

Hey Shiny, Iceland was different because they had their own currency. Cyprus is under the Euro. FYI it seems Krugman advocated for Ireland, Spain etc to pull an iceland....

http://www.bloomberg.com/news/2011-0...e-iceland.html

"Iceland’s success in rebuilding its economy has been contrasted with the plight of euro member Ireland by economists including Nobel laureate Paul Krugman. Ireland, where most bank debt has been protected by a state guarantee since 2008, would have been better off using Iceland’s “bankrupting yourself to recovery” model, Krugman argued in a Nov. 24 New York Times column. Sigfusson says the advice could be dangerous, as European leaders try to agree on how investors share the cost of a second Greek rescue"

If Cyprus tries to leave the Euro and go back to their Cypriot Pound then there will be capital flight of Russian movies and other international monies.

Their exchange rate will be devalued and now they would own sovereign debt in a foreign currency.

It would not work out well for them.

Cyprus is in a position where nothing is going to work out well for them. What's the difference between Cyprus going back to the Cypriot Pound and Iceland having their own currency? Iceland imposed capital controls to keep money from flowing out. Couldn't Cyprus do the same thing?

If Cyprus takes the approach of ripping off the Band-aid fast via bankruptcy, rather than signing up for decades of "austerity" in order to keep the banks whole, wouldn't that be better for them? It wouldn't be better for the German and French banks, though.

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

What would happen to Cyprus and the EU if Cyprus pulls an Iceland?

Not so easy to do in the same way, in this case.

There aren't many foreign bondholders to default on. The liabilities of the banks are mostly their depositors. So the closest equivalent to "pulling an Iceland" is exactly what the troika was advocating: hit the foreigners (Russians) with the bill by defaulting on them (tax large-asset accounts) until all shortfalls are recovered.

My guess is that this would get Russia hopping mad, but not too much else. I can't exactly see Russia invading Cyprus over this. The problem is that Russia is probably the nation closest to Cyprus diplomatically at the moment (other than the collapsing Greece, of course). Cyprus has even been cooperating with Russia in smuggling arms to back the Syrian regime, which indicates an extremely close relationship. Cyprus is going to have to choose, ultimately, whether it is in Europe, or the East. But it will try to postpone that day as long as possible, and try to get as much wealth as it can in the meantime.

It is the EU that is trying to force the decision. It's saying "ok, we'll bail you out, but only to the extent you dump your old friend. If you're going stick with him (Putin) then he should be the one to bail you out." There's no sense in bailing out an entity that is aligning itself against you even while you do so, which Cyprus appears to have been doing by acting as a money-laundering center for Russia.

Even with all the maneuvering, I think Europe is seeing this mostly as a question of financial alignment, and giving little regard to the question of halting the expansion of Russia's military power-base. That isn't really the theater that it is expecting the conflict to be resolved in. It remains to be seen whether America will consider the military implications significant enough to intervene. If so, it may well step in to sweeten the EU's deal, to swing Cyprus to the west. So far it's been pretty quiet, at least in public.

Either way, someone is going to be mad, either the neo-cons/neo-liberals in the US, or Putin in Russia. But Cyprus and the EU are probably both going to be just fine. The money itself isn't enough to matter to either the EU or Russia, the political game is pretty dissimilar to anything in Spain or Italy, so fears of contagion are largely only being trotted out by those ignorant of the historic circumstances, and Cyprus will wind up getting bailed out by either the EU on the EU's terms, or Russia on Russia's terms. The fact that there's two bidders means that the final choice won't be too distasteful to Cyprus.

The decision of which path to take will ultimately be made in Cyprus, so if Cyprus does wind up leaving the EU, it won't be a calamity for the EU. It wouldn't be the EU abandoning one of its own, but Cyprus deciding to leave to side with Russia. It's not obvious that this would shatter confidence in the European project. If Cyprus does leave, and subsequently hits hard times, it might even serve as a warning shot to others whose devotion to the ideal is wavering.