Cypriots Stunned by Forced Savings Cuts

[don]

Cypriot Gas Deposits

What Is The Value Of The Gas Assets That Cyprus Pledged To It's Bank Depositors?

Following yesterday's highly analytical rant on Cypriotic bank nonsense, I present an interesting analysis on the value of the gas assets pledged to those who's bank accounts may be clipped by the Cypriotic government/ECB. For those who don't know, the proposal was to compensate those who were subject to the tax/levy on their bank accounts with bonds linked to the output of Cyprus natural gas mines. Of course, the first question anyone should ask is "Why not simply pledge the gas assets directly to the ECB vs stealing from the bank depositors?" I think we can all ascertain the answer to that question. I was tweeted an analyst by Anthony Alfidi wherein he delved into the fundamental value of the exchange. I would like to reproduce a portion of it here. The balance can be found on his site. Cyprus Bank Deposit Levy and Natural Gas Bonds

Cyprus' president has pledged to cover the value of its imminent savings deposit levy with an equivalent value of natural gas bonds. It's hard to say whether Cypriot savers should take this promise seriously without some analysis of its viability.
Let's use the European bailout sum for Cyprus of US$13B as a proxy for the amount of savings about to be confiscated from Cyprus' resident depositors. I need a proxy because I have no idea how much the government of Cyprus will actually collect from this levy. The natural gas revenue needed to back the bonds that would make savers whole would likely come from the Aphrodite field. Title to this field is unclear; Turkey has made a competing claim for the sovereign right to control drilling.


This is the likely answer to the quetion above. If the ownership and rights to the mine are in question, then it is essentially an encumbered asset. As such, how is it Cyprus's to pledge to anybody? May I add that Turkey actually has a functional military, and Cyprus has???



There is currently no pipeline from Cyprus to either Turkey or Crete which could deliver the gas to market; that would cost US$1B to build and Cyprus has no money. Building a $10B LNG terminal is ten times as unlikely, because Cyprus is still broke. The energy supermajor that ends up building it will get the lion's share of the revenue from the gas field as compensation for its costs and will have to deal with the likelihood of being shut out of other projects in Turkey.


Again, exactly how will this gas asset be monetized? I have not verified the facts and calculations behind this article, but if they ring true, then it appears that Cyprus is pledging the option of future development to a gas asset that it MIGHT own in exchange for actual cash in terms of what is being offered to bank depositors. So, the most valuable asset possible (actual cash denominated in a major currency) is being exchanged for an option on an undeveloped asset whose ownership and right to pledge/transfer is undetermined. Does this sound like a good deal to you? And we haven't even started to glean the actual fundamental value yet?



The lack of drilling and delivery infrastructure means that no Aphrodite gas will go to Europe until 2018 at the earliest. A lot can happen with the price of natural gas in five years. The wide availability of shale gas in the U.S. will keep the price down in North America. Europe's need for gas is met mainly by Russia, and Gazprom can adjust its rates at will to pressure Russia's neighbors.


And such pressure is guaranteed if Russian citizens are to lose the 2 billion or so euros to the Cyprus bailout levy that is being bandied around.



There is more to Mr. Alfidi's analysis, and I urge you to visit his site to read it. In the meantime, keep this chart from yesterday's post on Cypriotic bank nonsense in mind...

image006

I'm currently preparing the release of a report that will make the Cyprus affair look like peanuts as this contagion reinfects the core and I produce so much evidence of apparent fraud as to make your nose bleed.

[astonas]

Re: Cypriot Gas Deposits

Apparently Russia doesn't think much of the deposits either. Here's the latest from Reuters:

Russia rebuffs Cyprus, EU awaits bailout "Plan B"

...

"The talks have ended as far as the Russian side is concerned," Russian Finance Minister Anton Siluanov told reporters after two days of crisis talks with his Cypriot counterpart, Michael Sarris.

Russians have billions of euros at stake in Cyprus's outsized and now crippled banking sector, a factor in the EU's unprecedented demand that bigger depositors take a hit in the interests of keeping Cyprus afloat.

But Siluanov said Russian investors were not interested in Cypriot gas and that the talks had ended without result. Sarris was due to fly home, where lawmakers were locked in yet more crisis talks.

[c1ue]

Re: Cypriot Gas Deposits

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.

That's a good point - at least part of these loans could be considered 'protection money' to Greece, which has been one of the historical stakeholders in Cyprus (the island). Cyprus the island, after all, is part Greek and part Turk - a sort of North Korea/South Korea situation only with Turk vs. Greek (language and culture presumably) as the divider.

And given these ties, it is easy to see why the EU might want to hold the line with the Republic of Cyprus (as opposed to the Republic of Northern Cyprus). Any money passed on to the (southern) Cypriot banks would at least partially leak into Greece, and Greece of course is the 'bad boy' of the EU right now.

This point also highlights some other subtext(s): Russia is negotiating with Turkey over Black Sea pipelines and Middle Eastern/Central Asia natural gas flows into Europe (see South Stream and the various NATO/Israeli schemes). At the same time, Cyprus (and its maritime territory in the Med) represent a possible bottom end of an access squeeze around Turkey. Thus Cyprus is both a possible carrot and a possible stick in negotiations with Turkey.

Other subtexts: rather than natural gas flows - how about a Russian naval base? It seems Tartus might not be the best place anymore, besides which Cyprus is far better located (to piss NATO off). I was half joking when I first wrote this - but at a second glance it is interesting. The Republic of (southern) Cyprus might well need a new protector since Greece is embroiled in its own problems, and the EU seems far from welcoming at this point. If the EU/ECB want to punish Cyprus so badly, it seems far fetched that the same institutions would go out of their way to protect (southern) Cyprus either literally or figuratively should Turkey (or the Republic of Northern Cyprus) want to revisit 1974.

At this point, the offshore Russian deposit money seems like a relatively minor issue.

[don]

Re: Cypriot Gas Deposits

the Brits seem to like it . . .

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

Does anybody have any further suggestion?

You didn't mention physical gold, which might have been because you don't have any, but might also be because you are prudent enough to minimize advertising such information unnecessarily.

If the former, have you considered 1 oz. Krugerrands, or 1/10 oz. Maple Leafs for smaller stuff? They're gold, reasonably international, and an intermediate level of accessibility between physical cash and bullionvault in the event of a bank closure. In a worst-case scenario, I could imagine a 1/10 oz coin being accepted by the local grocer in the event that all the banks are closed, and the Lira is re-instated, but not physically re-issued yet.

The Krugerrands would mostly be for real emergencies: passage out of the country should food get short, a surgery that needs to happen right away, even if banks are closed and money rapidly deteriorating, etc. Or (if you have more money than I) they could be for unusual opportunities: your only competitor's business goes up for sale for a song, but only if you have a desirable form of liquid payment in hand when nobody else does. That, however, can be a particularly fraught path.

The tricky part in any usage would be keeping the word from getting out that you have a small stash of physical gold. It's easy enough for people to assume that the cash you are spending at the moment is what you happened to have in your hand when things went belly-up. But gold implies that you've planned, and that raises the question of "how well?" How well do you know your grocer and gas-station attendant? Well enough that they'll take the coin, but not so well that they know where you live? Well enough that they won't resent you for having something when others don't? If you invest in physical gold, the same logic leads you to invest in personal and community relationships as well.

Physical gold is the hedge for the REALLY worried. If you wind up in a place where only that will work, it'll be because society is desperately broken. But entertaining even that concept is not quite as crazy at it used to be. I can certainly imagine such a moment in Cyprus, and perhaps elsewhere as well.

I wish you luck in the coming times, while hoping that it doesn't come down to luck.

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

Here's an interesting summary of the logic that is being applied in the north:
Bailout Clash: Why Europe Must Play Hardball with Cyprus

and a slightly more current update on the four most likely scenarios:
Euro-Rettung: Vier Szenarien für Zypern

Sorry the second one is not in English. It hasn't made it to Der Spiegel's international site yet, and I don't have time to translate it myself at the moment. I'll be in meetings the rest of the day, but I'll try to translate/summarize it later.

[GRG55]

Re: Cypriots Stunned by Forced Savings Cuts

Thanks, that helped quite a bit!

As an American citizen, I get taxed by the US no matter where I live, work, or earn investment income. It seems I may have been extrapolating too heavily from that, apparently fairly unusual, circumstance. Since taxes here are based on self-reported income (audit-able through bank reports), the frequent use of offshore banks to hide income for the purpose of (illegally) evading taxes provides a more negative connotation.

You are of course right in pointing out that for other nationalities, which may tax based only on domestic income, this connotation should not apply. Thanks for the reminder!

The USA taxes on citizenship. That is most unusual. Almost all the other nations in the world tax on residency or domicile. The major benefit that USA citizens derive from this, imo, is that no matter what the USA will come to the aid of its citizens anywhere in the world...that includes evacuation of expatriates who find themselves trapped in a pending or current war zone. When I lived abroad I always found it amusing that some expat citizens of other countries like Canada, the UK and Australia seem to think they are deserving of the same privilege from their government, even though they don't pay taxes to support that function.

Income in most jurisdictions are "self-reported". I have to report and pay tax on my worldwide income, including anything from business ventures offshore. If I don't the penalties are extremely harsh, so I have no incentive to try to cheat the taxman...and these days the media & the taxman appear to have no great difficulty finding offshore bank accounts if they really want to - witness the French Budget Minister debacle this week. As much as most people do not like paying taxes, we might perhaps treat them as a measure of individual success. I would hate to be in the position where my income is insufficient to trigger any tax...life would be a bitch.

As for Cyprus, my beef is the hypocrisy being promulgated by everyone involved. Much is being made of Cyprus as an offshore tax haven laundering huge amounts of Russian money. This is not new information to the EU, the ECB, the IMF, Interpol, the Germans, the Russians, the Cypriot bankers or politicians, or the world at large. This problem is even larger in Dubai, growing rapidly in Asia as money funnels out of mainland China ahead of the coming crash, and even London is anything but lily-white. Yet they all look the other way. Nobody is suggesting the Cypriots are blameless. Perhaps what needs to be asked "Is this reason enough to bring the entire country of Cyprus and its citizens, residents and legitimate commerce to its knees?" And for what purpose?

HSBC and a few other banks get caught laundering Mexican money by U.S. authorities and they get "rap on the wrist" level fines...no other consequences. Why? Blatantly simple...if you are big enough you are above the law:

"...Attorney General Eric Holder told another Senate panel that it was difficult to prosecute some large institutions because it would "have a negative impact on the national economy, perhaps even the world economy...When (Senator Elizabeth) Warren repeatedly asked whether regulators could identify a line beyond which a bank should face losing a license, (Treasury Department's David) Cohen struggled to respond before saying: "The actions that we took in the HSBC case we thought were appropriate in that instance..."

Manipulate LIBOR, with the full knowledge of the FSA. No problem. And on it goes. Russian offshore money laundering looks pretty tame by comparison, imo.

Cyprus is not a "unique case" as the Eurocrats wish us to believe. It's part of a now long established pattern playing out all over the world. If you are big enough to do damage you are protected at the taxpayer's expense. If not, and you have been trying to play with the big boyz, you will be taken down and your economy destroyed. Ireland, Greece, Spain, Portugal and now Cyprus have all learned that lesson.
Maybe that's how it should be. Let's just stop believing the nonsense that Cyprus is one of a kind, or somehow behaved worse than others.

I wonder what would happen if the Cypriots called the EU bluff and liquidated their insolvent banks. Make the shareholder and then bondholders take the hit that they should take. Instead of offering future nat gas production revenues to Russia's Gazprom, perhaps instead commit to use those revenues to make good, over the next 10 or 20 years, on every bit of deposit insurance for Cypriot citizen's and small business accounts under $100k that it is unable to service today. Let the northern Europeans figure out how to deal with the knock-on effects from the Cyprus bank collapse on their own banks. That's a performance I would pay to get a ticket to watch...

[don]

Re: Cypriots Stunned by Forced Savings Cuts

As for Cyprus, my beef is the hypocrisy being promulgated by everyone involved. Much is being made of Cyprus as an offshore tax haven laundering huge amounts of Russian money. This is not new information to the EU, the ECB, the IMF, Interpol, the Germans, the Russians, the Cypriot bankers or politicians, or the world at large. This problem is even larger in Dubai, growing rapidly in Asia as money funnels out of mainland China ahead of the coming crash, and even London is anything but lily-white. Yet they all look the other way. Nobody is suggesting the Cypriots are blameless. Perhaps what needs to be asked "Is this reason enough to bring the entire country of Cyprus and its citizens, residents and legitimate commerce to its knees?" And for what purpose?

HSBC and a few other banks get caught laundering Mexican money by U.S. authorities and they get "rap on the wrist" level fines...no other consequences. Why? Blatantly simple...if you are big enough you are above the law:

"...Attorney General Eric Holder told another Senate panel that it was difficult to prosecute some large institutions because it would "have a negative impact on the national economy, perhaps even the world economy...When (Senator Elizabeth) Warren repeatedly asked whether regulators could identify a line beyond which a bank should face losing a license, (Treasury Department's David) Cohen struggled to respond before saying: "The actions that we took in the HSBC case we thought were appropriate in that instance..."

Manipulate LIBOR, with the full knowledge of the FSA. No problem. And on it goes. Russian offshore money laundering looks pretty tame by comparison, imo.

Cyprus is not a "unique case" as the Eurocrats wish us to believe. It's part of a now long established pattern playing out all over the world. If you are big enough to do damage you are protected at the taxpayer's expense. If not, and you have been trying to play with the big boyz, you will be taken down and your economy destroyed. Ireland, Greece, Spain, Portugal and now Cyprus have all learned that lesson.
Maybe that's how it should be. Let's just stop believing the nonsense that Cyprus is one of a kind, or somehow behaved worse than others.

I wonder what would happen if the Cypriots called the EU bluff and liquidated their insolvent banks. Make the shareholder and then bondholders take the hit that they should take. Instead of offering future nat gas production revenues to the Gazprom, perhaps instead commit to use those revenues to make good, over the next 10 or 20 years, on every bit of deposit insurance for citizen's accounts under $100k that it is unable to service today. Let the northern Europeans figure out how to deal with the knock-on effects from the Cyprus bank collapse on their own banks. That's a performance I would pay to get a ticket to watch...

+1

[GRG55]

Re: Cypriot Gas Deposits

the Brits seem to like it . . .

MUCH better winters than their own overcrowded, over-regulated, overpriced inbred island - for both military postings & civilian retirements. :-)

(Hmmm, I wonder if they have a Cadillac dealership...)

[shiny!]

Re: Cypriots Stunned by Forced Savings Cuts

The USA taxes on citizenship. That is most unusual. Almost all the other nations in the world tax on residency or domicile. The major benefit that USA citizens derive from this, imo, is that no matter what the USA will come to the aid of its citizens anywhere in the world...that includes evacuation of expatriates who find themselves trapped in a pending or current war zone. When I lived abroad I always found it amusing that some expat citizens of other countries like Canada, the UK and Australia seem to think they are deserving of the same privilege from their government, even though they don't pay taxes to support that function.

This would be honest. It would be Cyprus' version of pulling an Iceland.

Income in most jurisdictions are "self-reported". I have to report and pay tax on my worldwide income, including anything from business ventures offshore. If I don't the penalties are extremely harsh, so I have no incentive to try to cheat the taxman...and these days the media & the taxman appear to have no great difficulty finding offshore bank accounts if they really want to - witness the French Budget Minister debacle this week. As much as most people do not like paying taxes, we might perhaps treat them as a measure of individual success. I would hate to be in the position where my income is insufficient to trigger any tax...life would be a bitch.

As for Cyprus, my beef is the hypocrisy being promulgated by everyone involved. Much is being made of Cyprus as an offshore tax haven laundering huge amounts of Russian money. This is not new information to the EU, the ECB, the IMF, Interpol, the Germans, the Russians, the Cypriot bankers or politicians, or the world at large. This problem is even larger in Dubai, growing rapidly in Asia as money funnels out of mainland China ahead of the coming crash, and even London is anything but lily-white. Yet they all look the other way. Nobody is suggesting the Cypriots are blameless. Perhaps what needs to be asked "Is this reason enough to bring the entire country of Cyprus and its citizens, residents and legitimate commerce to its knees?" And for what purpose?

HSBC and a few other banks get caught laundering Mexican money by U.S. authorities and they get "rap on the wrist" level fines...no other consequences. Why? Blatantly simple...if you are big enough you are above the law:

"...Attorney General Eric Holder told another Senate panel that it was difficult to prosecute some large institutions because it would "have a negative impact on the national economy, perhaps even the world economy...When (Senator Elizabeth) Warren repeatedly asked whether regulators could identify a line beyond which a bank should face losing a license, (Treasury Department's David) Cohen struggled to respond before saying: "The actions that we took in the HSBC case we thought were appropriate in that instance..."

Manipulate LIBOR, with the full knowledge of the FSA. No problem. And on it goes. Russian offshore money laundering looks pretty tame by comparison, imo.

Cyprus is not a "unique case" as the Eurocrats wish us to believe. It's part of a now long established pattern playing out all over the world. If you are big enough to do damage you are protected at the taxpayer's expense. If not, and you have been trying to play with the big boyz, you will be taken down and your economy destroyed. Ireland, Greece, Spain, Portugal and now Cyprus have all learned that lesson.
Maybe that's how it should be. Let's just stop believing the nonsense that Cyprus is one of a kind, or somehow behaved worse than others.

I wonder what would happen if the Cypriots called the EU bluff and liquidated their insolvent banks. Make the shareholder and then bondholders take the hit that they should take. Instead of offering future nat gas production revenues to Russia's Gazprom, perhaps instead commit to use those revenues to make good, over the next 10 or 20 years, on every bit of deposit insurance for Cypriot citizen's and small business accounts under $100k that it is unable to service today. Let the northern Europeans figure out how to deal with the knock-on effects from the Cyprus bank collapse on their own banks. That's a performance I would pay to get a ticket to watch...

This. This is what everybody should be doing. Maybe we'll get to watch. May the Realm of Justice come.

[thriftyandboringinohio]

Re: Cypriots Stunned by Forced Savings Cuts

...I wonder what would happen if the Cypriots called the EU bluff and liquidated their insolvent banks. Make the shareholder and then bondholders take the hit that they should take. Instead of offering future nat gas production revenues to Russia's Gazprom, perhaps instead commit to use those revenues to make good, over the next 10 or 20 years, on every bit of deposit insurance for Cypriot citizen's and small business accounts under $100k that it is unable to service today. Let the northern Europeans figure out how to deal with the knock-on effects from the Cyprus bank collapse on their own banks. That's a performance I would pay to get a ticket to watch...

That's the clearly honest approach, GRG55

The basic arrangement was known to one and all - deposits up to 100,000 euros were insured 100%. Deposits above that are at risk just like shares of stock in the bank or bonds.

Plan A, hitting small depositor with a loss of 6.7% violates that agreement. Protecting big deposits above that also violates the agreement.
Fair play would be to close the bank, make depositors whole only up to 100,000 euros, and let the rest take their losses. The sun will rise again the next day in Cyprus.

[GRG55]

Re: Cypriots Stunned by Forced Savings Cuts

...The sun will rise again the next day in Cyprus.

Exactly. I made a comment in a recent email exchange that on my only visit to Cyprus, about a decade ago, I went to an evening mass in a magnificent stone church in Larnaca that was more than 1000 years old...and I wondered in another 1000 years if anyone in Cyprus would care much about the goings on with the EU today...

[don]

Re: Cypriots Stunned by Forced Savings Cuts

Exactly. I made a comment in a recent email exchange that on my only visit to Cyprus, about a decade ago, I went to an evening mass in a magnificent stone church in Larnaca that was more than 1000 years old...and I wondered in another 1000 years if anyone in Cyprus would care much about the goings on with the EU today...

All the Euro-Latin countries have history going for them. My Rumanian neighbor, who castigates the Romantic countries (she inc. Romania), says they always fall back on how long they've been around. I see her point, but from another perspective

[GRG55]

Re: Cypriots Stunned by Forced Savings Cuts

All the Euro-Latin countries have history going for them. My Rumanian neighbor, who castigates the Romantic countries (she inc. Romania), says they always fall back on how long they've been around. I see her point, but from another perspective

Isn't that part of the strong affinity that the Cypriots and Greeks have for each other? I think it goes back a lot further than 1974.

Some use that same appeal to history to rationalize every excess in China today...Beijing is taking "the long view". Maybe the EU should try that approach :-)

[BadJuju]

Re: Cypriots Stunned by Forced Savings Cuts

http://www.aljazeera.com/news/europe...748632355.html

The Cypriot parliament has finally given its approval to the first two of eight measures hammered out by the government in a desperate bid to rescue an EU bailout by a Monday deadline.
Legislators voted late on Friday in favour of a national solidarity fund to be set up through the nationalisation of public and private sector pensions.
The measure also calls for capital controls to prevent a run on the island's troubled banks when they are finally due to open on Tuesday after a more than week-long break.
The votes followed prolonged talks between party leaders on the package aimed at raising $7.47bn to qualify for $13bn in rescue loans or face being denied European Central Bank (ECB) emergency funds.
More contentious measures remain to be debated including a tax of up to 15 percent on bank deposits of $129,000 and more, a levy that in a slightly different form was rejected by legislators last Tuesday.