Monthly Archives: March 2013

Stuck in Cyprus? Head to the Beach Perhaps…

The information below is based on quality media reports made today (March 25th). However, at this stage there is very little official information published about the agreement, so important details may be subject to change.

1. Bank Popular (Laiki) will be closed. Accounts less than Eur100k will go into Bank of Cyprus, which will get support from the ECB. In cases where accounts have more than Eur100k, it is not formerly stated whether the first first Eur100k will be transferred to BoC, but this is a reasonable assumption. Investments remaining in Bank Popular will be written down against its losses. The owners of these deposits will be compensated with equity of the remaining bank, although this will likely have only very low residual value. Bond holds of this bank, should also expect to be written down.

2. Bank of Cyprus will remain open, receiving ECB funding and insured deposits from Bank Popular. As it is also in a very weak financial position, large depositors in this bank will likely be partially written down (estimates maximum 40% loss) to restore the banks solvency. It is currently unclear if bonds in this bank will be written down. Those experiencing write-downs may also be compensated with equity, although again the residual value will be very low.

3. In theory no other depositors in Cypriot banks will suffer losses. However, even when the banks reopen, capital controls will remain in place, it is not clear how or when money will be released from accounts. This will likely depend on how quickly Cypriot banks can liquidate assets themselves. The fact that Cypriot banks will have to sell assets to fund withdrawals explains our caution about the short-term market direction.

Best regards,

James

Cyprus Capital Controls: New Post-Credit Crisis Rescue Rules

Cyprus is close now to finalising a rescue deal with the EU. These are the key aspects:

– Wind down the worst bank(s)

– Probably defend the deposit insurance plan so that accounts less than Eur100k are protected in theory

– Tax larger deposits

– Capital controls

After all that has happened, people want to get their money out. But we all know what happens if everyone draws their money out the bank at the same time – the result would be massive losses for everyone.

So, Cyprus will put in place strict capital controls to prevent money from leaving.

This is against EU law, and an exception will be made.

But after Iceland, financial theory now considers such controls to be acceptable in this kind of situation. (Iceland didn’t impose capital controls and so the banks crashed and the losses were higher and uncontrolled.)

What does it mean for us? It likely means the risk of markets going down is not over just because Cyprus has a deal.

What does it mean for clients? If they still have money in Cyprus they won’t recover it.

What can you do to help them? Distressed debt funds will be ready to buy frozen assets at a discount. If you want more information please contact me.

Have a good weekend

Cyprus Capital Controls – Crisis Resolution Evolving

Cyprus is close now to finalising a rescue deal with the EU. These are the
key aspects:

– Wind down the worst bank(s)

– Probably defend the deposit insurance plan so that accounts less than
Eur100k are protected in theory

– Tax larger deposits

– Capital controls

After all that has happened, people want to get their money out. But we all know what happens if everyone draws their money out the bank at the same time – the result would be massive losses for everyone.

So, Cyprus will put in place strict capital controls to prevent money from leaving.

This is against EU law, and an exception will be made.

But after Iceland, financial theory now considers such controls to be acceptable in this kind of situation. (Iceland didn’t impose capital controls and so the banks crashed and the losses were higher and uncontrolled.)

What does it mean for us? It likely means the risk of markets going down is not over just because Cyprus has a deal.

What does it mean for clients? If they still have money in Cyprus they won’t recover it.

What can you do to help them? Distressed debt funds will be ready to buyfrozen assets at a discount. If you want more information please contact me.

Have a good weekend

Notes on Cyprus (from someone who’s been there)

Leaving aside the implications of hitting deposits ostensibly covered by guarantees (big, but likely containable) here is the Russian view: 

Contrary to what the media keep saying, Cyprus isn’t full of “mafia” money. It’s full of Russian corporate money, which goes there legally and illegally to avoid excessive taxation in Russia. Of course, this differentiation doesn’t help much – companies need their working capital more urgently than mafia bosses need their ill-gotten gains. 

Cyprus is very widely used, so there is a distinct risk to the Russian economy from this event. Not from the taxation so much, but from the closure of the Cypriot banking system. This makes cash management very inconvenient for a lot of Russian businesses. It’s a risk, but most likely people will find alternative capital sources; and where they fail, the government and CBR will help out, likely indirectly through VTB and SBER. 

Longer term, this event is good news for Russia. It is a mistake to say that Putin is sabre-rattling. He is unlikely to do anything dramatic. Firstly, he understands that he can’t change what Europe will do, although he’d like to be kept in the loop. Secondly, this news is actually very good for him. Russia’s “de-offshore-ization” campaign just got a giant shot in the arm. Expect Russia to be cooperative behind the rhetoric and behind the scenes. 

The bigger problem here is Cyprus itself. Unless it can offer something a motivation not to withdraw, a very large volume of Russian money will leave Cyprus when the banks reopen. 

It seems impossible to tax deposits guaranteed (sub Eur100k). But equally, the banking system in Cyprus (functional or otherwise) is a major economic sector, taxing large deposits held there threatens it very directly. Without banking, essential forward projections of Cypriot GDP are useless, and the plan proposed doesn’t seem to have enough leeway for this sector to fail.