Category Archives: cyprus capital controls

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