Mish's Global Economic Trend Analysis

Poker or Chicken? Cyprus Archbishop Says "Leave the Eurozone and Readopt the Cyprus Pound"
Cyprus Bailout Math; Can Depositors Be Left Whole?
Cyprus Details: Blackmail, Bulldozer Threats, Bank Holiday to Tuesday; Calls to Exit Eurozone; Reflections on Arrogance and Idiocy

Poker or Chicken? Cyprus Archbishop Says "Leave the Eurozone and Readopt the Cyprus Pound"

Posted: 17 Mar 2013 10:06 PM PDT

EU officials are now swarming over Cyprus threatening to cut off funds to Laiki , Cyprus' second largest bank if the deal does not go through. Nonetheless, Cyprian politicians are balking because they know what will happen to those who go along with EU blackmail threats.

Making matters difficult for President Nicos Anastasiades, the Cyprian government controls only 28 of 56 seats in the chamber and needs support and backing from two deputies of a small pro-European party.

Today's vote was postponed for one obvious reason. The votes are not there.

As one would expect Cypriot authorities in revised deal talks.

Cyprus' embattled president was on Sunday in talks with Brussels and political rivals to ease the terms of a planned levy on smaller deposit holders as he tried to scrape together a parliamentary majority for a €10bn bailout for the debt-laden island.

A revised deal being discussed in Nicosia, with the blessing of the European Commission, would shift more of the burden on to deposits larger than €100,000, according to officials involved in the talks.

"The ECB officials were very blunt," said one Cypriot official familiar with the discussions. "There are serious fears of contagion regarding Italy and Spain if this legislation doesn't go through."

Cypriot officials insisted no levy on smaller depositors was impossible. One senior Cypriot official involved in the talks said that because about 35 per cent of all deposits are below the threshold, exempting them would mean a rate so high for the rest that it would no longer be viewed as a tax.

Archbishop Chrysostomos, the island's influential spiritual leader, called for Cyprus to leave deposits intact, leave the eurozone and readopt its former currency, the Cyprus pound.

Lie of the Day

Cyprus President Nicos Anastasiades now states "depositors would be offered bank shares covering the full amount of their losses, while those who left their savings in banks for another two years would be rewarded with bonds backed by future income from exploiting Cyprus's natural gas deposits."

The Mish response is "Please be serious". Bank shares are worthless, and if they are not, they should be and soon will be. As for leaving money in the bank for two more years, subject to still more confiscation at the whims of the EU, I also say "please be serious".

"Bailout Math"

The Financial Times stated "The depositor levy was demanded by a German-led group of creditor countries to bring down the bailout's price tag from €17bn."

I went through the Cyprus Bailout Math addressing the question "can depositors be left whole?" The answer is yes, up to €17.7 billion (and depositors were only hit with €5.8 billion).

Poker or Chicken?

Some have likened events in Cyprus to the world's largest game of poker. Advantaged "chicken" is not more like it.

The Financial Times reports "The message, delivered by the ECB's chief negotiator, Jörg Asmussen, meant that if no deal was reached, Laiki would collapse, probably bringing the island's largest bank down with it, and saddling Nicosia with a €30bn bill to reimburse accounts covered by the country's deposit guarantee scheme. It was money Nicosia did not have. All of the island's account holders would be wiped out."

Apparently this is another one of those "offers you cannot refuse". The ECB was willing to inflict €30 billion in damages on Cyprus to collect €5.8 billion from Cyprian citizens.

Contagion-Begging Actions

What is someone in Greece, Spain, or Italy supposed to think?

Consider Spain. By a 526 to 86 vote, the nannycrats in Brussels just passed a regulation that will require a country to accept a bailout if offered. (Please see An Offer You Cannot Refuse; EU Passes Law Forcing Countries to Take Bailout; Is Spain the First Target?)

Also note that EU Court Strikes Down Spain's Eviction Law.

Think about the parlay of EU contagion-begging actions for a second.

Spanish banks will not be able to evict homeowners, who in turn will be give reason to default. Losses will soar at Spanish banks and they are insolvent already.
The "Offer You Cannot Refuse" action by the EU is sure to arouse suspicion of a forced bailout in Spain.
Cyprus actions will heighten fears of bank takeovers, capital controls, and theft of deposits via confiscation.

Reader Scott had this pertinent comment:

"This has simply got to be ruinous for legitimate business in Cyprus. Right off the bat every business in Cyprus is having part of its capital confiscated. Governments may not understand this but a lot of people and businesses are on a razors edge. That $1000 rent payment may not withstand a $67.50 haircut. A monthly payroll of $100,000 might not be made if 10% of the businesses cash is seized."

My friend Bernd who lives in Germany had these comments. "Judging by the German forums on Focus, Der Spiegel, SZ, FAZ and Die Zeit, there is hardly any support for this action. The name calling and swearing is rather blunt. These guys did not study their Machiavelli. He said roughly if you hurt people, you must never hurt all of them at once."

The closest Machiavelli quote I can find is "If you need to injure someone, do it in such a way that you do not have to fear their vengeance."

"F" the EU

It will not stop here. There will be more demands and more haircuts. Staying in the eurozone cannot be worth the price.

It is high time something be crammed straight down the throats of the EU and for that matter, straight down the throats of anyone in Cyprus parliament who votes for the imposed terms.

I encourage 100% of Cyprus citizens take every penny out of their banks the second the "bank holiday" ends.

Justifiable vengeance is coming, in spades.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Wine Country Conference

I am hosting an economic conference on April 5 in Sonoma, California. Proceeds go to the Les Turner ALS Foundation (Lou Gehrig's Disease).

Please see My Wife Joanne Has Passed Away; Stop and Smell the Lilacs for my association with the disease.

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Cyprus Bailout Math; Can Depositors Be Left Whole?

Posted: 17 Mar 2013 06:36 PM PDT

Inquiring minds are wondering about the terms of the bailouts imposed upon citizens of Cyprus. I am one of them.

In Cyprus Details: Blackmail, Bulldozer Threats, Bank Holiday to Tuesday; Reflections on Arrogance and Idiocy, I made the claim that Cyprus depositors need not be liable for any of this.

Many people have emailed that much of the money in Cyrus accounts was via illegal inflows from Russia. OK, is that a reason to screw every Cyprus depositor, even the small accounts below the €100,000 deposit guarantee?

I suggest not. I object to the entire scheme. First the bondholders should have been wiped out. If that was not enough then the deposits above the €100,000 deposit guarantee should have been hit. Then and only then should the average citizen been hit.

And guess what. The average Cyprus citizen would likely not have been hit. Instead, the EU mandated a "screw every citizen" policy to protect the senior bondholders.

Cyprus Bailout Math

What I wrote above was a guess, but an accurate one. Reader Jeff Baryshnik, Baryshnik Capital Management Inc., in Toronto provides some specifics in an email to me a few hours ago.

Hi Mish

I read with interest your article on the Cyprus bailout deal. After a quick review of the most recent financial statements of the four publicly listed Cypriot banks as shown on their websites, it is notable that a simple alternative proposal could protect the country from bankruptcy and make its depositors whole.

By wiping out 100% of the equity, 100% of the bondholders, and 17% of the banks' liability to central banks, the Cypriots could stabilize their banking system (based on the 5.8Bn EUR figure being discussed) without penalizing local savers.

Instead of raising 5.8Bn EUR from depositors, it could raise 1.4Bn from combined market cap, 2.0Bn from bondholders and preferred shareholders, and 2.4Bn of the 14.3Bn in combined Central Bank loans (Cypriot and ECB) it has on its books. This assumes zero contribution from the Cypriot subsidiaries of foreign banks so it may be conservative.

If the banking system is bankrupt, anything other than an Alice-in-Wonderland recovery system suggests that the order of liquidation is shareholders, preferred shareholders, debt holders, Central Bank creditors, and THEN depositors. If 10Bn or even 17Bn EUR is truly required, then coincidentally up to 17.7Bn EUR is available from equity holders, debt holders, and Central Bank creditors without impairing a euro cent from depositors.

I received other emails noting that much of the money in Cyprus was "hot money" from Russia seeing unfair tax advantages.

So what? Is that any reason to punish every Cyprus citizen? Clearly the answer must be "no".

Perhaps one can create additional spots for illegal deposits (if they could be proven), and one could (and should) distinguish between deposits above and below the deposit guarantee limit, but otherwise, the order suggested by Baryshnik seems quite reasonable.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Cyprus Details: Blackmail, Bulldozer Threats, Bank Holiday to Tuesday; Calls to Exit Eurozone; Reflections on Arrogance and Idiocy

Posted: 17 Mar 2013 10:58 AM PDT

As details of the EU's heavy handed blackmail of Cyprus come pouring in, the volatile reactions mount as expected.

Cyprus President Statement on Confiscation of Accounts

Here is the Statement by the President of the Republic Mr Nicos Anastasiades. Points five and six are interesting:

5. It saves provident and pension funds and avoids taking other tough measures such as wage and pension cuts that were put on the negotiations table.

6. It avoids further recession and the risk of the vicious circle of a second memorandum.

Care to bet?

Man Threatens Bank with Bulldozer

The BBC reports Man threatens bank with bulldozer

Threats to Vote Against Action

The Financial Times reports

"President Nicos Anastasiades faces an uphill task to persuade reluctant lawmakers, after pledging that he would "never" accept a haircut of deposits as a condition for a bailout by international lenders. His governing coalition controls 28 seats in the 56-member parliament but several members of the Democratic party, the junior partner, have threatened to vote against the bill."

Cyprus Parliament Delays Vote

What follows threats of a "no" vote should be easy to predict: Cyprus parliament delays vote on bank deposits tax.

"Cyprus' parliament on Sunday postponed a debate and vote on a controversial levy on all bank deposits that the cash-strapped country's creditors had demanded in exchange for €10 billion ($13 billion Cdn) in rescue money. The vote, which had been expected later Sunday, has been pushed back to Monday afternoon, parliamentary official Antonis Koutalianos said. The announcement set off an immediate scramble among top European officials, with reports that the European Central Bank was pressuring Cypriot authorities to hold the vote without delay."

UK to Compensate Troops and Government Workers

Chancellor George Osborne says the UK will compensate any British troops in Cyprus hit by plans to introduce a bank levy as part of a £9bn EU bailout.

Greece Exempt From Haircuts

Ekathimerini reports "the account haircut does not affect bank accounts in Cypriot bank branches based in Greece, according to sources from the Greek Finance Ministry."

German Finance Minister Wanted 40% Haircuts

Also from Ekathimerini: "Cyprus state broadcaster CyBC reported on Saturday that German Finance Minister actually entered the Eurogroup meeting on Friday proposing a 40 percent haircut on Cypriot bank accounts. Sarris stated on Saturday that this had also been the proposal of the International Monetary Fund."

Communist Party Proposes Eurozone Referendum

The Financial Times notes "The Akel communist party denounced the deal, proposing a referendum on whether Cyprus should remain a member of the eurozone. The Democratic party (Diko), which supported Mr Anastasiades in last month's presidential election, urged Cypriots to remain calm, while claiming Cyprus had been "blackmailed" at the eurogroup meeting."

Also from the above link "Yannis Stournaras, Greek finance minister, said depositors holding funds in Greek branches of Cypriot bank would not be affected. The Greek networks of Bank of Cyprus and Laiki (Popular) Bank, the largest Cypriot banks, would be split off from the parent banks and transferred to a Greek state bank, perhaps as early as Tuesday"

Bank Holiday to Tuesday

Ekathimerini reports Nicosia declares Tuesday a bank holiday, but ECB urges for action

The Cypriot cabinet has declared Tuesday a bank holiday, for fear of capital flight, and this may even be stretched to Wednesday, as depositors are certain to withdraw huge sums from the Cypriot banks after the haircut imposed.

Nicosia postponed from Sunday to Monday the tabling in Parliament of the bill including the measures for the Cypriot bailout – including a bank account haircut and a tax hike on interest and corporate earnings – but the European Central Bank insists on a rapid voting because there are already signs a domino effect will follow across European lenders and markets from Monday.

There is genuine fear of market unrest on Monday morning when stocks may crumble in the eurozone and bank accounts in other southern European bank may suffer.

Skai radio reported on Sunday that the Bank of Greece has sent between 4 and 5 billion euros to Cyprus in order to help Cypriot banks respond to cash requirements by their clients.

Reflections on Arrogance and Idiocy

Note the ridiculousness of the situation: Greece is sending cash to Cyprus.

Every step of the way, the nannycrat idiots in Brussels have underestimated the seriousness of every situation, the amount of money involved to fix them, and the public blowback in response to their policy decisions.

Cyprus is tiny. But the ramifications of this move will not be. The taxation of all deposit accounts in Cyprus was a huge mistake. It is only going to net the EU 5.8 billion Euros.

Many people have emailed that much of the money in Cyrus accounts was via illegal inflows from Russia. OK, is that a reason to screw every Cyprus depositor, even the small accounts below the €100,000 deposit guarantee?

I suggest not. I object to the entire scheme. First the bondholders should have been wiped out. If that was not enough then the deposits above the €100,000 deposit guarantee should have been hit. Then and only then should the average citizen been hit.

And guess what. The average Cyprus citizen would likely not have been hit. Instead, the EU mandated a "screw every citizen" policy to protect the senior bondholders.

This is not going to sit well in Cyprus or anywhere else, and all for a mere EU 5.8 billion Euros.

The stupidity and arrogance of these nannycrats is staggering. The nannycrats think this will stop "contagion". They are nuts.

By my accounting, the need to stop contagion has spread to Greece, Portugal, Spain, Ireland, Italy, and Cyprus. France is soon on the way.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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