As a Greek with contacts in Cyprus, his opinion is one of the most valuable ones out there. Here it is:
We have now the latest bailout plan and contrary to the spin in parts of the western media it is COMPLETELY DIFFERENT from the plan we saw last week.
What was utterly outrageous about last week’s plan was its seizure of money from deposits held in every account in every bank across the entire island of Cyprus. This offends against every principle of banking, the rule of law and of private property I know of. By what logic, if solvent debtor A owes me money, am I required to lose money to bail out insolvent debtor B with whom I have no connection at all? The Cypriot government and the Troika compounded the outrage by extending it even to deposits that held less than 100,000 euros. This was blatantly illegal since it violated the EU’s own deposit insurance scheme. As I said, what all this managed to do was transform a problem of two Cypriot banks into a systemic problem of the entire Cypriot banking system.
Though you would not know it from the way it is being reported by the western media this morning, the entire calamitous idea of a deposit raid has been entirely dropped. There will be no raid on deposits whether above or below 100,000 euros. What is happening instead is what should have happened last week. The two insolvent banks, Laiki and Bank of Cyprus, are being merged and restructured. Since they will not be bailed out and since Laiki is being effectively liquidated, the bondholders of Laiki (one of whom is a Russian businessman) will be completely wiped out. The big deposit holders in both Laiki and Bank of Cyprus will also take a big loss. This is not because their deposits in Laiki and Bank of Cyprus are being raided as was proposed last week. It is because they will suffer a commercial loss (or “haircut” if you prefer) as creditors of debtors who have become insolvent.
What proves that the Cypriot authorities and the Troika were at all times aware of the blatant illegality of last week’s proposals, is that the statement setting out this week’s agreement that has been issued by the the eurogroup specifically says that deposits below 100,000 euros (including those in Laiki and Bank of Cyprus) will be fully protected in accordance with the EU’s deposit insurance scheme. What is that if not an admission that last week’s proposed raid on those deposits was illegal?
We now therefore have a bailout agreement that at least conforms with the law. What are its further implications?
The immediate losers are the bondholders of Laiki and the big depositors in Laiki and Bank of Cyprus. Whilst I do not have private information about who these depositors are, I am going to make an informed guess and say that I doubt that many of them are Russians.
Laiki and Bank of Cyprus are the country’s two biggest retail banks. Historically Laiki has serviced the poorer people whilst Bank of Cyprus (which I believe is the country’s oldest banks) looked after the wealthier people and their businesses. I understand that Bank of Cyprus is the biggest lender to Cypriot businesses. It is likely therefore that the great bulk of the deposits in Laiki and in Bank of Cyprus (which are around half the bank deposits in the island) belong to local people. Since Laiki and Bank of Cyprus are essentially retail banks I doubt that many of the big Russian depositors have their money with them. They will have put their money in the newer private and commercial banks that have been set up in recent years on the island to service the trade with Russia. The most important of these is the Russian Commercial Bank of Cyprus though I suspect that VTB Cyprus is also a big player. I would guess further that the majority of foreigners who do have accounts in Laiki and Bank of Cyprus are Britons rather than Russians because of the long history of Britain’s connection to Cyprus and by extension to these two banks, both of which incidentally have several branches in Britain.
If this is correct, then the horrible anti Russian gloating of some of the British newspapers this morning is completely misplaced. Russian economic interests in Cyprus have come out of this affair (comparatively) unscathed. In a meeting with Medvedev this morning Shuvalov pointedly said that the Russian Commercial Bank of Cyprus (which is where I suspect most of the really big Russian money is) is unaffected. Moreover the restructing of Laiki and Bank of Cyprus does not affect the entrepot arrangements between Russia and Cyprus, which retail banks like Laiki and Bank of Cyprus are not involved in .
By contrast those who are going to be hammered are the Cypriot business community, who traditionally hold their accounts with the Bank of Cyprus and who take out their loans with it. They must now expect to lose between a third and a half of any money they have on deposit. Many of them are now going to go bust taking their businesses down with them. They form the core of Anastassiades’s political constituency and politically speaking he is now a dead man walking. This opens up the unattractive possibility that last week’s proposed deposit raid was an attempt to appropriate (steal if you prefer) Russian money to save the electoral base of a right wing pro European politician. If so then Russians doubly need to think through the implications of what happened.
What of the future? Firstly, the Cypriot domestic economy is now going to go into a tailspin. Paradoxically, this means that Cyprus is going to become more, not less, depend on its connection to Russia. European politicians and economic commentators who burble on about how the Cypriot offshore model is unsustainable should understand that the bailout makes Cyprus more dependent on it not less.
The question is however whether the model will now survive? Though the new bailout terms and the capital controls are probably enough to prevent an immediate stampede of foreign money out of the country when the banks reopen, the Russians have seen that the Cypriot government and the Troika egged on by Russophobic media commentators see no moral objection to helping themselves to their money. Despite the attempts to mollify them of the Archbishop of Cyprus (who has emerged as a towering figure in this crisis and just about the only person to talk sense) I cannot believe that they will want to keep their money in Cyprus or continue their trade with the island. I expect that over the next year or so they will quietly wind their businesses down and take their money with them. Shuvalov been talking this morning with Medvedev of the need to transfer Russian money in Cyprus back to Russian banks, presumably in Russia, and that is surely what will now happen. Since this fits in with Putin’s agenda of ending the Russian economy’s use of offshoring, contrary to the ugly jibberish and anti Russian gloating appearing in much of the western media this morning, he has come out the big winner from this affair.
By contrast, for the people of Cypriot this has been a complete disaster. Not only is the island’s economy and the trust in its banking system and government destroyed, but its major trading partner and key political and diplomatic ally in its standoff with Turkey, has been alienated, probably forever. Moreover given the way Cyprus’s GDP is now going to collapse I cannot possibly see how this bailout is going to work. On the contrary I firmly expect it to fail. As I have said before, as a Russophile I can see the benefit to Russia from what has happened. As a Greek with a strong sense of sympathy and of ethnic solidarity with Cyprus and its honest and hardworking people I am deeply angered and upset by it.
Lastly, what this ghastly shambles shows is the complete incompetence, economic illiteracy and rabid Russophobia of the people who run the eurozone. What they did last week was take a bad situation and turn it into a catastrophe. So blinded are they by their Russophobia that they were willing to agree to a scheme that broke every known law and principle of modern banking and which was bound to provoke a bank run. Behind all the Twittering and bluster of the last week they have now had to draw back in bewilderment as the Cypriot banks threatened to crash down around them. As it is confidence has been so badly shaken that we now have capital controls on a eurozone state, which has been landed with a bailout debt it can never repay.
“A majority of the deposits of more than €100,000 at the Bank of Cyprus and Laiki Bank are ultimately owned by Russian beneficiaries, a person close to one of the lenders told the Financial Times – meaning that Russian businesses and individual depositors will be paying the lion’s share of the local bailout.”
http://www.ft.com/intl/cms/s/0/5007a1fc-9577-11e2-a4fa-00144feabdc0.html#axzz2OXYpWecL
Dear Mark,
I saw this article. Any speculation about how much Russian money is held in Bank of Cyprus is a guess but what I was told today is that this article is wrong and that most of the biggest deposits are Cypriot, Greek or British.
At the end of the day though I come back to my essential point. Bank of Cyprus has crashed. Depositors in a failed bank always risk losing the uninsured part of their deposit. If they are foreigners who put their money in a bank in a tax haven then they must together with the benefits that come from that also accept the risk that if the bank fails the local government may not have the resources to bail them out. What is outrageous about what was proposed last week was not that big depositors in failed banks should take a loss, but that all depositors in all banks including ones like the Russian Commercial Bank that are completely solvent should have their deposits raided. From a Russian point of view what made it even more outrageous is the way they were abused basically for being Russian in order to justify their money being taken.
One last comment about this article. It has just been pointed out to me by someone who should know that the article does not say that the biggest deposits in Laiki and Bank of Cyprus are held by Russians. What it says is that Russians are the beneficiaries of these deposits. In other words the writer of the article or the source assume that many of the big deposits in Laiki and Bank of Cyprus are held by Cypriot proxies for the benefit of Russian clients.
This revives Paul Krugman’s idea that many accounts in Cyprus are held by local proxies for Russians. It is of course possible that some of the accounts in Laiki and Bank of Cyprus are indeed of this sort. One wonders though how the writer of the article or the source would know given that the whole idea behind owning an account through a proxy is to keep ownership secret? People I have spoken to by the way have ridiculed the whole idea and tell me that accounts in Cyprus simply do not work in that way. This is simply not something I know enough about to discuss.
Overall this article looks to me like a case of the wish continuing to be father to the thought. Some people (Ed Lucas for example) have been salivating at the idea of massive seizures of Russian money. It is perfectly obvious reading the British media over the last few days that there are some people who cannot quite reconcile themselves to the fact that it may not be happening, at least not to the degree or in the openly illegal and brazen way they thought it would. At least this article (as its comments about the Russian Commercial Bank of Cyprus shows) admits that the idea of a deposit raid on every Cypriot bank has for the time being been dropped.
That’s two factual errors in half a sentence. Looks like Alexander, yet again, has no clue what he’s talking about.
Read further.
PS: I made one mistake. I thought the foolish Russian investor had a bought a part of Laiki. It turns out that he bought part of the Bank of Cyprus, not Laiki, which was only slightly less foolish.
OK, can you spot the second one?
Well, a shareholder, not a bondholder. But is this of vast significance to the overall argument Mercouris has been making?
Dearest Peter,
Thank you so much for taking all the trouble to correct my every mistake. It is so comforting to know that there is someone like you out there checking even my most minor point. What would I do without you?
This also seems very important and up-to-date. Evidently most of the Russian money may have been snuck out of Bank of Cyprus and Laiki in the last few days.
http://www.reuters.com/article/2013/03/25/eurozone-cyprus-muddle-idUSL5N0CG13920130325
It’s also completely wrong. The banks in Cyprus are closed, money can’t sneak out. Their affiliates in other countries are owned by them, but they are completely separate legal entities with different regulations and capital structures, i.e. you can’t walk into Uniastrum and take money out of your BoC account and vice versa. They are, legally, just as separate as if they had no affiliation whatsoever.
Dear JLo,
You are certainly right now. There was a short period at the start of last week when it was still possible despite the imposed Ban Holiday to make electronic transfers out of accounts on the island. However by Wednesday the European Central Bank had closed that option down. I don’t know how much money left Cyprus before the clampdown, but I doubt any is leaving now.
Lastly here is a report of an interview with Itar Tass by a Cypriot lawyer Sophocleous (not personally known to me), who makes many of the same points about potential Russian losses I am hearing.
http://www.itar-tass.com/en/c154/688026.html
The Russian stake and exposure to Cyprus is being exaggerated. Those Russian companies who merely use Cyprus as a base for their Russian operations will not be severely affected. Of course any Russian business that has invested in the Cyprus economy (for example in its tourist sector) is going to take a huge loss given that the economy is about to collapse, but realistically how many such businesses are there and how big relative to the size of the Russian economy can such a loss be?
I posted a version of this in another forum & much of it has been partly covered here, but thought it was still worth posting here. As pointed out by Alexander & others, the majority of the money in Laiki & Bank of Cyprus is not Russian, and the deposits most likely go in this order:- Cypriot, Greek, UK, Ukraine, Russia, Romania, & Serbia. Dubai was probably the largest after the UK (possibly even larger at one point in money passing through) but they likely got all their money out in time.
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The headline problem that led to the Cypriot default was the Marfin Laiki bank (also called the Marfin Popular Bank), with the Bank of Cyprus following behind it. As usual, it was a small cabal at the top which inspite of the banks superb fundamentals (some of the best ratio of deposits to loans in the Eurozone) managed to saddle the banks with massive debts by extensively gambling on mostly Greek bonds, picking up large profits for those connected insiders along the way.
The oddity in this is that they continued to buy Greek bonds in massive amounts after the Greek crisis had exploded, while the European regulators were essentially cheering them on. The ECB performed ‘stress tests’ twice while in the middle of this & both times sang their praises, essentially saying how wonderful & stable the Cyprus banks were, and came out with a statement just before the crisis that said everything was fine. The IMF were also onboard, stating “Supervision is strong, effective, and in compliance with International Standards”
Meanwhile Laiki had been expanding heavily into Eastern Europe, with 73 branches in Ukraine, 26 in Serbia, 27 in Romania, 41 in Malta & 27 in Russia (5 in UK). In their investor presentations in these countries they said they had NO exposure to Greek debt, & that the Bank of Cyprus didn’t either at the end of 2011 (a flat lie).
Marfin Laiki’s largest shareholder is Dubai – 18.8% through the Dubai Group, with the second largest shareholder being the Marfin Investment Group, of which they 9.55%.
In their investor presentation they seemed to boast of ties to Noble Energy & extensively talked up the Gas sector, which seemed to make little sense for a bank.
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Some of this could be explained by the obvious corruption & insider trading that is rampant, but the close support of the ECB & IMF of these banks prior to collapsing them would seem to open them up for charges of at best, complete incompetence, at worst, active collusion in fraud, & major lawsuits by investors seem likely. And while there is very little reporting of this aspect in the MSM, many investors were likely enticed into buying into these banks along with depositors putting & keeping their money there by the strong ECB/IMF backing.
Ultimately, these banks were being actively packaged & sold as safe havens from troubled economies in Eastern Europe & Greece, and the ECB & IMF’s support played a major role in this.
Is The Collapse Of Cyprus Due To This Man?
http://www.zerohedge.com/news/2013-03-28/collapse-cyprus-due-man
Marfin Laiki investor presentation in Ukraine, Novemeber 2011
http://www.intax-info.com/pdf/intax_info_presentations/Kiev_November_2011/7_Marfin%20Laiki.pdf
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