Friday, March 29, 2013

"Soh-Teh-Gai" (想定外; Beyond Expectation) in Cyprus: Bank of Cyprus Depositors to Get 37.5% of Deposits in Bank Shares and Some Interest on the Remaining Deposts Which Will Not Be Returned

It looks like Russians have cleaned their accounts.

According to Reuters, Bank of Cyprus's depositors will get, for deposits over 100,000 euros:

37.5% bank equity (priced at ....?)
22.5% of deposit will earn no interest
40% of deposit will earn interest but won't be repaid sans some miracle that the bank does well.

Latest from Reuters (3/29/2013):

Big depositors in Cyprus to lose far more than feared

Big depositors in Cyprus's largest bank stand to lose far more than initially feared under a European Union rescue package to save the island from bankruptcy, a source with direct knowledge of the terms said on Friday.

Under conditions expected to be announced on Saturday, depositors in Bank of Cyprus will get shares in the bank worth 37.5 percent of their deposits over 100,000 euros, the source told Reuters, while the rest of their deposits may never be paid back.

The toughening of the terms will send a clear signal that the bailout means the end of Cyprus as a hub for offshore finance and could accelerate economic decline on the island and bring steeper job losses.

Officials had previously spoken of a loss to big depositors of 30 to 40 percent.

Cypriot President Nicos Anastasiades on Friday defended the 10-billion euro ($13 billion) bailout deal agreed with the EU five days ago, saying it had contained the risk of national bankruptcy.

"We have no intention of leaving the euro," the conservative leader told a conference of civil servants in the capital, Nicosia.

"In no way will we experiment with the future of our country," he said.

(Well Mr. Anastasiades, you just did.)

...At Bank of Cyprus, about 22.5 percent of deposits over 100,000 euros will attract no interest, the source said. The remaining 40 percent will continue to attract interest, but will not be repaid unless the bank does well.

Those with deposits under 100,000 euros will continue to be protected under the state's deposit guarantee.

(For now, you mean.)

...But policymakers are divided, and the waters were muddied a day after the deal was inked when the Dutch chair of the euro zone's finance ministers, Jeroen Dijsselbloem, said it could serve as a model for future crises.

Faced with a market backlash, Dijsselbloem rowed back. But on Friday, European Central Bank Governing Council member Klaas Knot, a fellow Dutchman, said there was "little wrong" with his assessment.

"The content of his remarks comes down to an approach which has been on the table for a longer time in Europe," Knot was quoted as saying by Dutch daily Het Financieele Dagblad. "This approach will be part of the European liquidation policy."

(Full article at the link)

So he did say that and now it's confirmed as experiment and template. I have a feeling that more people are now hoping for liquidation of EU.

So it probably isn't "soh-teh-gai" after all. It was, and has been, well within the expectation that Russians would clean their accounts in time, and that "haircuts" (or decapitation) will be administered to the rest of them small people so that they can serve as a model of European liquidation.


John Bernhart said...

When I first heard of this story (on this blog) there was no mention that those with savings under 100,000 Euros would be spared, so I was quite angry as it seemed yet another way for the rich to fleece the poor. But now that it is clear that the policies only affect those with deposits over 100,000 Euros, I entirely support them. In fact, I would say that they don't go far enough. As a poor, working class man, I think every rich person on Earth with savings more than 100,000 Euros or 100,000 USD, or 10,000,000 yen should have their entire wealth over the insured amount confiscated. Then we would have billions of dollars to spend on social programs to help the poor. Instead of being an omen of theft to come, Cyprus now seems to me a hope for things to come.

Anonymous said...

John, they were indeed going to fleece the poor, and the rich, and not so rich. This time, not yet is all I can say. And if you think people with deposits over 100,000 qualify as "rich", you tell that to people like this one -->

Or businesses who suddenly do not even have operating cash to pay for goods or employees.

Didn't you read here or elsewhere that the super-rich have probably withdrawn all their money anyway?

And please tell me who is going to do your "social programs" for the "poor". Technocrats and politicians? Good luck with that.

And please wake up.

Anonymous said...

Perhaps John hasn't kept up with inflation? 100,000 USD isn't much anymore.

Mike said...

I'm really of two minds about this. The initial proposal, which circumvented the deposit insurance system to confiscate from accounts below the insurance ceiling was plainly unlawful. But when it comes to uninsured deposits in an insolvent bank, what do the holders of such accounts have a right to expect? It seems to me they can reasonably expect no better than the treatment they would receive under the ordinary laws for liquidating an insolvent bank. If they'd be wiped out under those circumstances, then they can't really complain about the treatment they're receiving now.

The fact that they will lose money is not in itself problematic, since that is a risk they took by placing funds above the insured amount in those banks. The issue should be whether the current deal deprives uninsured depositors of procedural protections that they might receive under the liquidation law, that might result in a better payout.

arevamirpal::laprimavera said...

Mike, read this-->

Depositors, the most senior creditors to a bank, are being wiped out because last year the ECB practically bailed out the creditors of lower claims - subordinate debt holders who bought bank debt on a fraction of the par value. They should have been the 2nd to get wiped out (first are equity holders), but instead they were bailed out long before the current mess.

Mike said...

Thanks for that. Maybe I need to mull this for a bit longer, but after reading the ZH article I'm still puzzled.

If old junior debt has been taken out by new junior debt, why does it make a difference to the most senior class (depositors) in liquidation? Sure, it's a windfall to the juniors, but it doesn't leave the depositors any worse off than they were before. It's not as if the most senior creditors (depositors) were being primed with new debt. And no one seems to be suggesting that the terms of the new debt to ECB were so much worse than the terms of the old junior bonds as to push the bank into insolvency -- and the bank was already insolvent.

I don't have a grasp on how the ECB works, so perhaps that's where the answer lies. In any event, thanks for the reply, it has given me food for thought.

arevamirpal::laprimavera said...

Mike, what the ECB did was to pay, say 50 cents on a euro to subordinate debt holders who had bought the debt in the secondary market for, say 10 to 20 cents on a euro. By "bailing them out", ECB hugely profited these subordinate debt holders (international hedge funds and other investment banks) who doubled, tripled their money. The debts were retired, replaced by the loan from ECB.

That's my understanding so far.

Another Zero Hedge post showing Cyprus's bank liabilities with no subordinate debts:

Anonymous said...

So, in the end it is 100% confiscation?
Hah. And where does the money go, pray tell?

Post a Comment