Wednesday, March 27, 2013

Cypriot dominos

Following up yesterday's post, Musings on the Cyprus bail-out, Students protest in Cyprus the New York Times had a fascinating article yesterday, Europeans Planted Seeds of Crisis in Cyprus, that provided more on the detail of a crisis that I had not properly. The photo from the Times shows students demonstrating to protest the arrangements.

One key thing that I learned was the way that the forced cuts in the value of Greek Government bonds meant that those holding the bonds — notably the then-cash-rich Cypriot banks — would lose at least half the money they thought they had. Eventual losses came close to 75 percent of the bonds’ face value. Of course more was involved, but that level of loss seems to have ultimately doomed the Cypriot banking system. It's also interesting that the Cypriot Finance Minister apparently did not spot the danger at the meeting.

I was going to comment further tonight on regulatory issues, but this short post is all I have time for.


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Winton Bates said...

I wonder why Cyprus remains in the Euro.

In a situation like that in Cyprus where banks are viewed as both 'too big to fail' and 'too big to save', the restructuring process would normally be expected to involve substantial currency depreciations. In one sense that would just be an alternative way for depositors to take a haircut. However, politicians could be expected to see it as a more attractive option because it would give foreign depositors a greater immediate haircut than domestic depositors.

Jim Belshaw said...

Interesting point, Winton. As I understand the Greek case, the difficulties and risks involved in transitioning from the euro to the drachma were just too great.

In the Cypriot case, they have had willy nilly to accept some of those including freezes on withdrawals and capital controls. Whether they could have gone further and exited and what that would have done is more complicated. For example, all the deposits and securities are denominated in euros. Just how do you manage that?

As always, you are helping me unpick my ideas!

Anonymous said...

Hi Jim

It depends where you wish to concentrate your thoughts: 1)how did it happen? or 2) how to 'fix' it. Cyprus is an interesting, and very worrying case study I think.

On the first, you've suggested the immediate (as in proximate) cause of the problem was the Cyprus haircut taken on Greek bonds. I think that's fair, but a wider view might be to state that one country within a larger block of common currency was permitted (probably the wrong word) to put in place a tax system placing it at an advantage over other members of the block - a 'tax haven' if you will. This attracted funds far in excess of those able to be employed within its own economy, hence investment abroad.

Now we are at the position of having a small easily definable banking system which operates in what is basically a global environment having a 'solution' imposed upon it which seeks to assign all cost to the citizens of that country. I think that is a nonsense, and bound to fail.

Further, if the excessive unemployable funds of Cyprus are 'the problem', then I wonder how long it will be before attention turns to places like Luxembourg, Liechtenstein - and dare I mention Switzerland - where the funds to internally employed funds ratio is many multiples of Cyprus?

On the second (how to fix) Winton's preference is probably the best, but that probably guarantees it won't happen. I don't really believe a 'fix' is possible - for Cyprus or globally - until some recognition is given to the nonsense of pretending our banking system is in any way linked to country of origin.

Cyprus' problem is that it is small and easily identifiable. This makes it easier to pretend that a 'fix' can be imposed which will not bleed into the rest of Europe, or the world as a whole.

Anyway, in a perverse way, one good thing to come out of it will be widespread recognition of the true status of ordinary depositors: that of unsecured lender, when push comes to shove. Maybe now the assessment of risks will be more realistic.


Anonymous said...

In Australian terms, it's a bit like Tasmania being allowed to instite a highly attractive tax regime which sucks funds out of the rest of the states, yet has to then invest those funds back into the mainland because it cannot employ them locally.

Instead of the Euro, we could call ours the Emu.


Jim Belshaw said...

Nice comments, kvd. I love the emu!

Anonymous said...

Savers above €100,000 at Laiki will lose 80pc of their money, if they get anything back. Those at the Bank of Cyprus will lose 40pc.

Thousands of small firms trying to hang on face seizure of their operating funds. One Cypriot told me that the €400,000 trading account of his father at Laiki had just been frozen, leaving him unable to pay an Egyptian firm for a consignment of shoes.

From an article in the UK Tele - - by AE Pritchard. I don't particularly like his hyperbolic style, but over the years I've found him to be quite accurate when quoting facts.

(At the very least I think non-interest-bearing chequing accounts should have been excluded from the 'haircut'. They are basically destroying their small business base.)


Jim Belshaw said...

Thanks for the material, kvd. I will pick the points up in an overall post on regulation and related matters. Why shouldn't I stray?

Anonymous said...

Cyprus has already effectively devalued: since the Cyprian Euro now has limited convertibility it has characteristics that differentiate it from Euros elsewhere in the Euro zone. This is a development that could set a precedent for the likes of Greece and Portugal.

Jim Belshaw said...

Hi anon. I think that you are right on the first point, although its messy. I hadn't realised until the Greek crisis that the euro notes themselves were actually country specific, carrying the country initial, so the C euro is now worth less than the rest.

On your last point, it could. If the reporting is correct, Slovenia is likely to be the enxt hot spot.

Anonymous said...

If you are travelling (and purchasing Euros in advance from an Australian bank), beware of any Euro note with a letter 'G' prefixing its serial number. These are Cyprian Euros. Best (if you can) to go for 'X', 'P', 'L', or 'N' prefixes - respectively denoting Germany, Holland, Finland and Austria as the country of issue.

Jim Belshaw said...

Thanks, anon. It's interesting. The wikipedia article on the euro states: "Euro banknotes do not show which central bank issued them. Eurosystem NCBs are required to accept euro banknotes put into circulation by other Eurosystem members and these banknotes are not repatriated."

It would appear that this is not totally correct!

Jim Belshaw said...

And here is a link with further information -

Anonymous said...

But see:

Merchants are evidently fearful of 'dodgy' Euros.

Also In the Oz it is reported to-day that Cyprus has been 'restocked with Euros flownn in from Germany (consisting of)a consignment of up to E5b - believed to be one of the largest airlifts of cash in history'. All these notes have been provided by the Bundesbank.