12-Point Crash Course on Economic Crisis in Cyprus--And How It Could Affect You

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View the full post at Cameron Harris: Your 12-Point Crash Course On the Economic Crisis in Cyprus--And How It Could Affect You

This is the most informative summary I have read of what is occurring in Cyprus and how the situation could eventually affect all of us. Worth the read

Last night, Eurozone finance ministers held a summit in Brussels to decide whether Cyprus gets a €10 billion bailout or whether the country gets shoved out of the Euro. The ministers finally approved a bailout deal to rescue Cyprus (momentarily) and keep it in the Eurozone, but the deal carries a high price for those that have deposited their money in Cypriot banks. Here is a crash course on how Cyprus and the Eurozone arrived at where they are and the effects of the situation:

1. Cyprus joined the Eurozone in 2008. This new membership lowered the cost of borrowing money for the Cypriot government and the country's banks.

2. Cyprus' parliament is composed of one house with 59 seats. The Democratic Rally party is the largest party, but it does not have a majority--meaning that it cannot pass laws without the support of other parties.

3. Cyprus and Greece have a very long-standing, very close relationship. When Greece entered an economic slump, so did Cyprus.

4. Cypriot banks held large amounts of Greek government debt. When Greece partially defaulted on its debt last year, Cyprus's two largest banks took a major hit. The government was forced to step in and look for a bailout.

Continued at Cameron Harris: Your 12-Point Crash Course On the Economic Crisis in Cyprus--And How It Could Affect You

 

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Is Cyprus another Lehman Bros.?...

Why the Cyprus Solution Will Hurt Market Stability
Monday, 25 Mar 2013 | What appears to be the final resolution of the crisis in Cyprus may not be perfect but it does not stray that far from the approach advocated here and on The Wall Street Journal's editorial page last week.

But a good resolution of the Cyprus crisis may not be enough to undo the damage from interventions that are not based on clearly stated diagnoses or predictable frameworks for government actions. The lesson that policymakers should have learned in 2008 was that massive ad hoc responses with little public explanation undermine market confidence. Such interventions, developed through secret meetings, promote uncertainty and fear. If, as the gentleman once said, the only thing we have to fear is fear itself, this is the perfect recipe for producing that dangerous dish. (See this paper by John Taylor on how unpredictable intervention worsened the reaction to Lehman's collapse.)

The last-minute deal agreed by Cypriot and EU leaders will impose serious losses on the creditors of Laiki Bank, also known as the Cyprus Popular Bank. Some 4.2 billion euros in deposits of more than 100,000 euros will be placed in a "bad bank," meaning they could be wiped out. Smaller deposits will be moved to the Bank of Cyprus, which will see its own deposits in excess of 100,000 euros frozen while the bank is restructured and recapitalized. A good portion of those deposits—it's not clear exactly how much—is likely to get converted into Bank of Cyprus equity as part of the recap. Imposing losses on the creditors of failed banks—including uninsured depositors when the losses are extensive enough to wipe out bondholders—should have been the first reaction of policymakers. Instead, they sought to spread the burden of propping up Laiki and the Bank of Cyprus by imposing a tax on accounts of all depositors, including those in healthier banks.

As economic historian Anna Schwartz explained five years ago: "Firms that made wrong decisions should fail." "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich," Schwartz told The Wall Street Journal. It's not clear why Laiki has to be wiped out. Perhaps its losses are worse than they have let on. But credible sources I spoke to thought the bail-in recapitalization should have been able to work for Laiki. It's also unclear why the Bank of Cyprus' bondholders have not yet been wiped out. Depositors should sit on the top of the capital structure. If some deposits are being converted to equity, this should only be a last resort after the wipeout of other creditors.

I suspect the answer to these questions is that both banks were debtors to the European Central Bank. The ECB is unwilling to take losses on its support for banks, so it has arranged a scheme to wipe out Laiki while moving Laiki's ECB debt to the Bank of Cyprus. This isn't necessarily a terrible policy—but it is terrible that we're left speculating rather than being given direct answers by the authorities involved. It's striking that this level of public dithering can be combined with the extreme lack of transparency. One would think that nothing kept this secretive could possibly look so publicly foolish at the same time. Once again the Eurocrats have outperformed expectations. It will hardly be surprising if the fallout from this is far more traumatic to markets than the Eurocrats expect. They've revealed that they're still making this stuff up as they go along, that there is no way of predicting (much less quantifying) the risks of unprecedented policy moves being undertaken for unheralded interests. Not exactly the stuff that builds confidence, stability, and trust in a financial system.

Why the Cyprus Solution Will Hurt Market Stability

 

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Granny says she'd like to be a teller; she'd tell `em 'Dat's all ya get'...

Cyprus: cash withdrawals capped at 300 euros
Mar 27,`13 -- Banks in Cyprus are to open for the first time in more than a week on Thursday, operating for six hours from noon (10:00 GMT), but restrictions will be in place on financial transactions to prevent people from draining their accounts.

Among the capital controls, cash withdrawals will be limited to 300 euros ($383) per person each day. No checks will be cashed, although people will be able to deposit them in their accounts, according to a ministerial decree that was released late Thursday. The controls will be in place for four days. Cyprus's banks were closed on March 16 as politicians scrambled to come up with a plan to raise 5.8 billion euros ($7.5 billion) so the country would qualify for 10 billion euros ($12.9 billion) in much-need bailout loans for its collapsed banking sector. The deal was finally reached in Brussels early Monday, and imposes severe losses on deposits of over 100,000 euros in the country's two largest banks, Laiki and Bank of Cyprus.

Since Monday's deal, Cypriot authorities have been rushing to introduce measures to prevent a rush of euros out of the country's banks when they do reopen. Other capital controls include a cap of 5,000 euros on transactions with other countries, provided the customer presents supporting documents. Payments above that amount will need special approval. Travelers leaving the country won't be able to take with them anything over 1,000 euros in cash - as well as the equivalent sum in foreign currency. Tuition fees and living expenses of up to 5,000 euros for three months will be permitted for overseas students, but documentation must be provided proving the student's relationship to the dispatcher.

Also investors will also not be able to terminate fixed-term deposit accounts before they mature unless the funds are to be used for the repayment of a loan in the same bank, the decree says. In the capital, Nicosia, armed police officers guarded several trucks carrying containers arriving at the country's Central Bank, while a helicopter hovered overhead. The contents of the trucks could not be independently confirmed, although state-run television said they were carrying cash flown in from Frankfurt for the bank reopening.

Meanwhile, private security firm G4S will dispatch 180 of its staff to all bank branches across the island to keep a lid on any possible trouble, said John Argyrou, managing director of the firm's Cypriot arm. "Our presence there will be for the comfort of both bank staff and clients, but police will also be present," he said. Argyrou said he doesn't foresee any serious trouble unfolding once banks open their doors because people had time to "digest" what has transpired. "There may be some isolated incidents, but it's in our culture to be civil and patient, so I don't expect anything serious." Another 120 staff from G4S would be assigned money transportation duties. In Nicosia Wednesday night, several hundred demonstrators marched from the European Union's offices in the capital to Parliament to protest the bailout plan.

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Banks in Cyprus opened on Thursday - for the first time in nearly two weeks...

Bank of Cyprus big depositors could lose up to 60%
30 March 2013 - Bank of Cyprus depositors with more than 100,000 euros (£84,300; $128,200) could lose up to 60% of their savings as part of an EU-IMF bailout restructuring move, officials say.

The central bank says 37.5% of holdings over 100,000 euros will become shares. Up to 22.5% will go into a fund attracting no interest and may be subject to further write-offs. The other 40% will attract interest - but this will not be paid unless the bank performs well. It was known that the wealthiest savers at the Bank of Cyprus would take a large hit from the bailout deal - but not to this extent, the BBC's Mark Lowen reports. Cypriot officials have also said that big depositors at Laiki - the country's second largest bank - could face an even tougher "haircut". However, no details have been released.

The officials say that Laiki will eventually be absorbed into the Bank of Cyprus. The fear is that once the unprecedented capital controls - which are in place for an indefinite time - are lifted, the wealthiest will rush to move their deposits abroad, our correspondent says. He adds that the larger than expected loss could also have devastating consequences for large depositors such as schools and universities. And it could spread fear in other indebted eurozone countries that Cyprus might set a precedent.

'Loans written off'

Cyprus needs to raise 5.8bn euros to qualify for the bailout, and has become the first eurozone member country to bring in capital controls to prevent a torrent of money leaving the island and credit institutions collapsing. The original 10bn-euro bailout deal was agreed in Brussels earlier this month. It placed a one-off tax on all customers of Cypriot banks, starting at 6.75% for the smallest deposits. But this led to mass protests across Cyprus, and the deal was later voted down by the country's parliament. MPs later backed a revised deal. Cypriot President Nicos Anastasiades has said the financial situation has been "contained" following the deal. He has also stressed that Cyprus has no intention of leaving the euro, stressing that "in no way will we experiment with the future of our country".

On Thursday, banks in Cyprus opened for the first time in nearly two weeks. Queues formed of people trying to access their money, but the mood was generally calm. By Friday, banks had returned to their normal working hours and there were no longer reports of big queues. In a separate development, Cyprus launched an investigation after Greek media published the names of politicians who allegedly had loans forgiven by three Cypriot banks at the height of the crisis. The Bank of Cyprus, Laiki and Hellenic Bank apparently wrote off loans of millions of euros to companies, local authorities, and politicians from some of the island's biggest parties. The list has now been handed to the ethics committee of the Cypriot parliament.

BBC News - Bank of Cyprus big depositors could lose up to 60%