Eurozone
THE LATEST GREEK TRAGEDY TURNS INTO AN ARGENTINE-STYLE NIGHTMARE
FX
A horrible outcome for Cyprus, and two dangerous precedents for the Euro
Cyprus, the EU, and the IMF have struck a 10 billion euro bank refinancing deal that includes the closure of its second largest
lender
Laiki Bank, and the shrinking of its largest lender, Bank of Cyprus. Both banks currently cover together about half of the country’s bank deposits. Laiki’s bonds and its deposits above 100’000 euro, for a total of 4.2 billion euro, will be wiped out. Te remaining deposits will be transferred to Bank of Cyprus. Te larger deposits of Bank of Cyprus face draconian write- downs (very likely significantly in excess of 20%). To prevent a massive
capital flight Cyprus will introduce account freezes and capital controls. Its economy is entering a multi-year economic
depression. Markets are
buying into the “uniqueness” of Cyprus travails. Yet, the very fact that the EU had officially considered the taxation of all the country’s bank deposits, as well as the by now inevitable freezing of those deposits, sets two dangerous new precedents for Europe’s embattled monetary union.
Frantic search for 5.8 billion euros How has it been possible for deal
the
EU to come up with a Cyprus bank refinancing
that contemplated
nothing less than a 6.75% levy on all deposits smaller than 100’000 euro?
First, because Cyprus banks are almost exclusively financed through deposits such that meaningful bond write- downs were not an option. Second, a full bail-out, raising the EU-IMF loan from 10 billion euro to 15.8 billion euro, would have raised the small country’s debt to GDP ratio to unsustainable levels. Finally, the country’s economy has been relying almost exclusively on an outsized offshore banking sector, such that Cyprus’ government wanted to prevent its implosion by limiting the toll on larger foreign deposits (keeping it at 9.9%, below the psychologically significant two- digit level). Tis original plan has now been aborted. Te prospect of an implosion of the country’s banking system is as real as ever.
FX TRADER MAGAZINE April - June 2013 9
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