The Resolution To The Cyprus Bank Crisis

The Resolution To The Cyprus Bank Crisis
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The Resolution To The Cyprus Bank Crisis

There has been snippets of information all over European newspapers, so a summary might be called for. It ended where it started with the solution originally proposed by the ECB and Germany:

1)      Small depositors (below 100.000 EUR) should be paid in full.

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2)      Large depositors take a”haircut” to bring the balance sheet to some sort of solidity.

3)      Branches abroad (Greece) are sold off in proper impaired condition.

4)      A restructuring of the economy is put in place.

The background is that the Cypriote bank sector had balances of about eight times the GDP a third of the deposits Russian; but neither that nor the rest would pass any scrutiny for being acquired through “best business practices. To earn a yield much of it had been placed in Greek sovereign bonds, which suffered a nasty ”haircut” last year.

As with any financial reconstruction plan, it is paramount to pay off the small creditors, as the large will not be materially less furious for the pittance their loss is increased by sharing the burden with the small fry. On the other hand minor creditors can wreck havoc with any attempt to find a sensible solution and waste time when speed is of the essence.

The size of the haircut has guessed numerous times and the seems to be around 20% for the largest (Bank of Cyprus) and 40% of the second largest Laiki or Cyprus Popular Bank, while the third largest Hellenic seem so far to have gotten a life extension – it also seem to have stopped buying Greek sovereign bonds very early on. The banks on Cyprus will remain closed over Easter probably because all the energetic and aimless local political action has brought the books in such disarray that even getting a damage assessment is laborious – the major deposits are frozen anyhow – but it will take some time before the full picture emerges.

The political activity has been one of trying to come up with one harebrained scheme after another by pathetic amateurs. Putin blew a gasket when Russian money seemed to be lost; but has since calmed down. I can’t help looking across to the suicide of the Putin-critic Boris Beresovski – not that I really think there was any foul play: Finding life unbearable is not uncommon in financial circles when fund out and all is lost.

Selling off foreign branches is more or less the standard procedure these days as there is no way Greece will bail out or take the losses of a foreign bank. Banking still seems to be under the delusion that they will be rescued but everybody else. In this case the Cypriote states ability to rescue anything was never in doubt – it was simply totally unrealistic to back up deposits (not balances) several times the GDP of Cyprus. Again the concept that the EU – especially Germany and France – should make good the losses to depositors that had already embezzled their states with tax evasion once – adding insult to injury – strains credulity. Of course they won’t!

The issue to the EU is building up some sort of economy in a country where there is no idea of what a real job is – if for no other reason: The whole thing is a tinderbox that has had UN Blue Helmets as the main structure for long periods. Now Greece is cut down to size, there just might be a chance of a settlement.

It won’t be easy for the population, but it will probably not be totally David Copperfield or Oliver Twist. Of course bruised egos take longer to heal than any other mental disorder.

Has it been a crisis to the EUR or the EU? No, not really! The EU has demonstrated that it is master in its own house and an attack on the EUR or even the sovereignty of a member nation (even a spoiled brat like Cyprus) by large banks will be dealt with harshly.  The real agenda of Germany and France is that tax evaders will be pursued and bringing down their banks on top of them is just a matter of course.

The other point to be noted is that the EUR will be defended, but not necessarily on the speculator terms.  All in all: Cyprus was a minor skirmish and nowhere near a battle:  The casualties all to the enemy and the hostages freed.

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