Saturday, March 23, 2013

Saturday’s Cyprus News

Cyprus is considering a plan to tax accounts over the guaranteed value of 100K euros at 25%, with no tax on smaller accounts.

This suggests that Russia told Cyprus that it doesn’t care what it does with the presumably ill-gotten deposits of Russians. But, there’s also the view that a lot of the (largely anti-Putin) Russian middle-class uses the Cypriot banking system to hide legitimate funds from the Russian government.

There are also rumors that ownership of the gas fields that Russia wanted is in dispute with Turkey, and the Russians don’t want to antagonize the Turks (old enemies who’ve been doing might well economically for the last few decades).

Banks are down to 2-3 days of cash to fill ATM machines.

Cyprus did pass 9 laws to 1) split banks into good and bad parts, 2) impose capital controls, and 3) raise some money by nationalizing government pension funds. These actually have nothing to do with satisfying the demands of the Eurozone directly … they’re the easy stuff. There are rumors that the Eurozone has completely discounted the pension fund idea: they want cold, hard cash as proof of seriousness on the part of Cyprus, and they don’t see pledging pension funds as talk without the walk.

The Telegraph is still live blogging tweets about the crisis … they just seem to be doing this on a day-by-day basis. Here’s Friday (the reporters are taking the weekend off). Timestamps are GMT, so subtract 6 hours (usually it’s 7, but we do daylight savings time earlier than they do in London). There are dozens of tweets and over 3K comments, if you’re interested.

There are 4 branches of Laiki (the 2nd largest and most troubled Cypriot bank) in England. Because of their organizational structure, depositors there are not covered under English law, and will be subject to any legislated actions in Cyprus. So, there’s going to be some chance of contagion there.

The Cypriot plan right now includes completely shutting down Laiki. They figure they can save $2-3B (by not trying heroic measures to turn a dead bank into a zombie bank) out of the $5-6B they need to come up with that way.

BTW: The Eurozone has increased the amount they want Cyprus to contribute by almost a billion. No reason given, but it probably reflects evolving estimates of the scope of losses that will need to be covered.

Summing up: so far the Eurozone is coming out well, with no contagion apparent, and no bad politics at home. If they thought they were punishing Russia, they instead seem to be punishing Russians. And Cypriots are still screwed:

Take a moment to realise the scale of what’s been done here. No human agency has achieved [sic] so much economic destruction in such a short time without the use of weapons. The combination of laying waste to the financial sector and tearing up the savings of thousands of residents means that Cyprus won’t return to current levels of output for a decade, a funeral pyre which bears comparison only with Greece. There are four shocks happening at once; the bog-standard austerity shock; the trauma of bank withdrawal controls; the wealth shock; and the structural shock of wiping out the financial sector. The bailout bill is certainly going to get a lot higher too, as a larger amount of debt is piled onto a smaller economy.

That said, a future as “Iceland without the fish” does have some comforts for Cyprus. Its economy actually looks a lot more like that of Iceland than that of its cousin, Greece. It’s a relatively wealthy, open economy with much stronger institutions – ranked #36 in the World Bank’s Ease of Doing Business survey – closer to Iceland’s 14, than Greece’s 79.

The debt clean-out will help growth as it always has. But cold comfort for the people sacrificed by a toxic blend of European idealism and grotesque local incompetence

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