Cyprus bail in revisited - consequences for small economies
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Cyprus bail in revisited - consequences for small economies

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Cyprus bail-in is spilling over and the 100% of added burden is falling on the country, with 70% of its gold reserves at risk and EUR 5.8 billion withheld from banks depositis. ...

Cyprus bail-in is spilling over and the 100% of added burden is falling on the country, with 70% of its gold reserves at risk and EUR 5.8 billion withheld from banks depositis.
Small economies with a large financial sector are increasingly bullied by larger countries which are quick to find scapegoats

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Cyprus bail in revisited - consequences for small economies Cyprus bail in revisited - consequences for small economies Document Transcript

  • http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/ Cyprus bail-in revisited Consequences for small economies1. The newsEuropean Commission draft documents leaked and released on the FT web site areoffering a different picture from the previously released details of the bail-in.First and foremost, in 9 days the bill has spilled over by EUR 6 billion amounting toa EUR 23 billion shortfalls to gap over a 3 years period. The additional burden falls onCyprus, the total reaching EUR 13 billion.Second, it will be entirely born by the deposit-equity swap at the new Bank ofCyprus (i.e. post acquisition of Laiki deposits), which nearly doubles to EUR 10.6billion from EUR 5.8 previously: EUR 5 billion in 9 days (30% of 2012 EUR 17 billionGDP) is quite a number…Third, Cyprus will sell “excess” gold reserves for a total consideration of up to EUR400 million: I like the term “excess” in a world of ever devaluing fiat currency and“excess” represents 70% of its 13.9 t of gold! Since the leak, Cyprus has denied theyintended to sale gold: what is contained in the report is an hypothesis, of course…Fourth, bond holders under Cypriot law will be “encouraged” to roll over up toEUR 1 billion that mature until 2016, meaning that the EZ countries and the IMF willonly provide EUR 700 million. In 2011 this “encouragement” was deemed by ratingagencies (for whatever credibility they have) to lead to a selective default (ratingagencies must have learnt from politicians rhetoric: one meets its commitments or onedoesn’t; “selective” is bullshit), not talking about a credit event for CDS. Why what wasmeant to apply to Greece would not for Cyprus?Fifth, like all assumptions made about Greece by the EU, the ECB and the IMFproved wrong, these will prove wrong for Cyprus: the economic situation will worsenmuch more than expected the 8.7% real GDP fall in 2013 and 3.9% in 2014. The debt/GDPratio will go way above 130% in 2015, and not the 126% projected.2. Cyprus other routeCyprus lost its independence, like any over indebted country will, France included,not being able to meet its commitments. 1
  • http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/To lose its independence, Cyprus had a better course of action: quickly negotiatingjoining a ruble zone and offering Russia a naval base in Cyprus plus offshore gas rights.Cyprus would have lost its independence but Cypriots would have been betterof.Geopolitically this would have been a coup for Russia: it will loose its naval base in Syriaand would have replaced it with an even more strategically positioned one. Russia wouldalso have enjoyed privileged access to Cyprus gas, further surrounding the EU. This alsowould have open the way for other disappointed countries with the EU to join the fray likeSerbia; and eventually why not Greece. The Orthodox church is a powerful cultural andhistorical link between all these countries.Cyprus cannot be kicked off the EU (well, European politicians and eurocrats are used totwist and carve treaties and laws to their own advantage), and therefore it would haveallowed Russia to have a foothold in the house.In any case, this would have been a trump card in the hands of Cyprus in itsnegotiating positions with the troika.3. The future of small countriesThe crisis has demonstrated that all countries in the EU are not equal inrights despite what is claimed (not surprising, it has always been the case: big boysbullying feeble ones). Rules do not apply the same way depending on size: France hashardly ever abided by Maastricht criteria, and always got away unarmed (we are nearingthe end of it, since eventually facts are always right over rhetoric). Greece was slammed(they lied, so they got what they deserved), Cyprus walked over and Luxembourg isbullied.Cyprus and Luxembourg are criticized for over relying on the financial sector. I do notknow what makes Germany, France or the US to impose a business model to smallcountries whose size limits their ability to enjoy a well diversified economy. If they do notlike money fleeing, they should offer a fiscal environment where money is happy at home:there is no tax haven if there is not tax hell. With France’s banks over 3 x GDP(more or less Cyprus post bail-in), the financial sector is much too leveraged. In the case ofFrance, the media are increasingly reporting that young educated French national aregoing abroad to find a job (40-50,000 in 2012 – when one calculates the heavy cost ofeducation and no return from those leaving the country, it will become unbearable at somepoint). These larges countries should first put their home in order before lecturing others.A few examples: Delaware money laundering machine where the beneficiary owner of acompany does not need to be disclosed or the specific local laws that make it very difficultto get rid off an incompetent board or special protections against takeovers; France with 2
  • http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/its free zones, special tax treatment of Corsica or no income tax in French Polynesia toname a few; and what about the UK with the Channel Islands, The Netherlands with itsholding tax efficient regime, etc.Small to medium size countries where the financial sector allowed them to prosper areincreasingly subject to bullying from large ones, the latter specializing in findingscapegoats for their own economic sins.We are entering a world where democracy is much talked about as never before, but wherereality contradicts the words. Small European countries beware, you have been warned.Source:European Commission: Assessment of the public debt sustainability of Cyprushttp://blogs.r.ftdata.co.uk/brusselsblog/files/2013/04/DSA-9-April2013.pdfEuropean Commission: Assessment of the actual or potential financing needs of Cyprushttp://blogs.r.ftdata.co.uk/brusselsblog/files/2013/04/Estimate-of-financing-needs-ESMT-art-13-v09042013-1.pdfReuters: Cyprus to sell around 400 million euros worth of goldhttp://uk.reuters.com/article/2013/04/10/uk-cyprus-bailout-gold-idUKBRE9390NW20130410 3