Europe Does It Again: Cyprus Depositor Haircut “Bailout” Turns Into Saver “Panic”, Frozen Assets, Bank Runs, Broken ATMs, Bulldozer Parks Outside Bank; After Cyprus, Who Is Next?

Europe Does It Again: Cyprus Depositor Haircut “Bailout” Turns Into Saver “Panic”, Frozen Assets, Bank Runs, Broken ATMs

Tyler Durden on 03/16/2013 10:33 -0400

Loan to Deposit ratio_0Euro Banks Loans vs Total vs US_0

Europe has done it again.

Late last night, after markets closed for the weekend, following an extended discussion the European finance ministers announced their “bailout” solution for Russian oligarch depositor-haven Cyprus: a €13 billion bailout (Europe’s fifth) with a huge twist: the implementation of what has been the biggest taboo in European bailouts to date – the  impairment of depositors, and a fresh, full blown escalation in the status quo’s war against savers everywhere.

Specifically, Cyprus will impose a levy of 6.75% on deposits of less than €100,000 – the ceiling for European Union account insurance, which is now effectively gone following this case study – and 9.9% above that. The measures will raise €5.8 billion, Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area ministers, said.

But it doesn’t stop there: a partial “bail-in” of junior bondholders is also possible, as for the first time ever the entire liability structure of a European bank – even if it is a Cypriot bank – is open season for impairments. The logical question: why here, and why now? And what happens when the Cypriot bank run that has taken the country by storm this morning spreads everywhere else, now that the scab over Europe’s biggest festering wound is torn throughout the periphery as all the other PIIGS realize they too are expendable on the altar of mollifying voters and investors in the other countries that make up Europe’s disunion.

Bloomberg’s take on the sacrifice of Cyprus’ savers:

Officials have struggled to find an agreement that would rescue Cyprus, which accounts for just half of a percent of the euro region’s economy, without unsettling investors in larger countries and sparking a new round of market contagion. Policy makers began meeting at 5 p.m. yesterday in a hastily convened gathering, seeking to overcome differences on bondholder losses while financial markets were closed.

“Further measures concern the increase of the withholding tax on capital income, a restructuring and recapitalisation of banks, an increase of the statutory corporate income tax rate and a bail-in of junior bondholders,” according to a communique released by ministers after the talks. It didn’t specify whether bank or sovereign bond holders could be affected.

The European Central Bank will use its existing facilities to make funds available to Cypriot banks as needed to counter potential bank runs. Depositors will receive bank equity as compensation.

Finance Minister Michael Sarris said the plan was the “least onerous” of the options Cyprus faced to stay afloat.

“It’s not a pleasant outcome, especially of course for the people involved,” said Sarris. The Cypriot parliament will convene tomorrow to vote on legislation needed for the bailout.

Needless to say, the locals are delighted:

In the coastal town of Larnaca, where irate depositors queued early to withdraw money from cash machines, co-op credit societies that are normally open on Saturdays stayed closed.

I’m extremely angry. I worked years and years to get it together and now I am losing it on the say-so of the Dutch and the Germans,” said British-Cypriot Andy Georgiou, 54, who returned to Cyprus in mid-2012 with his savings.

“They call Sicily the island of the mafia. It’s not Sicily, it’s Cyprus. This is theft, pure and simple,” said a pensioner.

For the real response, look to Russia:

The island’s bailout had repeatedly been delayed amid concerns from other EU states that its close business relations with Russia, and a banking system flush with Russian cash, made it a conduit for money-laundering.

“My understanding is that the Russian government is ready to make a contribution with an extension of the loan and a reduction of the interest rate,” said the EU’s top economic official, Olli Rehn.

Almost half of [Cyprus’] depositors are believed to be non-resident Russians, but most of those queuing on Saturday at automatic teller machines to pull out cash appeared to be Cypriots.

While “saving”, pardon the pun, yet another insolvent country merely has the intent of keeping it in the Eurozone, and thus preserving Europe’s doomed monetary block and bank equity for a little longer, this idiotic plan will achieve two things: i) infuriate not just Russians but very wealthy, and very trigger-happy Russians. The revenge of Gazpromia will be short and swift, and we certainly would not want to be Europeans next winter when the average heating level of Western European will depend on the whims of Russian natural gas pipeline traffic; ii) start a wave of bank runs first in Cyprus and soon everywhere else that has the potential of being the next Cyrpus.

Sure enough, here come the bank runs:

While the tax on deposits will hurt wealthy Russians with money in Cypriot banks, it will also sting ordinary citizens. Some ATMs in the country have run out of cash, Erotokritos Chlorakiotis, general manager of the Cooperative Central Bank, told state-run CYBC.

Forzen assets and “national bank holidays” are baaaaack:

Funds to pay the levy were frozen in accounts immediately, ECB Executive Board Member Joerg Asmussen said. The levy will be assessed before Cypriot banks reopen on March 19 after a March 18 national holiday. Sarris said electronic transfers will also be limited until then.

Europe’s response: this is a unique situation. Just like the Greek bailout was unique;  just like the Irish and Portuguese bailouts were unique;  just like the bailout of Spanish banks was unique.

“As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders,” Dijsselbloem said, noting the country’s financial industry was five times the size of its economy. The plan includes “unique measures” that address the “exceptional nature” of Cyprus and show “inflexible commitment to financial stability and the integrity of the euro area.”

Curiously, even everyone’s favorite liar, former Eurogroup president, Jean-Claude Juncker, has a warning that this “bailout” is the worst thing Europe could have done:

Skeptics including Luxembourg’s Jean-Claude Juncker had said that imposing investor losses in Cyprus risked reigniting the financial crisis that has so far pushed five of the euro zone’s 17 members to seek aid. Last year, the euro area took what officials called a unique step to ask Greek bondholders to absorb losses.

But fear not: Europe has promised this absolute resolution taboo won’t repeat itself…

When asked if a deposit assessment could be ruled out for future rescues, Rehn said in an interview: “It can and there is no concrete case where it should be considered.”

… Until it does repeat itself of course – after all the fundamental problem for Europe has never been resolved: the continent is still broke, and it still is running out of good, unencumbered assets (which as being repledged by the banking oligarchy) with every passing day.

Now the only thing unknown is Russia’s response:

Corporate tax rates in Cyprus will rise to 12.5 percent to 10 percent as part of the deal, Dijsselbloem said. Rehn told reporters that Russia, whose banks have loaned as much as $40 billion to Cypriot companies of Russian origin, would ease terms on its existing loans to Cyprus as the rescue unfolds. Cyprus’s finance minister is scheduled to fly to Moscow on March 20.

What is known, however is that Cypriots have taken the news in stride…. and to their local ATM machine, which sadly is showing the following message: “Your transaction has been cancelled due to a technical issue. This ATM cannot complete withdrawals at this time” (courtesy of Yannis Mouzakis).

It didn’t take long before the Cyrpus Cooperative bank issued a statement saying “some ATMs run out of cash” – by some they likely mean all as the entire country is now gripped in a full force depositor run.

Some other snapshots of what is currently happening in Cyrpus, where locals are using excavators if not to force the ATMs into “compliance” then to block bank entrances out of blind fury. From Philenews:

Indignant citizen who has the testimony of the Cooperative Credit Society Kyperoundas, cut the morning the entrance of the branch of the SEA, located on Avenue Nikos and Despina Pattichi in Limassol.

He said he believes that deceived by the assurances that the relevant deposits are insured citizens and decided how to express his protest, parking the excavator outside the entrance of the branch of SEA

And more from iefimeirda:

With the first light of day after the unprecedented decision to the Eurogroup on the terms of the Memorandum of Agreement and the taxation of savings,hundreds of people flocked to Cyprus stores credit cooperatives Larnaca to withdraw their deposits.

With the opening of stores found they could not withdraw all their money, because the electronic system of credit cooperatives was not working. And when it became possible, writes the Daily Cyprus, the system seemed to finally hit the appropriate amount of the new tax, which provoked strong reactions. Even after the government ordered the stores eventually closed.

At the same time, according to information or ATMs of banks give no money so that there is a huge inconvenience.

After lunch return to Cyprus President Papadopoulos Nikos Anastasiadis from Brussels in the morning reached political agreement on the rescue of the economy, while in the meantime the Presidential prepares emergency meeting of ministers of the government.

According to all the information, will this weekend be submitted and voted on bills in the form of urgency, before the banks opened Tuesday morning.

In the text of the agreement, with the characteristic title “We caught napping,” the website says Sigma Live Nicosia agreed terms “under threat of closing banks.”  painful Describing the agreement, Sigma relies on sources from Brussels you speak of night thriller and roll jams, and the Cypriot delegation warned even withdrawal from the negotiations.

Congratulations Cyprus savers – you were just betrayed by both your politicians, and by Europe – sorry, but you are the “creeping impairments” in the game known as European bankruptcy. And so is anywhere between 6.75% and 9.9% of your money, which you were foolish enough to keep with your banks (where at least you were compensated with a savings yield of… 0%).

More importantly, as of this morning Europe has finally grasped that there is a 6.75% to 9.9% premium to holding physical cash in your mattress rather than having it stored with your local friendly insolvent bank.

Luckily Cyrpus is so “small” what just happened there will never happen anywhere else: after all in Europe nobody has ever heard of “setting an example”. Or so the thinking among Europe’s unthinking political elite goes.

And congratulations Europe: just when people almost believed you things are “fixed” you go ahead and prove to the world that you are asdisunified (because size doesn’t matter in a true union), as confused, as stupid and as broke as ever.

Bulldozer Parks Outside A Cyprus Bank – Full Video

Tyler Durden on 03/16/2013 12:15 -0400
The logical question comes next: why is there a massive bulldozer parked outside a (just “bailed out”) Cypriot bank? Well, if up to 9.9% of your money was suddenly and without warning stolen by your bank (pardon, forcefully “reinvested” in the equity of the same bank) and the rest was completely inaccessible, you too would probably park your bulldozer in front of said bank.

Depositors Pay Price in Cyprus Bailout Deal

By MATINA STEVISGABRIELE STEINHAUSER and COSTAS PARIS

BRUSSELS—Depositors in Cypriot banks will be hit with a one-off tax on their savings, as part of a €10 billion ($12.96 billion) bailout for the Mediterranean island from the euro zone and the International Monetary Fund.

The deal, announced early Saturday, marks the first time in the euro zone’s five-year-old financial crisis that depositors in bloc’s banks will lose money. Accounts with more than €100,000 will be taxed at 9.9%, those with less at 6.75%, raising an expected €5.8 billion for the near-bankrupt nation.

“This decision should not be compared to the ideal, but to the very real possibility that much more money could have been lost in bankruptcy of the banking system or indeed of the country,” Cypriot Finance Minister Michalis Sarris told reporters, looking strained after 10 hours of often-fraught negotiations.

Mr. Sarris said the Cypriot Parliament would adopt the taxes over the weekend and the money would be extracted from accounts before banks take up business Tuesday. Monday is a public holiday.

“We have taken immediate measures so that electronic transfers cannot take effect before banks reopen on Tuesday,” said the minister, who took office just two weeks ago.

Jörg Asmussen, a member of the executive board of the European Central Bank, stressed that amounts in excess of the levy will remain fully available. Accounts held in Greek offshoots of Cypriot banks will also be spared.

Cyprus, which first applied for help last summer, has proved a major headache for the euro zone, mostly because of an outsized banking sector, which has swelled to eight times the size of the island’s economy and was hit hard by a restructuring of Greek government debt last year. Allegations of money laundering and a general election in February also hampered bailout talks.

An initial assessment of Cyprus’s finances in January concluded it needed more than €17 billion, including €10 billion just to stabilize its banks. That would have been an unmanageable burden for the island, whose annual economic output is less than €18 billion and shrinking.

As they struggled to bring down the rescue costs, euro-zone finance ministers and the troika of the European Commission, the ECB and the IMF chose to go ahead with the deposit tax despite warnings it could unsettle savers and investors in other weak European countries.

“This is a special situation, with a very specific banking sector, with a very specific structure and size, which calls for this specific package,” said Jeroen Dijsselbloem, the Dutch finance minister who chaired the discussions. He said similar measures weren’t being considered for other countries that have received bailouts.

Officials hoped that the contribution of depositors will make it easier to pass the rescue package through parliaments in rich countries like Germany, the Netherlands and Finland. Lawmakers there have balked at bailing out foreign depositors, many of them Russians, whom they suspected of taking advantage of Cyprus’s lax banking laws.

Nicosia will also raise its corporate-tax rate to 12.5% from 10%, among the euro zone’s lowest, impose a levy on interest income and undergo a review of its anti-money-laundering legislation.

The IMF, which had been the strongest advocate for having the bailout burden fall partly on depositors, will contribute to the rescue, said the fund’s Managing Director Christine Lagarde. Two officials said the IMF is expected to chip in €1 billion of the overall €10 billion needed.

Olli Rehn, the European Union’s economic affairs commissioner, said Russia had indicated it was willing to give Cyprus more time to repay a €2.5 billion rescue loan from 2011, and may also lower the interest it charges. Mr. Sarris is expected to travel to Moscow on Wednesday to nail down the final terms.

The struggle to agree on a bailout for tiny Cyprus, which accounts for just 0.2% of the euro zone’s economy, once again underlines how vulnerable the currency union remains to economic shocks in any member nation.

“Cyprus is of systemic relevance to the euro area,” said Mr. Rehn. “Not to provide assistance to Cyprus would have posed a risk of undoing the progress that has been painstakingly made over the past year.”

Ministers also agreed to give Portugal and Ireland more time to repay their bailout loans, but didn’t provide any details.

Saxo Bank CEO: “This Is Full-Blown Socialism And I Still Can’t Believe It Happened”

Tyler Durden on 03/16/2013 15:59 -0400

Authored by Lars Seier Christensen, CEO Saxo Bank; originally posted at his blog at TradingFloor.com,

It is difficult to describe the weekend bailout package to Cyprus in any other way. The confiscation of 6.75 percent of small depositors’ money and 9.9 percent of big depositors’ funds is without precedence that I can think of in a supposedly civilised and democratic society. But maybe the European Union (EU) is no longer a civilised democracy?

heard rumours about this when I visited Limassol last week, but dismissed them as completely outlandish. And yet, here we are. The consequences are unpredictable, but we are clearly looking at a significant paradigm shift.

This is a breach of fundamental property rights, dictated to a small country by foreign powers and it must make every bank depositor in Europe shiver. Although the representatives at the bailout press conference tried to present this as a one-off, they were not willing to rule out similar measures elsewhere – not that it would have mattered much as the trust is gone anyway. It is now difficult to expect any kind of limitation to what measures the Troika and EU might take when the crisis really starts to bite.

If you can do this once, you can do it again. if you can confiscate 10 percent of a bank customer’s money, you can confiscate 25, 50 or even 100 percent. I now believe we will see worse as the panic increases, with politicians desperately trying to keep the EUR alive.

Depositors in other prospective bailout countries must be running scared – is it safe to keep money in an Italian, Spanish or Greek bank any more? I dont know, must be the answer. Is it prudent to take the risk? You decide. I fear this will lead to massive capital outflows from weak Eurozone countries, just about the last thing they need right now. Even from the EU as a whole, I suspect, as the banking union is in place in most countries already.

Another open question is what will happen to the huge number of brokerages based in Cyprus? There is about 100 or more FX and other brokers currently operating under the relatively light Cypriot regulation. How will this impact the trustworthiness of these many small institutions? What IS the exact impact on the client deposits they might be holding in Cyprus? Will anyone dare to do business with them going forward?

This is a major, MAJOR game changer and the fallout will be with us for a long time to come. I believe it could be the beginning of the end for the Eurozone as this is an unbelievable blow to the already challenged trust that might be left among investors. Talk about a possible own goal.

Market reaction? it must be very good for gold – and for safe-haven countries like Switzerland, Singapore and economically more healthy non-Euro countries in, for example, Scandinavia. I would think the EUR and associated markets will be undermined by increasing lack of confidence when the full implications become clear for investors.

This is full-blown socialism and I still cannot believe this really happened.

After Cyprus, Who Is Next?

Tyler Durden on 03/16/2013 14:41 -0400

Short answer: we don’t know.

We do, however, know something we have been pointing out since early 2012 – when it comes to the funding structure of European banks, there is a dramatic difference between the US and Europe. In the US, as we showed most recently two months ago, the Big Three depositor banks (JPM, Wells and Bank of America, excluding the still pseudo-nationalized Citi), have a record $858 billion in excess deposits over loans.

Extending the above to cover the entire US financial system, shows more of the same: according to the Fed, in the latest week ended March 6, there was a total of $9,283 billion in consolidated deposits, covering just $7,255 billion in commercial bank loans, a record $2+ trillion in excess deposits over loans.

How is it possible that there is a record amount of deposits in the US financial system, while the notional outstanding of total commercial loans is less than at the time Lehman filed? Simple – the delta has been filled by the Fed’s excess reserves, which amounts to… drumroll… just over $2 trillion, which via circuitous ways make its way back to the bank deposit ledger – this was explained in “A Record $2 Trillion In Deposits Over Loans – The Fed’s Indirect Market Propping Pathway Exposed.”

In other words, by becoming America’s indirect “bad bank”, the Fed has mitigated the concern of a deposit run, or at least within the US traditional banking system, however in the process making the US $14 trillion shadow banking system (where it was been soaking up safe collateral at an epic pace) breathtakingly fragile.

However, shadow banking is a topic for another day. For the time being, the take home message is that at least superficially, there is a record $2 trillion in deposits which are not encumbered by loans, and which incidentally are used by banks such as JPM to fund the operations of its prop trading desks, such as the CIO, and ramp stocks and risk in general, higher (as also explained previously) at least until these investments go horribly wrong and we get the usual theater of Senatorial hearings and the like.

So what about Europe? Here things get bad. Very bad. So bad in fact that we covered it all just one short year ago, in “A Few Quick Reminders Why NOTHING Has Been Fixed In Europe (And Why LTRO 3 Is Not Coming).”

Sure enough LTRO 3 didn’t come (for the reasons we explained), and a year after the above post was penned, nothing has still changed in Europe, as Cyprus’ bank depositors just learned to their humiliation and savings losses.

What is the reason for this? Well, as readers can surmise based on what just happened in Europe, it once again has to do with deposits, and specifically the loan-to-deposit ratios of European banks. Because if the US has an excess of deposits over loans, Europe is and has always suffered from the inverse: a massive excess of loans (impaired assets) compared to the most critical of bank liabilities – deposits. This goes back to centuries of capital formation in Europe, which unlike the US has always relied far more on secured bank loans than on unsecured corporate debt as can be seen on the chart below.

One doesn’t have to be a rocket scientist to figure out that in a world in which European loans are massively mismarked relative to fair value, and where bad and non-performing loans are an exponentially rising component of all “asset” exposure, it will be the liabilities that are ultimately impaired. Liabilities such as deposits.

This happened in Cyprus overnight, where the non-performing asset side of the consolidated bank balance sheet was just forced to collapse to allow the continued operation of the country’s financial system, however with a far smaller corporate bond and loan liability matching (there was only €2 billion in bond outstanding in Cyprus which made any realistic bail-in impossible) the only way to shrink the liabilities of the consolidated balance sheet – inevitable when one is terminally impairing assets – was to impair the most sacrosanct of bank liabilities – deposits.

This is precisely what just happened. The reason it happened first in Cyprus was for two reasons: i) the primary bank liability was deposits, and ii) a key source of deposit funding was those “evil” oligarch Russians: after all they deserve to be taught a lesson, or so the populist thinking in Germany and the Netherlands goes. Well, that may be the case, but at least half of the impaired deposits ended up belonging to the local population, which was neither oligarchic, nor “evil”, not stole (allegedly) to make their money.

Of course, those who had read Zero Hedge a year ago would have known all about this. This is what we said in March of 2012:

The chart below explains why not only is Europe’s severely asset constrained, it is also running out of funding, in the form of depositor cash: the most critical bank liability. Remember: without incremental deposits, banks can not invest in new assets, unless they generate cash from operations, and thus grow shareholder equity. There is a problem: as the final chart below shows, Europe, and especially Scandinavia which has consistently remained off the radar, is literally off the charts when it comes to LTD ratios.

With banks such as Danske, SHB, Swebank, DnB, and Nordea literally at 200% Loan-to-Deposits, but most other European banks too, even the tiniest outflow in deposit cash (ala what is happening in the PIIGS) will send the system into yet another liquidity spasm. Only this time, since what little unencumbered assets remaining have already been pledged to the ECB, there will be no quick LTRO collateral-type fix this time.

One year after we warned Europe that it was only a matter of time before deposits become impaired to “grow into” the European bank balance sheet, Cyprus has drawn the short stick.

And yes: we don’t know who will be next, but we do know that nothing has changed in the one year since we wrote our warning a year ago (because guarantees – not actions – of unlimited funding by the ECB not only do not help the actual underlying problems, they exacerbate them) and the last thing we want is to be accused by Europe of spreading the evil truth. But we do know that the unprecedented asset-liability mismatch in Europe is very unsustainable, and the lower the funding deposits in a given bank, the greater the eagerness will by management, regulators and politicians to impair, and confiscate said deposits, allowing a parallel collapse in bad assets and a gradual progression to a viable banking system. The only problem is said viability will be on the backs of savers and depositors once more who will have no choice but to lose much more than just 9.9% of their savings before it is all said and done.

So for those who really want to know who is next – look to the left side of the chart above: that’s where the loan-to-deposit ratio among European banks is highest, and thus most unsustainable.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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