Europe Braces for Renewed Turmoil as Cyprus Deposit Levy at Risk; “Cyprus will turn into Libya”; The levy is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future”

Europe Braces for Renewed Turmoil as Cyprus Deposit Levy at Risk

Europe braced for renewed turmoil as outrage in Cyprus over an unprecedented levy on bank deposits threatened to derail the nation’s bailout and spark a new round in the debt crisis.

Cypriot President Nicos Anastasiades, who bowed to demands by euro-area finance ministers to raise 5.8 billion euros ($7.6 billion) by taking a piece of every bank account in Cyprus, delayed a parliamentary vote to pass the measure by a day. The European Central Bank pushed for a vote today, according to two people with knowledge of the discussions. Anastasiades plans to address the nation later today.

The levy is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future,” Joachim Fels, chief economist at Morgan Stanley in London, wrote in a note to clients.

Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm that settled over the 17-member bloc since the ECB’s pledge in September to backstop troubled nations’ debt. With no government in Italy, Spain in the throes of a political scandal and Greece struggling to meet the terms of its own bailout, more turmoil could hamper efforts to end the crisis.

Anticipating gains in haven markets, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said on Twitter that the concern in Cyprus “moves risk-on trade to backseat.”

“Sell euro as well,” he wrote.

Bank Levy

The levy — 6.75 percent of all deposits up to 100,000 euros and 9.9 percent above that — whittles the euro-area’s bailout of Cyprus to 10 billion euros, down from an original figure of about 17 billion euros, near the size of the nation’s 18 billion-euro economy.

European finance ministers reached the agreement early yesterday after 10 hours of talks. Cypriots awoke to find bank transfers already frozen as the government prepared to impose the tax before banks reopen March 19. Tomorrow is a bank holiday.

Anastasiades, who took office less than three weeks ago, said the choice was between “the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis.” The ECB would have stopped providing liquidity to one of the country’s banks on March 19, leading to its collapse, he said without identifying the lender.

Cyprus Splits

Anastasiades will meet with lawmakers tomorrow before the parliament’s session on the measure begins at 4 p.m. His Disy party holds 20 seats in the 56-seat legislature. The third- biggest faction, Diko, which supported him in his February election, holds eight seats. Cyprus’s communist Akel party, with 19 seats, plans to vote no.

Afxentis Afxentiou, the governor of Central Bank of Cyprus from 1982 until 2002, told the state-run broadcaster CYBC that failure to enact the legislation “opens the road to chaos.”

“Cyprus will turn into Libya,” Afxentiou said. “Even with the pain, we need to follow a normal course, with hope we’ll see better days.”

Jeroen Dijsselbloem of the Netherlands, who leads the group of euro-area finance ministers, sought to highlight the rescue package’s “unique measures” that address the “exceptional nature” of Cyprus. Its banking system’s assets are about five times the size of the economy. Instead of targeting the country’s wealthiest depositors, which include Russian billionaires, the tax also stings ordinary savers.

‘Just’ Contribution

“As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders,” Dijsselbloem told reporters at the euro group’s 4:30 a.m. press conference yesterday in Brussels.

The International Monetary Fund may contribute to the package and junior bondholders may also be tapped in a so-called bail-in, the finance ministers said.

Barclays Plc (BARC) said in a report today that the deposit levy is the latest erosion of bondholder protection at European banks and an “ominous” sign of how bailouts are being handled.

The ECB’s pledge to buy bonds should prevail over market panic, though the tax on deposits brings the euro area into “uncharted territory again,” Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note yesterday.

“Given the fragile state of the banking systems, especially in Greece and Spain, anything that can impede the needed rebuilding of confidence in these banking systems can potentially cause financial and economic damage,” he said.

Cyprus also agreed to step up asset sales, make further budget cuts and increase its corporate tax. Russia, whose banks have loaned as much as $40 billion to Cypriot companies of Russian origin, will ease terms on its existing loans to Cyprus as the rescue unfolds, according to the plan. Cyprus’s finance minister is scheduled to fly to Moscow on March 20.

To contact the reporter on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net

Cypriot Bank Levy Is ‘Ominous’ for Bondholders, Barclays Says

The decision to impose losses on Cypriot depositors is the latest erosion of bondholder protection at European banks and an “ominous” sign of how bailouts are being handled, Barclays Plc (BARC) said.

Investors need to be better aware of national resolution frameworks, with Switzerland, Britain, the Netherlands and Germany being the riskiest for bondholders, Barclays, Britain’s second-largest bank by assets, said in a report.

“The imposition of a levy on depositors in Cyprus is a material development that furthers the erosion of bondholder protection at European banks,” London-based Barclays said in the report. “We believe the expropriation of SNS Reaal subordinated bonds, the imposition of losses on Anglo Irish senior bonds and the haircuts of depositors in Cyprus form an ominous trend.”

Euro-area finance ministers early Saturday morning agreed to an unprecedented tax on Cypriot bank deposits as part of a 10 billion-euro ($13 billion) rescue plan for the country, the fifth since Europe’s debt crisis broke out in 2009.

Cyprus will impose a levy of 6.75 percent on deposits of less than 100,000 euros — the ceiling for European Union account insurance — and 9.9 percent above that. The measures will raise 5.8 billion euros, in addition to emergency loans.

The unprecedented decision to “bail-in” depositors underscores the lack of progress on a Europe-wide deposit protection system, Barclays said in the report. It was signed by Laurent Fransolet, the bank’s head of European fixed-income strategy, and Antonio Garcia Pascual, Barclays’s chief economist for southern Europe.

The risk of the Cypriot rescue package leading to deposit outflows in other troubled euro countries is less than it would have been at the time of the Irish rescue in 2010, Barclays said. Peripheral banks are better capitalized than they were then, the European Central Bank has stepped up its support for the region’s banks and the determination to keep Greece in the single currency has reduced redenomination risk, the bank said.

Cyprus was also a special case, it said, with 30 percent of deposits coming from non-euro countries. The size of Cyprus’s bank recapitalization needs, at 80 percent of economic output, dwarfs Ireland at 40 percent, Greece at 27 percent, Spain at 6.5 percent and Italy at nothing.

To contact the reporter on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net

German Commerzbank Suggests Wealth Tax In Italy Next

Tyler Durden on 03/17/2013 15:20 -0400

While some argue that Cyprus was “one of the biggest money-washing machines for Russian criminals,” and others that Cyprus ex-Pat community and energy resources brough deposits (not to say their high deposit interest rates), it seems the European Union (IMF et al.) have decided that the route to crisis stabilization, just as we outlined here over a year ago and updated here, is through a wealth tax.

However, as Handelsblatt reports, the gross distortions of wealth distribution among both core and peripheral nations (evident in the chasm between ‘mean’ and ‘median’ net assets – or wealth) makes some nations more ‘capable’ of ‘giving’ and as Commerzbank’s chief economist notes, median wealth in Italy is EUR164,000 (as opposed to Austria’s median of around EUR76,000 and mean of around EUR265,000) meaning that in theory Italy has no debt crisis (with net assets at 173% of GDP) – significantly more than the Germans at 124% – “so it would make sense, in Italy a one-time property tax levy,” he suggested.

A tax rate of 15% on financial assets would probably be enough to push the Italian government debt to below the critical level of 100% of gross domestic product.” So there you have it, the ‘new deal’ in Europe, as we warned, is ‘wealth taxes’ and testing the “capacity of Cypriots” appears to be the strawman on what the public will take before social unrest becomes intolerable.

JPMorgan Asks “Has Europe Bazookaed Itself In The Foot”, Answers “Yes”

Tyler Durden on 03/17/2013 10:53 -0400

When even JPM says to panic, it may be time to panic. And then we ask why is all of this happening right now, why is even JPMorgan advocating a risk-off posture, and then we recall that every single year in late March, early April Europe comes back front and center with a bang, just as we forecast in “It’s Deja Vu, All Over Again: This Time Is… Completely The Same” and then everything becomes very clear.

From JPM’s Alex White:

Significant near-term risks after flawed Cypriot deal

Significant chance that Cypriot Parliament votes ‘no’ (30%) or has to further delay the vote (40%)

Either outcome would be highly problematic, highlighting regional stresses

President to address MPs on Monday at 9.00am GMT. Earliest likely time for vote late afternoon GMT.

This could be pushed back significantly

A delayed vote could require an extended bank holiday in Cyprus to avoid broader bank run

Regional contagion impacts should be containable, but risks unclear with new precedents set

It is difficult to over-state the extent of popular anger in Cyprus over the bailout deal which was pulled together on Friday evening. The deal includes €10bn of support from the Troika, as well as a depositor haircut, to be implemented through the introduction of a ‘stability levy’ of 9.9% on deposits over €100,000 and 6.75% on smaller deposits. Cypriot depositors with savings nominally below the European deposit guarantee threshold (€100,000) appear to have been squeezed between the policy interests of their major external partners; including Germany and Russia.
In insisting on a depositor haircut, the Eurogroup appears to have reflected the realities of German domestic politics (where the Cypriot package has been turned into an electoral battle-ground, in part as a consequence of SPD pressure). In agreeing to a levy on small depositors, as opposed to simply those with deposits above the guarantee threshold, the Cypriot Government also appears to have bowed to additional political pressure from those constituencies with large Cypriot deposits (including Russia). The total quantum of insured deposits in Cyprus is around €30bn, while uninsured deposits (i.e. deposits above €100,000) total €38.4bn. It would therefore have been possible to raise the total required (around €5.8bn) with a levy of 15.4% on the uninsured deposits; a path which the deal avoids in favour of more socialised pain. The result is highly problematic in the near-term, in our view.
Cyprus could vote ‘no’

As with other packages, the Cypriot bailout proposal needs to be approved by the ESM members, through a parliamentary ratification process, which could present some difficulties in Germany and elsewhere (with votes likely in April). The near-term challenge – securing domestic Cypriot approval – appears far more potent however. The parties which nominally provide support to President Anastasiades have a majority of one in parliament, and the opposition Communists (AKEL) have already given a clear indication that they will vote against. The extent of depositor pain, and the strength of public reaction, has pushed other parties in AKEL’s direction. We think the Government can be reasonably confident of only around 26-28 votes at the most (with risks to the downside), while the opposition may be confident of around 26. In total, 29 votes are needed for a majority in the 56 member parliament. Our best estimates of a potential vote have it too close to call at this stage (Evroko, a pro-European centrist group which has given differing indications, may be the swing party).

The ECB, and others within the Troika, have put intense pressure on the Cypriot Government to vote on the measures before the market opens on Monday; only to have President Anastasiades make clear that he does not yet have the numbers. We think there is a material risk of the vote failing if brought before parliament. Given the small size of the Chamber, parliamentary managers are likely to have a good idea of a potential result and might choose to delay a vote still further if they don’t have the numbers by Monday evening. Given the importance of having an agreement in place before Cyprus’ banks open their doors, this leaves open the possibility of an extended bank holiday (possibly through the week).
What if?

A ‘no’ vote, or a failure to bring the package before parliament in the immediate term could have significant regional implications. Germany has made clear that it won’t bring any measure which does not include depositor haircuts before the Bundestag. The extent to which the region has played hard-ball with Cyprus was indicated in Anastasiades’ claim that he was threatened with an immediate withdrawal of ELA support if he did not commit to the deal as it stands. In the event of a need to renegotiate, the path of least resistance in our view would probably see an amendment of the existing deal, such that the pain is redistributed to impact uninsured depositors (we think there is a chance of the Cypriot Government seeking to amend the terms in this direction before bringing measures to parliament if it faces the prospect of failure). In effect however, the damage would already have been done if Cyprus sees significant deposit flight, absent a deal. In the context of the Troika’s current disagreement with Greece on further disbursements, and the likelihood of political dead-lock in Italy, a return to a more stressful episode of the European crisis cannot be discounted, in our view. Should these hurdles be passed, longer-term we think there is a possibility of legal challenge to the package, under both Article 23 of the Cypriot Constitution, and under the European Convention of Human Rights (ECHR) given the requirements of both in respect of property rights.
Has Europe bazookaed itself in the foot?

Even if we avoid a negative outcome this week, events in Cyprus invite broader questions about the region’s commitment, repeated ad nauseum since June to ‘break the feedback loop between sovereigns and banks’. The IMF warned as recently as Friday that the Euro area lacked an effective deposit guarantee framework (before agreeing to a haircut that adroitly proves its point). The Cypriot package reinforces the fact that existing deposit guarantee schemes are only as strong as the sovereign which backs them; something which is unlikely to go unnoticed in the rest of the region (although we think specific contagion risks are limited near-term). Other EU member states will likely be affected, there are significant numbers of UK depositors in Cypriot banks, some of whom the UK has now promised to protect (with echoes of the Icesave situation), and some potential contagion channels may not be obvious. It is notable that German policy-makers have been insisting on Cyprus’ significant ‘systemic relevance’ over recent days while pushing a package that may test it.

Europe Scrambling With Last Minute Revision To Cyprus Deposit Confiscation Plan

Tyler Durden on 03/17/2013 16:28 -0400

If initially Europe came out as utterly deranged in its Cyprus deposit-confiscation scheme, at least it was consistent. Now, it appears that Europe is desperate to appear not only completely incompetent but also unable to even make a simple decision and stick with it, following news from both the WSJ and the FT that the original confiscation thresholds of 6.75% and 9.9% for deposits below and over €100,000 is about to be revised.

From the FT: “a revised deal being discussed in Nicosia, with the blessing of the European Commission, would shift more of the burden on to deposits larger than €100,000, according to officials involved in the talks. Under a controversial deal struck with international bailout lenders in the early hours on Saturday, a 6.75 per cent levy would be imposed on all deposits under €100,000 while accounts over that threshold would be hit with a 9.9 per cent levy. The depositor levy was demanded by a German-led group of creditor countries to bring down the bailout’s price tag from €17bn…. Officials involved in last night’s talks said the changes in the levy’s rates were in flux, but they could see the higher rate increase to as much as 12.5 per cent while the smaller deposits could be about 3.5 per cent.”

Elsewhere, according to the WSJ, the deposit “tax” would be under 5% for deposits under €100K, under 10% for deposits between €100 and €500K, and over 13% for deposits greater than half a million.

While this idiotic last minute revision will only infuriate Russian oligarchs even more, it will achieve absolutely nothing to streamline the passage of the bill through Cyprus parliament where it appears to have hung without enough support: the damage has already been done, and it is a virtual guarantee that Cyprus banks will suffer a full blown bank run the second banks reopen, which may be Tuesday, Wednesday, or never, at the current pace. That line around the block at your local neighborhood Nicosia ATM: that is not, and will not, be for people seeking to make a deposit, that much we can guarantee, no matter what the final confiscation percentage is.

What is worse, however, is the painful demonstration of the absolutely and completely arbitrary decision-making process out of Europe. Sure: the ECB and the European Commission may decide to fully unwind the deposit confiscation scheme before all is said and done, but the genie is now out of the bottle, and it is very clear that in the European Disunion, a few unelected oligarchs will now determine until such time as the Eurozone finally implodes, just whose wealth and deposits are ripe for the taking. That not even Germany can make a decision and stick with it is just icing on the cake of the European Titanic.

In the meantime, what happens in Cyprus tonight, or tomorrow, and what the final confiscation schedule looks like, is merely bitter sweet victory for all those who have claimed that the European monetary experiment is finally coming to a long overdue end.

Finally, we can only hope that the next European (in whatever Monetary Union or Disunion format it is then) winter, is mild. Because Gazpromia may just decide to hike gas costs by 5%… or 6.75%…. or 9.9%…. or 99.9%…. Who knows? After all, Gazpromia Russia – which just happens to be Europe primary external source of crude and gas, has a green light to make up its own rules on the fly.

Cyprus Parliament To Delay “Rescue” Vote Due To Lack Of Support, Despite ECB Pressure For Pre-Trade Open Decision

Tyler Durden on 03/17/2013 09:19 -0400

The painfully shortsighted Cyprus bail-out, pardon bail-in (also known as wealth tax to those who are actually doing the in-bailing), plan is going from bad to worse. Because in addition to all the previously discussed macro-implications, all of which are adverse and have the full potential of destabilizing the Eurozone once more and lead to bank runs across not only the periphery but the core as well, especially by offshore (read Russian) depositors, there is now a risk that the entire hurriedly-cobbled together “plan” may be on the verge of failure as it may not get a majority vote in domestic ratification.

Today, at 4pm local (2pm GMT) the Cypriot parliament was scheduled to meet to vote through and ratify the tax levy plan, presented as a fait accompli at least by the Eurozone FinMins. A few hours ago, this meeting was delayed until 4 pm local on Monday “after signs lawmakers could block the surprise move.… If [parliament fails to ratify the bail-in], President Nicos Anastasiades has warned, Cyprus’s two largest banks will collapse.” And so the late hour scramble to procure enough vote to pass the depositor impairment begins as the alternative is simply “or else.”

The problem is that while for Cyprus tomorrow is a national bank holiday (yes, ironic), the EUR opens for trading in a few hours, with the global equity futures markets, and Japan cash to follow shortly thereafter. And with absolutely no clarity on what the “pre-determined” outcome from the Cyprus bailout will be heading into Monday open, where one of the outcomes is the possible collapse of the country’s entire banking system, which would certainly have contagious effects on all of the mainland, Europe is starting to freak out.

Bloomberg clarifies the precarious math situation which nobody in technocrat Europe apparently considered when they assumed that they have acquired some 10% of Cypriot sovereignty:

With his Disy party holding 20 seats in the 56-seat legislature, he needs at least nine more votes to secure approval and avoid the financial collapse of the region’s third- smallest economy. If he doesn’t get backing for the plan, the banks may stay shut starting March 19, state-run Cyprus Broadcasting Corp. said. Tomorrow is a bank holiday in Cyprus.

“If tomorrow Cyprus’s Parliament rejects the bill, Cyprus opens the road to chaos,” said Afxentis Afxentiou, who was governor of the Central Bank of Cyprus from 1982 until 2002, said on CYBC. If the bill is rejected, “Cyprus will turn into Libya. Even with the pain, we need to follow a normal course, with hope we’ll see better days.”

For now, said European pressure is only coming form the ECB, although expect chaos to break out and a full on media onslaught seeking to sooth and calm the markets to result if there is no movement, and no sign of a majority emerging before the first trades hit the EUR pairs. As ANA reports,

More from Bloomberg:

Anastasiades rejected pressure from an ECB representative to bring a vote on depositor losses to Parliament today, Greek state-run Athens News Agency reported, without saying how it got the information. An unnamed ECB representative pressured Anastasiades to open banks on March 19, the news agency said.

Anastasiades met with leaders of the nation’s political parties yesterday. While he may get support from the third- biggest party, Diko, which backed Anastasiades in the election, Diko’s eight seats won’t assure him a majority.

Yet even without a complete market collapse, the damage to Cyprus’, and by implication Europe’s banking system is done, as the question of who will keep their deposits in European banks after this stunning episode (especially for the Russian billionaire oligarchs who are booking flights into Zurich, Geneva and Basel to shut their accounts immediately) will remain unanswered until we get the March European deposit outflow data, some time in May.

George Perdikes, a lawmaker from the Green Party who sits on Parliament’s finance committee, said ways were being examined to soften the blow to depositors. These include giving them bonds linked to profits from the country’s gas reserves, he said in comments broadcast on CYBC after a meeting of the committee’s members with Anastasiades.

“This is a lose-lose situation,” he said. “Whatever happens there will be a massive outflow from Cypriot banks, with or without a haircut.”

Ironically, it was Cyprus’ tiny position in the grand scheme of European things that allowed Europe to expose how it truly feels about all members- as it turns out everyone in Europe is equal, except for those deemed to be less important than others. So how high does the bar go: Athens next? Or Madrid? Or Rome?

Perhaps there is a very good reason why, contrary to the sell-side scrambling to assuage fears of a pan-European bank run, the new Dutch president of the Eurogroup Dijsselbloem declined to rule out further depositors haircuts in other Eurozone countries such as Greece, Spain or Italy.

And while readers contemplate that, we hope for the sake of Europe, that ATMs in the latter three countries are well-stocked, because all it will take is one photo of a cash dispensing machine in the periphery to be “temporarily out of service” to be the spark that reignites the European relapse into full outright contagion and panic.

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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