Market Watch

Cyprus Rolls Over

Looks like we have a bailout folks and those with more than $100,000 of skin in the game are not going to be pleased. Reuters reports HERE

Cyprus dodged a disorderly default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid.

Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets.

With the ECB threatening to cut off emergency financing for tottering banks as soon as today, Cyprus’s leaders engineered another way of shrinking the island’s financial system.

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest.

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

The seizure of larger deposits may spark tensions with Russia, the source of an estimated $31 billion in holdings in Cypriot banks, according to Moody’s Investors Service. A Cypriot mission to Moscow last week failed to yield an alternative to the European-sponsored bailout.

The effort to go after insured deposits, while abandoned, may have harmful repercussions, said Moody’s in a note early today. “Policy makers’ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign funding costs and broader financial-market dislocation throughout the euro area in the future,” Moody’s said.

Up front this may look to be resolved now. However behind the scenes the Russians may not be through with the EU…

There is yet to be a clear reaction from Russia but Russian depositors are likely to be hit hard by this deal. Russia’s First Deputy Prime Minister Igor Shuvalov has suggested today that an extension of the €2.5bn loan given to Cyprus is not guaranteed – something which the eurozone indicated was necessary last night. Separately, Russia remains the key energy supplier for most of the EU and has already issued veiled threats around this deal – such as a withdrawal of money from the EU and a switch-away from euro currency reserves.

Russian reaction above and additional summary can be read HERE

Some Russians may or may not have suffered depending on whether or not they found a roundabout to withdraw cash while Cyprus ran around panicking. From REUTERS

In banknotes at cash machines and exceptional transfers for “humanitarian supplies”, large amounts of euros fled the east Mediterranean island before and after Cypriot lawmakers stunned Europe by rejecting a levy on all bank deposits.

No one knows exactly how much money has left Cyprus’ banks, or where it has gone. The two banks at the centre of the crisis – Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus – have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia’s Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks’ largest depositors.

While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.

Companies that had to meet margin calls to avoid defaulting on deals were granted funds. Transfers for trade in humanitarian products, medicines and jet fuel were allowed.

Chris Pavlou, who was vice chairman of Laiki until Friday, said while some money was withdrawn over a period of several days it was in the order of millions of euros, not billions.

German Finance Minister Wolfgang Schaeuble said the bank closure had limited capital flight but that the ECB was looking closely at the issue. He declined to provide figures.

Update from GATA: From another angle it looks like offshore account party is over for Cyprus…

For Fedor Mikhin the deluge of overseas phone calls began on Wednesday, just five days after the EU first proposed the ill-fated tax levy on Cypriot depositors.

There were the two Andorran bankers who called offering to open bank accounts for the Cyprus-based businessman in the Pyrenees, and then Mr Mikhin’s Swiss bank, which announced it would be sending representatives to Limassol to poach Russian clients on Tuesday, the day Cyprus is due to reopen its banks for the first time in over a week.

While last week saw dozens of well-heeled Russians and their representatives fly down to Cyprus to check on bank accounts and confer furiously with Cypriot officials, they are being closely followed by another wave of visitors: the European bankers who hope Cyprus’ loss will be their gain.

One Cypriot lawyer with Russian clients said he had already been approached by half-a-dozen European banks in locales ranging from Latvia to Switzerland to Germany, some of them promising they could open new bank accounts for his clients in under an hour.

In Limassol, a lawyer for a Russian oligarch described receiving a call from the tycoon’s Swiss bank, which offered to open bank accounts for all the oligarch’s Cyprus-based employees as a favour, as well as emails from a dozen local Cypriot consulting firms imploring him to use their services when opening new accounts abroad.

While it remains to be seen how Cyprus’ many Russian businessmen will be affected by the proposed bailout and what comes after, most appear to have one foot out the door already. They are now considering to which jurisdiction they will move their businesses and how.

“The Cypriots killed their country in one day,” says Mr Mikhin, referring to Friday March 15, when President Nicos Anastasides accepted the EU’s proposal to seize E5.8 billion in emergency funds from Cyprus’ local and foreign depositors.

“The locals should understand: As soon as the money leaves, the people who go to restaurants, buy cars, and buy property leave too. The Cypriots’ means of living will disappear,” he says. “They are saying we laundered all the money, but they lived on that money for 10 years and forgot about it.”