01 April 2013| Gloomy perspective for Cypriot investors

EURO/USD fell to its lowest level in four month Monday on concerns about the spill over from Cyprus bailout terms. The Euro hit 1.2791, just above the four month low of 1.2750 reached on Wednesday. The Euro was trading at a high of 1.3711 back in February. Trading activities have been low over the last days due to Easter holidays in Europe.

 The short and medium term effects of the Cyprus crisis inside the Euro zone are so far not fully digested. Russian investors are hard hit, but Western European companies and individuals using Cyprus for the same tax planning reasons have also suffered heavy losses as a result of the collapse of Laiki, The Cyprus Popular bank, and near bankruptcy of the biggest bank, Bank of Cyprus (BOC). This comes among rumours that the Cypriot banks lately have given politicians and close friends - favourable loans and credits.

 Small companies struggling to repay loans in Italy and Spain signal bigger problems on the horizon for the euro zone. Defaults by small and medium sized enterprises which are the biggest employers in Spain and Italy, are rising explosively spelling troubles for banks and countries in the heart of Europe’s debt crisis.  While Cyprus count for 0,2% of the total Gross Domestic Product (GDP) in the euro zone, Spain and Italy count for 28%.  Whether these countries will be able to pull themselves out of the crisis and avoid full-blown bailouts depends on their banks which are fighting with bad loans and decreased profitability.

 Recent news from the Cypriot Minister of Finance and the Central Bank tell that account holders would be hit much harder than firstly announced. Cypriot authorities are still putting strong restrictions on “safe” accounts with less than Euro 100 000 meaning that Cyprus for all practical purposes not any longer is a functioning member of a currency union. On deposits above Euro 100 000.00 - 37,5% shall be converted into shares in Bank Of Cyprus (BOC), 22.5% are going to be frozen and the remaining 40% might be used for recapitalization of BOC.

 This means that Russian depositors stand to lose billions of Euro in what Prime Minister Medvedev has described as a Soviet style confiscation of Russian accounts.  The Russian government will, however, not aid businesses that have lost money in Cyprus.  Deputy Prime Minister, Igor Shuvalov, stated yesterday that Moscow is going to continue to clamp down on flight capital to offshore financial centers. “It is a terrible shame that Russians lose money, but the government will not take action in such a situation”.

 Much of the Russian money in Cyprus, probably up to Euro 19 Billion in bank deposits, are flight capital where Russian companies and rich individuals have tried to avoid taxation in Russia. The authorities have formerly offered a tax amnesty for flight capital being brought back to Russia.
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