25 March 2013: Euro gains on Cyprus bail-out

The Euro and Asian shares rose on Monday after Cyprus reached a last minute deal with international lenders for a 10 billion euro bailout. The agreement was reached hours before a deadline to avert a financial collapse. The European Central Bank (ECB) had declared on Friday that it would stop emergency liquidity to two big exposed, Cypriot banks, Bank of Cyprus and the Popular Bank, on the 25th if a solution was not found. The deal which is not dependent of support by the Cypriot parliament which last Tuesday rejected a bail-out proposal obtained in Brussels earlier. Euro/USD trades 1.3029; 50 points up from Friday.

During the negotiations all the concerned parties plaid hard ball. The newly elected Cypriot president, Nicos Anastasiades, who is known as Euro-friendly, threatened the Euro-ministers to resign if he was pressed, too, far. Anastasiades also firstly rejected to participate when final EU-meetings were resumed late Sunday night stressing the unacceptability of Cyprus negotiating with a pistol to its head. The German Finance Minister countered claiming a total lack of realism on Cyprus’ behalf. A crisis sentiment ruled during the talks, and in line with Brussels traditions a last minute deal was clinched after 12 hours negotiations.

The deal involves a winding down of the second largest bank, the Popular Bank of Cyprus, Laiki, and shifting deposits below 100 000 euros to the biggest Bank of Cyprus to create a bank with healthy assets. Deposits above 100 000 euros in both banks, which are not guaranteed under EU-law, will be frozen and used to recapitalize the Bank of Cyprus through a deposit/equity conversion. This raid on uninsured Laiki depositors is expected to raise 4,2 billion euros. Up to 40% of the balance on these accounts risk to be confiscated much higher than the 20% originally envisaged. This will especially hurt foreigners and mainly Russian depositors who stand to lose billions of dollars. It is estimated that Russians have deposited up to 35 billion euros in Cyprus.

It is likely that the proposed agreement will create strong negative reactions from Russia, Ukraine and other concerned countries. Prime Minister Medvedev likened last week the EU-proposal with Soviet-type confiscation. Most of the 6 200 employees in Laiki would probably lose their jobs. Employees reacted last week with fury on the proposals and out the President and Parliament under strong pressure. A poll during the weekend showed that 2/3 of the Greek Cypriots preferred to leave the Euro. A week earlier 67% was in favor of the Euro.

The Minister of Finance, Michael Sarris, said in an interview with BBS that the agreement avoided financial disaster for Cyprus. Anastasiades left Brussels without making any comments. A Cypriot exit from the euro might have been avoided in this first round, but the fact that international lenders for the first time during the debt crisis in the Euro zone use sacrosanct private account funds in a bail-in arrangement might have serious contagion consequences all over the euro zone.

Bank employees and the public have additionally taken notice that leading managers in Bank of Cyprus and Laiki lately have received generous parachutes when the two banks for all practical purposes were bankrupt. Many Cypriots are asking the fairness of such parachutes in a situation where the same bankers have gambled with clients money and speculated in treasury bills and unsecured Greek loans. The two biggest banks have 25 billion euros in bad Greek loans after firstly losing billions on the Greek Treasury bill haircut imposed by EU and IMF.

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22 March 2013: ECB gives Cyprus bailout ultimatum

The Cyprus drama escalated with furious banking employees protesting in front of Parliament as worries about the effect of the Cyprus-crisis on the euro zone intensified. Shares in Europe fall yesterday as did USD/EURO. The Euro is under continued downward pressure. The European Central Bank (ECB) simultaneously issued a bailout ultimatum that liquidity transfers to the Central Bank of Cyprus would be stopped on Monday unless Cyprus agreed on terms and conditions for a bailout.

In a bid to raise investments in a Solidarity Fund to raise the required Euro 5,8 billion that is necessary to unlock the EU/IMF’s Euro 10 billion financial assistance package for Cyprus, the Government yesterday succeeded in mobilizing support from all the political parties. The powerful and economically strong Greek Orthodox Church has also stated its willingness to contribute with cash injections and land assets. The Fund would be built up on possible future income from the oil and gas reserves on the continental shelf.

Any effort to speed up offshore natural gas exploration as a way of attracting desperately needed investment to save its teetering economy, might, however, be challenged by Turkey which questions Cyprus sovereign rights to explore and exploit what Turkey regards as disputed areas. According to the International Law of the Sea Convention agreement between the concerned parties is a prerequisite for starting drilling activities in disputed areas. A possible Turkish challenge gives an added dimension to the crisis as a stark reminder of the Turkish invasion of Cyprus in 1974.

Potential gas riches also seem to have been part of the negotiations the Minister of finance, Michael Sarris, is conducting in Moscow. The gas resources have been identified as one area where Russia might be interested in investing. A lot of rumors are surrounding these negotiations which so far has reached no breakthrough. Yesterday it was claimed that the second biggest bank, Popular Bank of Cyprus, was bankrupt, and that Gazprombank the financial arm of Gazprom, the world’s biggest gas company was ready to take over in a trade off with access to blocks on the shelf. That was denied by Gazprombank. It is, however, a fact that both Popular and the Bank of Cyprus are closed to bankruptcy.

Rumors were also spread that Cyprus has given Russia rights to establish a naval base in Meri. Russia might in connection with informal talks on the side line of the official negotiations, sounded out the opportunity to establish repair facilities for its merchant fleet in Cyprus. Similar sounding outs have been given to Greek islands. Nothing has yet been finally settled. Russia might be willing to extend the Euro 2,5 billion credit given to Cyprus for 5 years at 4,5% interest rate for 5 more years.

It is nevertheless worth reminding that England has had two military bases on the island since Cyprus gained its independence in 1960. There are also bases on the Turkish occupied northern part of Cyprus. On that basis a Russian naval base seems rather unlikely.

A delegation from the EU-commission headed by the President, Manuel Barroso, met yesterday with Prime Minister Dmitry Medvedev. Before the meeting Medvedev lambasted the EU’s handling of the Cyprus debt crisis comparing the “levy” with Soviet style confiscations. The fact that EU and the newly elected Cyprus president, Nikos Anastasiades, left Moscow, one of the most concerned parties, out in the dark regarding the bailout created outrage.

Officials in Moscow were privately skeptical to a Russian bailout or in Russia’s interest to provide further bridging loans. Commercial criteria would be the basis for any possible investments. This was clearly expressed by one Russian banker: “Buying worthless equity in a bank for a million or two. That is not going to bear very far here in Moscow”.

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