Cyprus Analysis
The cause of the problem
Cyprus has a debt to GDP ratio of about 123% and Greece has
a debt to GDP ratio of 150%.Cypriot banks held a substantial portion of Greek
bonds therefore exposing themselves to this sovereign debt crisis. There is a
high correlation between the two countries.
Current events
The Cyprus Financial crisis has dominated much of the
Eurozone’s attention in recent weeks. The EU and IMF proposed a one off bailout
plan that included taking 6.75% from deposits less than EUR 100,000 and 9.9% of
deposits greater than EUR 100,000. This was, as expected rejected in the Cyprus
Parliament.
Unsurprisingly, given the decision of the centre-right
governing party MPs to abstain from the vote, the Cyprus parliament voted
against the proposed one-off "stability levy" on resident and
non-resident depositors. 36 of the 56-seat parliament voted against a bill
which had been only slightly amended from the original plan announced at the weekend.
The bill kept the levy on all deposits over EUR 100,000 at 9.9% and kept the
levy on deposits below EUR 100,000 at 6.75%. The only change was that deposits
below EUR 20,000 would be exempt. So, even if the bill had been passed, it would
not have raised the EUR5.8bn required by the Euro group in order for the ESM to
provide the EUR10bn rescue package needed by Cyprus (HSBC Global
Research, 2013) .
Eurozone needs to loosen up
The reason for this line of reasoning is simple. The current
terms of the bailout are unreasonable and unprecedented, no other country even the
embattled Greece has had to pay for its bailout using a portion of Citizens
bank deposits.
Depending on how markets and the various games of
brinkmanship play out over the next few days, this cannot be ruled out but
currently Eurozone leaders are standing very firm in saying that EUR10bn is the
maximum package and that EUR5.8bn has to come from bank deposits. They are
mostly singing from the same hymn sheet too in repeating the "Cyprus is
unique" line in an attempt to limit contagion to the rest of the
periphery. This has been reinforced by some of their actions over the past few
days as well. At the weekend meeting when the Cyprus deal was reached, the Euro
group agreed to adjust the maturities of the EFSF loans to Ireland and Portugal
in order to smooth the debt redemption humps. By showing that they are still
increasing their support, and easing the terms for such countries, they may
hope to reinforce the message that Cyprus is an exceptional case with no feed
across to other member states.
More Help from Russia
More assistance from Russia would be very hard to negotiate
too. Two years ago Russia extended a EUR2.5bn loan (maturing in 2016) at a 4.5%
interest rate when the Cyprus government first faced difficulty tapping the
government bond market. Last year the previous government in Cyprus tried and
failed to secure more. Some more novel arrangements are now being mooted
ranging from a full-blown bailout by Gazprom, in exchange for future
exploration rights to the big offshore gas field discovered recently by Cyprus,
to the possibility of shares in the national gas company being given in
exchange for the 9.9% tax (or possibly a much higher one) imposed on Russian
deposits in Cyprus.
According to Reuters, a European Commission spokesperson
clarified on Tuesday that the guarantees only exist in the event of a bank
failure not "a one-off levy which will be applied as a fiscal measure".
But it is also fairly likely that the Eurozone and Russia soften their line a
little too and provide slightly more assistance, particularly if any further
loans are backed by future natural gas revenues. The Eurozone may be quick to
remind Cyprus that, if it does not accept the bailout deal, it faces financial
sector collapse and potentially euro exit, but Russia, Germany and the Eurozone
are also well aware of the potential damage to their own economies under such a
scenario.
The government’s alternative plan may include a new version
of the deposit tax, according to an official who spoke after a meeting of the
Cabinet yesterday and who asked not to be identified in line with government
policy. The country’s central bank declared that lenders would remain shut for
another two days, effectively barring Cypriots from their accounts until March
26 when they’re due to reopen after a national holiday on March 25 (Georgiou,
2013) .
Georgiou, G. (2013, March 21). Bloomberg.
Retrieved March 2013, 21 , from www.bloomberg.com:
http://www.bloomberg.com/news/2013-03-20/cyprus-seeks-new-funding-plan-as-bank-closure-extended.html
HSBC Global Research. (2013). Cyprus. London:
HSBC Global Research.
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