Bail-In Research

There is an interesting op-ed in the Irish Times today, from Stephen Flood of Goldcore. This is on foot of a research note which they have produced (introduced by yrs trly) on the state of play on Bail Ins (where depositors become part of the solution to bank recapitalization, a la Cyprus) across europe.

The risk of such bail-in in Ireland is low. But then so too are interest rates. It might be useful for people, in saving, to consider not just yield but also liquidity risk. Irish banks are well capitalised – but then we have heard that before.

Megan Greene on the implications of Cyprus: 11-4-2013 in TCD

“The Cyprus Bailout and what it means for the EU”

Time – 1430-1540h

Venue – Room 3.19 Aras An Phiarsaigh TCD

 

Megan Greene is the chief economist at Maverick Intelligence, which advises governments and companies on political, policy and macroeconomic developments. She was previously was director of European economic research at Roubini Global Economics.

Greene began covering Greece, Ireland, Italy and Germany at the Economist Intelligence Unit in 2007. She is a graduate of Princeton University and of Nuffield College, Oxford University, and worked at JP Morgan Chase & Co. and as an advisor to the Liechtenstein royal family. Greene divides her time between Europe and the U.S. She writes a blog at http://www.economistmeg.com.

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How big is the Cyprus bailout?

A slightly tricky questions originally posted at the link above.

Most publications talk about the 10B or 17B Cyprus bailout. Let’s take a pop quiz on the right answer:

(a) 17 B Euros (89% of GDP)

(b) 10B Euros (52% of GDP)

(c) 2.5B Euros (13% of GDP)

(d) -3.0B Euros (-15% of GDP)

(e) -7.5B Euros (-39% of GDP)

 

Now let’s work through the answers, in steps:

 

(a) The 17B figure was calculated assuming the bailout would provide 7B for the banks. The final number provided not a single Euro for the banks who were asked, against the approach taken in the last 147 banking crises worldwide tracked by the IMF, to find the whole 7B out of their depositor base. So, part (a) is wrong

 

(b) The remaining 10B is described as a bailout of the government. Of this 10B however, 7.5B is being used to refinance maturing debt.

 

This debt, I would guess, is mostly at this point beneficially held by ECB. This is just an assumption, but we know that 75% of it was held domestically, largely by the banks. This was probably the first collateral pledged by the banks via the ELA, so ultimately if the Central Bank and the government default it will ultimately fall on the ECB’s balance sheet. The 25% is probably traded internationally and, again outside of Cyprus hands.

 

So, the 7.5B is being lent to Cyprus in order to be paid right back to Europe. That is not charity, that is ‘hiding their embarrassing losses until later when someone else is in office’. If moral hazard requires clueless Cypriot retail depositors to pay for their banks’ decision to lend to the insolvent Greek government, then presumably it also applies to the financial wizards at ECB that lent to the insolvent Laiki, despite having full access to their financial information.

 

That leaves 2.5B of fresh financing for the government which I will concede is new money, though until we see the Memorandum and the terms under which we receive this money, I am not too excited about it. Cyprus could raise this amount domestically so long as it did not have to do it overnight (which it does not – it is to fund deficits over the next few years).

 

(c) Does that mean that 2.5B is the right answer? Not really, see below.

 

(d) At least 5.5B of the ELA taken by the banks (I suspect it is more) was for losses in the Greek branches of the Cyprus banks. These branches have 15B of deposits that presumably could have also been haircut, along with the Cyprus-based deposits, to make up for the losses.

 

Yet, under tremendous time pressure, they were sold to a Greek bank for 17% of NAV, even post NPL haircuts (very suspicious), while the liabilities (the ELA) stayed in Cyprus and are now, beyond all logic, is being transferred to the Bank of Cyprus.

 

We can call this: “Cyprus Contribution To Recapitalization of Greece, Part II”. And since Greece is insolvent and illiquid without EU assistance, it is really assistance to the EU.

 

Given that, it is perfectly fair to subtract it from the EU’s assistance back to Cyprus. That takes us to -3B

 

(e) The Greek PSI (write off of Greek government debt, implemented by the EU) impacted Cyprus, as Greece’s neighbor, in a wildly disproportionate manner. Cyprus banks took 4.5B in losses there.

 

One could have imagined a solution at the time that partially compensated Cyprus for these losses. In any case, it was a contribution by Cyprus in reducing Greek public debt and given Greece is backstopped by the EU, it reduces the EU debt load, so that is how we get to -7.5B.

 

Cyprus has certainly contributed to Greece’s bailout on a per-capita basis at a level vastly exceeding any of the nations that are putatively suffering from “bailout fatigue”. Cyprus, voluntarily or not, has contributed around 5% of the Greek public and private debt reduction, despite being 0.2% of the European economy, so a rate of 25x the European average, plus or minus.

 

The apparent “thank you” from the EU, is to try to talk down the main basis of the Cyprus economy (financial services) and aim to destroy the rest of the otherwise fairly healthy Cyprus economy by sucking all liquidity out of the system, literally overnight.

 

I would grade (d) or (e) as correct answers. But I don’t see any version of the numbers where Cyprus is not a net creditor to the EU bailout regime, as opposed to a net beneficiary. Cyprus should be fighting to block the ELA transfer to Bank of Cyprus at this stage…

 

Cypriot SME Cash Holdings and the “corralito”

Data on these are hard to get. The best and its not very good, is the Amadeus Database by Bureau Van Djik. 

Looking throught this this AM, I extracted the “cash and cash equivalent” balance sheet item for 2011 (the latest year for which there are accounts) for a set of Cypriot companies. These were non-financial non-state corporations, independent (as in not subsidiaries) and SME’s as per the european classification. 

Remember that all deposits up to 100k are safe; remember also that even the most financiallly unaware Cypriot SME must have been thinking about the safety of their cash since 2011.

Average Cash – €487 ; Median Cash €66k 

A lot of Cypriot SME’s if the distribution is similar now as it was then (which is imho still probable – who would think that the bank deposits would be in play, right?) will be badly hurt. 

Remember : “its all hot russian money”….

A song for europe…and cyprus

To some a song for Europe will always be Ted and Dougal…. but for the modern generation the superb Gavin Kostik has, following from his 10 Commandments, a new one.

There’s a hole in the system, dear Draghi, dear Draghi,
There’s a hole in the system, dear Draghi: a hole.

Then fill it dear Olli, dear Olli, dear Olli,
Then fill it dear Olli, dear Olli: fix it.

With what shall I fill it, dear Draghi, dear Draghi,
With what shall I fill it, dear Draghi: with what?

With taxes dear Olli, dear Olli, dear Olli,
With taxes dear Olli, dear Olli: try tax!

But the tax take is falling, dear Draghi, dear Draghi,
But the tax take is falling, dear Draghi: it falls!

Increase them dear Olli, dear Olli, dear Olli,
Increase them dear Olli, dear Olli: whack’em on!

But tax take falls more now, dear Draghi, dear Draghi,
But the tax falls more now, dear Draghi: it fell!

Squeeze the sovereigns, dear Olli, dear Olli, dear Olli,
Squeeze the sovereigns dear Olli, dear Olli: squeeze them!

But the sovereigns are bursting, they’re bursting, they’re bursting,
But the sovereigns are bursting, they’re bursting: some burst!

Try the savers, dear Olli, dear Olli, dear Olli,
Try the savers dear Olli, dear Olli: try them!

The hole just got bigger, got bigger, got bigger,
The hole just got bigger, got bigger: it grew!

Then the bondies, dear Olli, dear Olli, dear Olli,
If you must it’s the bondies, it’s the bondies: burn them!

Now the system is creaking, is creaking, is creaking,
Now the whole system is dear, dear Draghi: it creaks!

[female voice]

Inflate it dear Draghi, dear Draghi, dear Draghi,
Inflate the system it dear Draghi, dear Draghi: inflate!

But I don’t have a mandate dear Christine, dear Christine,
But I don’t have a mandate dear Christine: don’t ask!

Well then print it, dear Draghi, dear Draghi, dear Draghi,
Well then print it dear Draghi, dear Draghi: please print.

But we don’t have a printer, dear Christine, dear Christine,
We don’t have a printer, dear Christine: there’s no ink!

Well who make money, dear Draghi, dear Draghi?
Well who can make money, dear Draghi: who can?!

Well the banks are supposed to, dear Christine, dear Christine,
Well the banks are that system, the banks: that’s who!

[All together now]

But there’s a hole in the system, dear Draghi, dear Draghi,
There’s a hole in the system, dear Draghi – a hole!

Cartoons of Cyprus

 

 

ok So its not really a laughing matter but some rueful chuckles…

 

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Whatever the problem, the solution lies in Cyrpus

Wonderful as ususl from Japlandic

Some more thoughts on that awful Cypriot Business Model

I wrote yesterday on the “dead” cypriot business model.

Some more thoughts and data below on this.

First Cyprus is not that different to many many other countries in terms of the % of its GDP derived from the financial sector.

Second, Cyprus was not that out of line in terms of its percentage of employment (full time equivalent, hours worked) in the financial sector. It was the highest but…

Third, as a % of the total wage bill it was quite highly dependent on the financial sector – it was a well paid sector in the cypriot economy, a well paid sector now dead. Is it any wonder the hole is now beginning to get bigger – as of pixel time 1320h sunday the Toika have decided that Cyprus needs 2b more…

Finally, as a % of total employment in Financial Services,  Cyprus is not that out of line with the rest

The Ten Commandments of Eurozone Membership (for small states)

The quite wonderful Gavin Kostick of Fishamble Theatre has a comment on Irish Economy which is too good to linger there… It's super.

 

And Draghi came down from the mountain with two tablets of stone.

(1) Thou shall love the god of the market. Thou shall have no other god before it.

(2) Thou shall have no other engraved image except the Euro. There shall be no other image on thy coin, for I run a jealous central bank

(3) Thou shall not take the name of the Euro in vain or speak slightingly thereof, for those who seek to destroy confidence will not be held guiltless.

(4) Thou shall work all of the days, excepting none, for this is the will of the free market. And you shall remember that you are a debt slave as you once were in Egypt.

(5) Honour Germany and France and the contract they made in their betrothal at the altar of the European Coal and Steel Community: for these are your mother and father to whom you must be obedient.

(6) Thou shalt not kill the bondholders.

(7) Thou shalt not commit adultery with other nations, neither the Russians nor the Chinese, nor any other nation against which we set our face.

(8) Thou shalt not steal deposits with high interest, low tax or any other wiles against which we set our face.

(9) Thou shalt not falsely accuse the ECB of running a tyranny, or threatening to implode your banks, being subservient to German interest, nor any other false witness against them.

(10) Thou shalt not covet a living possessed by your neighbours, but rejoice in the purification of your impoverishment.

 

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Just how bad was the Cypriot business model ?

One of the more nasty strains of meme going round the Cypriot crisis is this : Cyprus has a business model (Converting russian deposits to lending) which is wrong. Well, its now dead. We know its dead because Angela Merkel said its dead. And who are we or Cyprus to argue with Dr Merkel. To be fair, its not just her, theres a lot of talk on blogs and social media that “at 7x its GDP the Cypriot banking sector is too big”

Theres a whiff here of how dare these hairy olive botherers have a success. For all its industrial might Germany is relatively muted as a financial sector. Cyprus has sunshine and not a whole pile else. Its economic potential lies untapped due in no small part to the ongoing division of the island post 1974. So how bad was the system? An interesting paper by a World Bank economist provides some clues.

Its banks were prudent : the tradition was to ring fence foreign deposits from local lending. The reclassification after 2004  of Greek deposits as “local”, concomitant on they both being now in the EU led to a boom in lending, and a significant amount of that went back to Greece. And therein lies a large part of the problem.

Cyprus had a large banking sector in 2004. But no larger than say Ireland or Malta or the UK or even the Netherlands. The post 2004 era saw its growth from large to supersized  but compared to Luxembourg its a tiddler. I must have missed the warnings that the Luxembourgois need to go back to steel and vineyards…

Second, the Cypriot economy was not a one trick pony. Yes, the large financial sector was large but its contribution to the Economy was not such as to make Cyrpus one big financial services company. Eurostat data suggest that we should be worrying about the disproportionate size of the financial sector in Bulgaria and the Czech Republic, or even Denmark or Austria as much as we should the Cypriots.  I must have missed that memo…

Cyprus has every right to decide its own way of doing business. It had a large sector and that got holed below the waterline by the Troika in Greece. Its now going to be punished for its success and by the failure of the center to be able to make joined up policy on who bears what losses where and on whose account. But rather than face up to that instead we get auld palver on flawed business models, dodgy Russians and a whiff of  “suck it up άνθρωποι ξωτικό”