Finance Minister Sarris came back from Moscow without any assistance from Russia. Russia had apparently made clear it was unwilling to offer loans, and would at most buy assets. Pravda reported that the Russians said if Cyprus hit their deposits, they would not put in a dime. And frankly, except for military assets, which could only be offered by the government, they’d do better scooping up bargains in the wreckage of deflation rather than now.
Bloomberg tweeted about 40 minutes ago that Cyprus had approved the legislation necessary for the EU bailout, but still does not have a news story up. The Wall Street Journal as of now has a “Breaking News” item on its website, again no story yet, “Cyprus lawmakers approve key bills aiming to secure broader bailout package.” So this looks to be a done deal.
I wonder how this will work. Capital controls are being implemented, since news reports from Cyprus indicated that residents intended (understandably) to drain accounts once banks reopened. In addition, I can’t see how the current government survives. Indeed, the President and key members of Parliament are likely at physical risk and it’s not hard to imagine that some will find it necessary to leave the country.
Update 2:45 AM: There’s a lot of reporting on the Parliament’s actions, and I’ll relegate that to Links. But the key issues are:
1. While Cyprus has voted in capital controls, it has yet to pass the “rape the depositors” bills. Those have not been finalized and are to be voted on Saturday. The legislature has voted on resolving the number two bank, Laiki. Now this means, despite Cyprus rolling over and showing its belly, a deal is not done. The Germans give every indication that they intend to remain rigid. So it is still possible that they won’t be able to bridge the now much narrower gap by the Monday ECB deadline.
Cyprus Mail (hat tip Richard Smith) had some details on the Laiki resolution plans:
The Laiki management team were last night informed in parliament that the government planned to table a bill proposed by the central bank governor to divide Laiki into a ‘good’ bank with only deposits of €100,000 or under, and a ‘bad’ bank where around €6 billion of uninsured deposits will be placed.
Speaking to the Cyprus Mail after his briefing in parliament and on his way to a board meeting, Phidias said the current decision on Laiki “will be a disaster not just for the bank, but for the economy of Cyprus”.
He added: “We’re talking about €6 billion belonging to Cyprus depositors being transferred to the bad bank with little possibility of them recovering their money. We’re talking about a lot of businesses having their assets and accounts frozen.
“Who gives anybody the right to say that someone with €100 million will get €100,000 back and someone with €80,000 will get it all? I’m not sure parliament has the right to decide this.”
Phidias warned the impact on the rest of the banking system would be severe: “The bank is a systemic bank and we believe this problem will be transferred to the other banks very quickly. So effectively no bank will be able to operate normally from now on and I don’t really know until when.”
The part that remains to be decided is how badly to hit depositors over €100,000. And there still appears to be a bid-asked spread between Cyprus and the Troika, and that’s before you get to some reports that the Troika has moved the goalposts for money to be provided by Cyprus from €5.8 billion to €6.7 billion. From Bloomberg:
Even with the raft of last night’s laws, Anastasiades may still find himself short of the 5.8 billion euros required to satisfy EU leaders. Winding down Cyprus Popular Bank Pcl, the nation’s second-biggest bank, would only bring the bill down to 3.5 billion euros, said Averof Neofytou, deputy president of Anastasiades’s ruling Disy party.
2. The imposition of capital controls has the potential to alarm depositors in periphery countries even more than deposit seizure. While the Eurocrats can try claiming that the deposit grab is a one-off, the result of Cyprus having a huge financial sector that was heavily deposit funded, it was already troubling that they didn’t go after equity or bondholders. But the imposition of capital controls effectively creates another currency without the benefit of allowing the currency to revalue. As Jeremy Warner of the Telegraph explained:
Yet the point is that if capital controls are introduced, it basically makes Cypriot euros into a national currency, rather than part of wider monetary union. The capital controls will severely limit your ability to get your euros out of Cyprus, rending them essentially worthless in the wider eurozone. It would be a bit like telling Scots they can’t spend their UK pounds in England. Monetary union is many things, but above all it is about free movement of money and a uniform value wherever it is spent. When these functions are disabled, then you cease to be part of a single currency.
John Dizard of the Financial Times is of the same view:
So even after the banks (presumably) reopen on Tuesday, a euro in Cyprus will now not be as freely transferable, or, really, as valuable, as a euro in Frankfurt. In some very real ways that is also true of euros on deposit in Greece, whose use is increasingly subject to detailed review and delay by tax authorities; or euros in Italy, where the size of cash transactions is severely restricted, at least by law.
Therefore, now that the Article 65 capital-controls cat is out of the bag, it is reasonable to consider when and where it will be used again, when a European banking system gets into trouble. You may be rich, in nominal Cypriot euros, or (fill in the blank) euros, but so what?….
In the same way that starting wars is much easier than ending them, the lifting of capital controls in Cyprus is likely to be a long time off. Britain imposed temporary exchange controls, as they were called then, in September of 1939 and did not lift them until 1979.
As we’ve indicated, the big risk coming out of the cramdown of Cyprus is a resumption of the flow of deposits out of periphery countries, which had been underway last year but was arrested by the introduction of the OMT. You’d be nuts to keep your money in a Spanish bank after the brutal treatment of Cypriot depositors. Expect Swiss, German, American, and, as Dizard put it, “banco de Mattress” to be the beneficiaries.