Recent Items

Pop Quiz: How Big Is the Bailout Of Cyprus?

Posted on by

By Antonis Polemitis, a venture capitalist based in Manhattan. Cross posted from Ledra Capital

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

(a) €17 billion Euros (89% of GDP)

(b) €10 billion Euros (52% of GDP)

(c) €2.5 billion Euros (13% of GDP)

(d) €-3.0 billion Euros (-15% of GDP)

(e) €-7.5 billion Euros (-39% of GDP)

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

(a) The €17 billion figure was calculated assuming the bailout would provide €7 billion 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 €7 billion out of their depositor base. So, part (a) is wrong

(b) The remaining €10 billion is described as a bailout of the government. Of this €10 billion however, €7.5 billion 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 €7.5 billion 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 €2.5 billion 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 €2.5 billion is the right answer? Not really, see below.

(d) At least €5.5 billion 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 €15 billion 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 (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 €4.5 billion 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% to 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.

Print Friendly
Twitter33DiggReddit0StumbleUpon0Facebook192LinkedIn7Google+3bufferEmail

23 comments

  1. Skeptic

    We never learn what happens to the Politicians who approve these deals. USA (remember Paulson?), Ireland, Spain, Italy, Greece, Cyprus. The MSM won’t tell us and the alternative media generally does not have the resources to report that story. (Kudos to Grillo in Italy for finally refusing to deal with these Criminals. Where is Ireland’s O’Grillo?)

    Are these Politicians just threatened or are they paid off? The EURO NOSTRA, with all that horsemeat in the food chain, would have no lack of horse heads to put in the Politicians’ beds.

  2. from Mexico

    So let’s try to translate the deal designed by the Troika into plain English:

    1) Cyprus banks had branches located both in Cyprus and in Greece.
    Greek branches had €15 billion in deposits.

    2) Total nominal amount of bailout = €17 billion, which came from:

    €7 billion out of the hide of depositors in Cyprus braches
    €0 out of the hide of depositors in Greek branches, who were shielded from losses due to a sleight of hand by the Troika

    €7.5 billion rollover of existing loans mostly from ECB
    €2.5 billion new loans

    3) Cyprus banks had loaded up on Greek sovereign debt. We know not whether this was of their own volition or because of arm twisting and backroom dealing by the Troika.

    4) Because Cyprus banks had loaded up on Greek sovereign debt, when the Troika bailed out Greece and dictated the write down of Greek sovereign debt, this had a disproportionate impact on Cyprus banks. Cyprus banks took a €4.5 billion hit. But this decree came down from on high — from the Troika. Or in other words, this was an edict that was imposed upon Cyprus banks by Troika fiat, and which the Cyprus banks had no say in, nor any possible redress, such as their day in a court of law.

    So the obvious red flags are these:

    1) Why the double standard? Why were the depositors in the Greek branches protected by the surreptitious doubledealing by the Troika?

    2) The trigger that murdered the Cyprus banks was pulled when the bailout of Greece, the PSI, was decreed by the Troika. Was the Troika ignorant of the fact that when it ordained its edict bailing out Greece, it was also ordering a hit on Cyprus?

    3) Where were Cyprus’ elected officials — the ones who are supposed to represent the interests of the people of Cyprus — during all this?

    1. Paul W

      Elected officials in the western world represent themselves and their Country Club buddies. They are the “al Qaida” threat to our standard of living. Until people realise they are the #1 enemy we will continue to be their victims. Battered Wife Syndrome?

  3. christofay

    Well, we know about two of them. Obama’s a lame duck. He should resign as early as possible in his re-election turn like Palin in order to start the cashing in process as early as possible, compound returns work best the longer you can let them run. John McCain Kerry due to his incompetence was elevated to Secretary of Give-away-the-State.

    1. Bob Morris (@polizeros)

      Au contraire. Bill Clinton made sure Glass-Steagall would be killed them within days started getting “speaking fees” upwards of $150,000 for speeches to banksters. So, there’s no need to leave office to start cashing in.

      1. oblivia

        The idea that Clinton killed Glass-Steagall is all kinds of nonsense. Citigroup didn’t even need to wait for its repeal to merge with Salomon Smith Barney — it was the insurance merger with Travelers that had to wait for Gramm-Leach-Bliley (the repeal bill sponsored by three Republican senators, which Bubba signed in exchange for support on a jobs bill).

        Most of the damage had already been done under Reagan/Bush I, and it was Republicans who were in the driving seat for its final repeal under Clinton, by which time it had so little effect as to be pointless.

  4. TomDor

    “Greek sovereign debt” – Mexico, did Greece have sovereign debt? – news to me, did I miss something?
    Sincerely

    1. Bill Smith

      You guys never miss a thing. The good news is that when Cyprus bought Greek debt, they had requested that it be denominated in Drachmas, ’cause, well, better!

      Greece informed Cyprus they didn’t have any Drachmas, so Euros would have to do. Cyprus grudgingly accepted but then was pleasantly surprised to find out the ECB crammed down a haircut on the Greece bond price (in Euros) to 30% of face value, instead of Greece devaluing the Drachma to 30%.

      Cyprus then lived happily ever after.

    2. from Mexico

      What is the argument you are attempting to make, something like put forth in this book?

      Greece’s ‘Odious’ Debt: The Looting of the Hellenic Republic by the Euro, the Politcal Elite and the Investment Community

      Escrito por Jason Manolopoulos

      1. TomDor

        Have not read your reference….if, however, the title explains the mechanism then I would agree. Not making an argument, just pointing out the injustice that has befallen the citizens majority who seem to have to bail out the structures that have committed the crimes against humanity.

        1. from Mexico

          I haven’t read it either.

          The concept of “odious debt” is something that gets kicked around quite a bit in economic discourse in Ecuador:

          The case of Ecuador

          The documentary suggests the case of Ecuador as an alternative government reaction to the International Monetary Fund and the World Bank, sensitive to social justice, that saves the people from having to pay for a loan that didn’t benefit them.

          In 2006, the Prime Minister of Ecuador, Rafael Correa reacted to the huge public debt that the country had, with a series of actions supposed to protect the rights of the people of Ecuador. First, Correa decided that the funds from the natural resources of the country (exploitation of oil) would be used for public policy, and not for the payment of the debt. Second, Correa decided that only 20% of the annual budget should be used for the debt, instead of 50%. Third, he organized a committee to analyze the public debt. Despite the obstacles and the reactions to this, the committee was able to complete the analysis of the debt, and to find that it was illegal on the basis that the loans taken were used for projects that benefited only a “few”, the governments signed the contracts without informing the people, and the bankers were aware of this. In the end, Ecuador was able to save about $7 billion.

          Solutions to the Greek crisis

          See also: Odious debt

          The solution suggested for the Greek crisis is the formation of a committee for the analysis of the debt in a similar way that Ecuador did. If the analysis proves all or part of the debt to be odious the people should not have to pay for it and therefore it should be erased.

          http://en.wikipedia.org/wiki/Debtocracy

          I didn’t realize that odious debt had come up in the Greek context, but then found quite a bit of literature suggesting that Greece should follow the Ecuadorian example, including the book I cited.

          I’m not sure where the conept of odious debt originated, but one hears the name of the Egyptian thinker, Samir Amin, mentioned frequently in conjunction with it:

          http://www.viewpointonline.net/samir-amin-a-tribute-to-a-fighter-against-global-capitalism.html

  5. jal

    Since so many accounts are insured to $130,000 and since these accounts a being withdrawn the question of who is lending the money to cover amount of money and who will have to pay back this unexpected loan to the Cyprus banks.

    I wonder who will pay the cost of bringing those plane loads of money with all the security cost involved.

  6. steve from virginia

    Obviously, what has occurred is theft. Any other description is euphemism.

    The real issue is what to do about it?

    A: nothing. The euro = gasoline.

    Lira, punt, pound, peseta, etc. = not so much gasoline or none at all. The theft of Cyprus’ gasoline does not ruffle the other Europeans’ incredible je ne sais quoi one bit because Cyprus’ gasoline consumption is set to flow to these other countries.

    Meanwhile, Europe’s gasoline consumption is set to flow to China … and the US! America will indeed become ‘energy independent’ … it will do so by stealing Europe’s energy consumption! After all, Europe depends upon Wall Street for its funds. No funds = no gasoline.

    See how it really works?

    This entire affair is nothing more or less than watching a cannibals’ feast.

    The world’s junkies in the alley all shooting up then moralizing about it. Utterly disgusting. “Oops, someone overdosed. It’s their own fault.”

  7. allcoppedout

    This is interesting material, though I suppose we already know that just who gets bailed out is always hidden from us in mainstream “reporting”.
    Banks increasingly look like road agents preying on cash in transit.

  8. Susan the other

    It is amazing how the politics of the EU is actually holding together. The thing that seems to be nonexistent (a political union) is actually the only glue they have left. Some kinda metapolitics. It’s psychological, right? All the centrifugal forces working against the EU, coming from the UK, Russia, the US, have not managed to pull the EU apart. Is this all about Russian hot money (left over from the Cold War?) and a land grab to get the oil and gas development rights across the Levant Basin? Oil Price said it was a battle between Europe and Russia to control who supplies Europe with energy. But it’s not just Russian money, the Saudis have poured zillions into “Cyprus” and probably the UK has too. We know that our money markets bought up lots of Greek debt thinking the EU would never be able to hair-cut any of it because it would trigger all those CDS default “contracts”… There has to be a simple human explanation to all of these money shell games. We watch in disbelief – Cyprus really is turning into a ghost island. What a lot of ruthless behavior.

    1. Chauncey Gardiner

      Susan,
      There are multiple dimensions to what has occurred in Cyprus IMO. I believe a point you made yesterday, which triggered thinking about an oil-based monetary system, is also a possibility. If so, it’s a multi-pronged strategy, not limited to economically and politically disenfranchising the people of much of Europe. Concurrently we are seeing the financial destruction of green energy infrastructure (particularly solar and wind energy) and Austerity, which would both play into such a strategy. And keeping Oil above $80 bbl (Presently @$97 bbl) despite a weak global economy provides the political-propaganda ammo to continue justifying fracking and Keystone… “Energy independence”?

      Hope I’m not going too far down the rabbit hole. “Carbon Democracy” and some related books that are linked on Amazon are on my reading list.

      In any event, your last sentence really struck a chord. These guys are running the table and no one is stopping them. Why are they doing so, and why is there little effective political opposition?

      1. banger

        The question of our time is “why is there no political opposition”? Morris Berman addresses this by saying, essentially, that the deepest source of Americanism is the the hustler culture (in a hurry to grab and exploit). Americans are just millionaires who are temporarily embarrassed (someone said). Americans identify with the rich and wannabe part of the one percent and, generally, have no sympathy with those who fall short of that goal, even themselves (there’s always the lottery). Berman’s point is that this mentality is really something that the entire world is embracing through the spread of the culture of narcissism/individualism that the U.S. exports to willing converts.

        It is amazing to witness the utter destruction of not just the left but what Chris Hedges calls the “liberal class”, i.e., the liberal class now just populates the lower and middle orders of the nomenklatura of the American ruling elites and worries more about gay marriage than Wall Street criminality or the growing poverty within the country–in fact, the more you travel into rural America the sadder and more depressing it is. I’ve heard some awful stories to lengthy to go into here.

  9. Blurtman

    The idea of “deposits” is intriguing in this day and age of the exposed meaninglessness of accounting integrity. Being credited often depends on who you know and who you are. If you are a bank, these digital credits can be bestowed upon you by keystroke. There has been no work or effort related to the appearance in your account of these digital credits. The little person, on the contrary, must labor for these credits. The luckier ones can earn credits as rentiers. The litte person expects some integrity in this accounting, and often views paper currency as synonymous with digital credits. But it is becoming more and more obvious that digital credits are an ephemeral entity. Add tangible (i.e., acute) inflation, and maybe, just maybe, we will start killing the banksters.

  10. Hugh

    Thanks for this post. It answers questions I had. Every other Troika “bailout” has been nothing more than a fiction with the reality being that the recipient country was just a pass through for bailout money that was actually going back to the Troika or the Northern banks with the recipient country being put on the hook for the tab and its economy largely destroyed in the process. I can see now that Cyprus is in no way an exception but another example of this kleptocratic model.

    I can’t help but think that all this looting and hardship can not but create a lot of anger and hostility toward Germany and Germans. Let’s be clear, the real culprits are the rich and elites throughout Europe. They are the ones who blew the bubbles, looted them, and now demand payment in full for their well deserved losses from the 99%s who have been the primary victims in all this. But I think there will still be a lot of schadenfreude when Germany falters and the blowback eventually hits ordinary Germans. We hear so much about how Germans are reacting to their history, World War II and now Weimar, but they still do not seem to have taken to heart the lesson of Martin Niemöller:

    First they came for the communists,
    and I didn’t speak out because I wasn’t a communist.
    Then they came for the trade unionists,
    and I didn’t speak out because I wasn’t a trade unionist.
    Then they came for the Jews,
    and I didn’t speak out because I wasn’t a Jew.
    Then they came for me
    and there was no one left to speak out for me.

    Substitute Greeks, Spaniards, Irish, Cypriots, Italians for those mentioned above, and in the end ordinary Germans should consider well who will be left to speak for them.

  11. Marios Soupashis

    This is what happens when politics meet economics. The situation on the island was deteriorating for a couple of years now, due to political reasons (right wing opposition never agreed with the Communist Government – and vice versa). When the bill came, again the Government (right wing this time) took the decision to stay within the Euro area at any cost. It was so hilarious to hear the Government spokesman debating about how Cyprus evaded the “Atomic bomb of bankruptcy”. Alas, right now is like a nuclear megabomb exploded on the island…

    1. Xenios Konomis

      Like your comment friend. To add, when stupidity meets the idiots (politics and economists)

Comments are closed.