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.