Cyprus: Plan B

The Eurogroup statement following last night’s meeting on Cyprus can be read here.

Laiki bank is going to put into resolution with shareholders, bondholders and uninsured depositors taking the hit.  The losses for depositors will be determined over the coming weeks but could be up to 40%.

Insured deposits of less than €100,000 will be moved to the Bank of Cyprus.  Bank of Cyprus will be recapitalised via a debt-for-equity swap with bondholders and uninsured depositors.  Junior bonds will be cut.

The official loans to be provided remain at €10 billion though no contribution from the IMF is currently in place.  Some financial assistance from Russia is expected.  Capital controls will be implemented.

This agreement does not require a vote in the Cypriot parliament and, although not confirmed, it is likely that the amount to be raised from the banking measures is greater than €5.8 billion.  All insured deposits of less than €100,000 will be protected. 

So how does Plan B compare to Plan A?

26 replies on “Cyprus: Plan B”

“Bank of Cyprus will be recapitalised via a debt-for-equity swap with bondholders and uninsured depositors.”

They are learning slowly. It is a bit like the early days of open heart surgery.
Poor Ireland was first in line and it was the equivalent of that hospital in Drogheda.

Senior bondholders are facing losses then, finally? Albeit in the form of a debt-for-equity swap.

B is better than A. But, B only took place because the Cypriots did not hit the SMP bid and the ECB shifted the burden of Greece onto the private sector. We now move onto unintended consequences- not every depositor in the 100k bracket is a Russian oligarch or an Irish drug lord.
Small countries in Europe should be very afraid now of the next capricious solution from the big powers. Given the debt burdens in Cyprus and Grece are in the 140% range the chances of them ever making it to solvency are slim.
There are only three ways out of this morass- default, restructuring or monetization. The Germs appear to be pushing towards default as their preferred choice.


There is a forth way:

Leave the EZ and hope the currency moves help restore what remains of a functioning economy and tell the ECB et al to take a hike.

The forth way is an enormous bet which it seems politicans are simply not willing to take. In time however the people may force it through. Either way Cyprus is fubared. Banking is a trust business and trust has been lost. Simples.

Apparently the Troika didn’t have the best of weeks on the harmony front as the crisis intensified. They tried not to make the mistakes of the Greek bailouts but wandered apparently unthinkingly into another danger area. They didn’t read Cyprus very well either. I wonder what the longer term implications of the last few days will be.

I think it’s quite misleading to call account holders depositors.

The story still seems to be that customers of the bank deposited money with the bank who later squandered it and can’t give it back.

Of course only 3% of euros exist as cash and there’s no way this amount of cash could lead to deposits which form the other 97%.

Most ‘deposits’ are created by the banks when the process a loan. They type a new bank balance for the customer and treat it as if the customer had deposited that amount of cash.

The result is that every ‘deposit’ has an even higher debt to the banks and it’s systemically impossible for all loans to be repaid.

When enough people default and the banks ‘bad debts’ account goes up and the Plan B is now to debit people’s account such that the banks liabilities decrease.

This means the money that was in people’s account will no exist. Plan B does not ‘raise’ €5.8billion – it destroys it. It’s not a tax because the Government won’t have the money afterwards, no one will.

The Cypriot economy is short of money and plan B will delete money.

All if these problems and the contradiction I’ve just highlighted are a consequence of not updating the system to take better account of digital money.

It’s an accident of technology that we not use the banks’ liabilities as money for 99.9% of transactions by value. We could declare all bank deposits as legal and recognise them as the money they are, this removing them from the banks’ balance sheet.

They would be 100% safe. There would never be a bank run again. There would be no need for deposit insurance. There would never be a banks bailout again.

@ seafóid

It is not the job of politicians in other countries to “read” [the reaction in] Cyprus but of Cypriot politicians. The system of international cooperation between nation states would be unworkable otherwise.

The thought that occurs to me is that, in unwisely going along with the misreading by the Cypriot president of the reaction in his own country, the EA finance ministers may have strengthened de facto the insurance guarantee of €100,000 on a shared rather than individual country basis as the mistaken idea that it such exists is now fixed firmly in the minds of citizens.

Woe betide the politician who would seek to dismiss it.


“It is not the job of politicians in other countries to “read” [the reaction in] Cyprus but of Cypriot politicians. ”

It’s the job of the plonkers who gave Cyprus that initial deal to have a feel for how it will be interpreted.
They thought they had another Greece scenario per the FT. They only realised the game was up when the Cyprus PM said he’d put it to a vote.

Culture sucks down words

At times like this culture is crucial

I wonder what kind of GDP contraction is calculated into the debt projections for Cyprus? With the financial system intended to being shrunk substantially I am afraid the 100% of GDP debt projection will turn out to be nothing but wishful thinking and the Cyprus’ state will turn out to be insolvent in economic terms after all…

While better than the original, the differing treatment of insured and uninsured depositors does raise questions. My understanding of deposit insurance as practised in the EU is that the State will make uninsured depositors whole in the event of a bank failure. What is happening here is essentially that uninsured depositors are making insured depositors whole. I understand that such preference for insured depositors is part of the US’s FDIC least-cost resolution process. The difference here is that it is being done ex post. Although I haven’t seen the new Cypriot resolution legislation passed last week, I assume that what has been done is facilitated under the legislation. Given this new way of protecting insured depositors it might seem that this adds a new layer of protection – especially for depositors in countries where the State is not creditworthy and in no position to make good on the insurance. But it would now seem crazy to have a 100K euro deposit or to purchase an unsecured bank bond. The need for EU-wide deposit insurance has become more urgent, though presumably the insured/uninsured distinction would now apply.

@ John McHale

I was wondering along the same lines, both in general and at a personal evel.

On the face of it this looks exactly like what should have happened to Anglo. After all there were not that many seniors and it is fair to presume that much of the over 100k stuff was, if not quite Russian, not a million miles removed from the accesses of the developers who hade up the other side of the balance sheet.

I argued at the time that such ex post rewriting of the rules was not a runner. If it turns out that Cyprus has done just that, then I got that wrong.

I presume that 100K is safe, and that 105K is only at risk to the tune of 5K, but who knows?

@John McHale
Isn’t it the reality now that no deposits in the Eurozone are safe.
The Eurogroup statement is revealing…
“These measures will form the basis for restoring the viability of the financial sector. In particular, they safeguard all deposits below EUR 100.000 in accordance with EU principles.”
Where were EU principles last Saturday week when the Eurogroup agreed to “haircut” all depositors in Cypriot banks?
And then there is the issue of Capital Controls on a member of the Eurozone
Which allows them to freeze deposits in Cypriot banks.
Not only are depositors there made subject to confiscation of 30-40% of their assets but the remainder of their funds are to be “frozen” indefinitely.

I suspect a bigger agenda is being played out.

@John Mch

“But it would now seem crazy to have a 100K euro deposit or to purchase an unsecured bank bond. The need for EU-wide deposit insurance has become more urgent, though presumably the insured/uninsured distinction would now apply.”

Not sure I follow.

Do you mean “significantly above 100,000”?

Do you also mean also “where the institution concerned is thought to be possibly insolvent”?

If the answer to those is both in the affirmative, then, yes you would be acting inappropriately in buying an unsecured bond issued by such a bank, or placing a large, uninsured deposit with it.

That’s how things used to work – if you managed money, you were supposed to actually do something.

The weirdest part of this shambles might be the introduction of the idea that money managers should perhaps start to avoid banks that they know are financially sound, but are HQ’d in states that might not be – or at least might not be if said state bailed out other, incompetently run, insolvent competitors.

The Dutch guy has just confirmed that depositors are likely to be subject to Bail-in……
“What we’ve done last night is what I call pushing back the risks.
If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?’. If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders.
If we want to have a healthy, sound financial sector, the only way is to say, ‘Look, there where you take on the risks, you must deal with them, and if you can’t deal with them, then you shouldn’t have taken them on’.
The consequences may be that it’s the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take.”

So nobody is safe.


So nobody is safe.

Well, not quite true. The Germans have never been safer and the flood of money to the German citadel of safe Eurozone capital is likely to further improve their financial position and worsen their attitude.

The story is a simple one. Once it suited the Deutsche-bloc to keep creditors whole and that was the policy, now it suits them to hit depositors so that is the policy. Not so hard to grasp.

I think when Brian Woods II sees that creditor seniority is a movable feast in the EU according to German requirements we can all accept that we are subject to EMU rather than being partners in it.

Nice to see the French rolling over as well.

How to move markets worldwide..down. Italian banks shares suspend trading ….down 5%.

From the Guardian
“Jeroen Dijsssebloem, the president of the eurogroup, said the relative market calm in recent months, coupled with the lack of market panic following the decision to force private investors and depositors to pay for the entire bailout of two large Cypriot banks, allowed the eurozone to go after private money more aggressively when banks fail.”

@Grimpy/John McHale/ @anybody

“But it would now seem crazy to have a 100K euro deposit or to purchase an unsecured bank bond.”

Quiz questions.

1. What was the last time an unsecured bond was issued by any bank in any periphery country?

2. The next time an EZ bank issued a covered bond, should
(a) Depositors under 100,000 feel more secure. Yes or No
(b) Depositors over 100,000 feel more secure. Yes or No.

”Nearly all euros are, in fact, the liabilities of banks.”

Martin Wolf, Irish Times, 27th March 2013

Glad to see some recognition of this fact in the media. Reducing the Cypriot banks liabilities reduces the money supply by the same amount.

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