When I first heard about the Cyprus ritual execution bailout, I had thought that the widespread predictions that the island nation’s economy would contract by 20% to 30% over the next two years were off base.

I thought it would happen much faster, on the order of two to three months. An estimated 45% (mind you, 45%!) of the economy is banking, and almost all of that international banking. So if you generously assume 200% of the 900% of GDP was bona fide domestic assets (remember you have a lot of retirees), the other 7/9 goes poof. And that’s before you get to the fact that a lot of the services provided to foreign customers (the higher-end accounting and legal services) will have no future in a purely domestic banking business. So assume 90% of that 45% disappears in short order.

That much of an economy vaporizing is a state change. It’s not clear how Cyprus can regroup or recover even if the surplus international banking types could decamp. How do natives, whose money is presumably entirely in Cyprus (assuming it was not devastated by the hits to depositors at Laiki and Bank of Cyprus) emigrate with capital controls? How can they get their money out to make a new start somewhere else, if that’s their inclination? Again, while the Cypriot government initially said that capital controls would only be in place a matter of day, no expert believes that. They anticipate they’ll be in place for years to keep the remaining deposits from vanishing.

I did not make predict the speed of decline because the my assessment seemed too extreme. Surely I was missing something. Even though it looked to me as if Germany had done the economic equivalent of nuking half the island, and there would be knock-on effects from that level of devastation, I figured I had to be missing something in terms of how quickly the bad effects would take hold.

Well, maybe not. Recall that we predicted that depositors of over €100,000 in Laiki, the number two bank, would be wiped out. Reuters tells us that depositors with over €100,000 in the biggest bank, Bank of Cyprus, will have no liquidity (see boldface):

Big depositors in Cyprus’s largest bank stand to lose far more than initially feared under a European Union rescue package to save the island from bankruptcy, a source with direct knowledge of the terms said on Friday.

Under conditions expected to be announced on Saturday, depositors in Bank of Cyprus will get shares in the bank worth 37.5 percent of their deposits over 100,000 euros, the source told Reuters, while the rest of their deposits may never be paid back…

Officials had previously spoken of a loss to big depositors of 30 to 40 percent….

At Bank of Cyprus, about 22.5 percent of deposits over 100,000 euros will attract no interest, the source said. The remaining 40 percent will continue to attract interest, but will not be repaid unless the bank does well.

Translation:
The over €100,000 deposits in Laiki are gone.

At the Bank of Cyprus:

The 37.5% of >€100,000 deposits being converted to shares is a seriously out of the money option. What would you value that at? Not much.

40% won’t be accessible even under a best case scenario for years. The duration of time deposits is to be determined, and any returns depends on the bank’s performance. And of course, depositors may not get it all back.

The remaining 22.5% may or may not be available in two to three months.

The New York Times’ story is broadly consistent with the Reuters account, indicating that over 60% of deposits at the Bank of Cyprus could be toast:

Under the terms of the transaction, large depositors would have 77.5 percent of their savings turned into different forms of equity, with the rest remaining as a frozen, non-interest-bearing deposit that they would be able to access in the future.

If the bank does well, depositors would be able to sell their stock. But even in the best case, in which the bank thrives on the back of a quickly recovering economy — a long shot most economists believe — the loss is likely to exceed 60 percent and could well be much more than that.

Lawyers and bankers who have analyzed the transaction believe the ultimate loss to the depositor could be anywhere between 60 and 77.5 percent.

Notice that the Times doesn’t buy the effort to pass off the “term deposit” that you maybe never see again and whose payout depends on performance as anything other than equity. It is silent on what happens to the remaining 22.5%. It does point out that nothing has been announced and final terms may therefore differ from the rumors.

Now remember, Laiki and Bank of Cyprus were the core of the payments system in Cyprus. And it would be very difficult for a business of meaningful size not to have over €100,000 in deposits. If you freeze a significant majority of the commercial balances, how can you operate? How can these businesses even survive and pay each other? By e-mail, Antonis Polemitis of Ledra Capital teased out the implications:

If the Reuters story is correct, for the purposes of liquidity on Tuesday morning, that is a 100% haircut.

If that is what they do, I am not sure how Cyprus can engage in economic activity on Tuesday without going to barter or scrips.

I mean, that basically will mean 100% of the large deposits (all the business accounts) at Laiki and BoC are lost or not available as of next week. The Laiki wipe out may have been survivable. If you wipe (for liquidity purposes at least), both Laiki and BoC, then we are not talking about whether or not GDP drops X%, we are talking about ‘how do you actually engage in commerce?’

If they do this, there is little chance it can last more than a month — the economy will simply fail at even basic functions…

And if the plan has been accurately reported and plays out as Polemitis fears, it will undermine the “Cyprus is a special case” narrative. This Eurozone fiasco is making Geithner look good. The former Treasury secretary used the need to keep the confidence fairy alive as the excuse for any and every sop to the banks, from coddling miscreant executives to foaming the runway with mortgage borrowers to stealth bailouts. But the Eurocrats have completely ignored the impact of undermining confidence in the banking system. The fact that Cyprus has a decent-sized population of English retirees means that the British media will report on the Cyprus meltdown, which will be a stark contrast with Greece, where the economic devastation has not gotten the coverage it warrants. Grim accounts of the destruction wrought by the tender ministrations of the Troika should strengthen the position of the growing Euroskeptic sentiment in Italy, borne out by the success of Berlusconi and Grillo in the recent elections. Playing into the hands of Italian refuseniks should be the last thing Brussels and Berlin want. The cost of getting tough with Cyprus is likely to be far greater than they anticipate.

14 Comments on "Destruction of Cyprus Economy Proceeding Ahead of Schedule"

Cloud9 on Sat, 30th Mar 2013 12:19 pm 



Every Ponzi scheme on the planet functions in an environment of misplaced trust. Our entire economic and political constructs are based on the perpetual growth mime. Ask any reasoning human being, they will tell you it is unsustainable. Confidence in the confidence game is waning and the air is leaking out of the bubble.

Arthur on Sat, 30th Mar 2013 1:12 pm 



I would not feel too sorry for these Russian tax dodgers, who lost a large part of their above 100k savings. Putin officially protested, but in the meantime he was quietly laughing, because it concerned money he had hoped in vain to tax himself. In future Russian black money will have a harder time escaping the Russian tax office, now that the EU, thank God, has refused to bail out this mafia nest. Poor Cypriots, in the future they have to make a living again from olives, feta goat cheese and serving a beer to German tourists and have to give up dreams of a yuppie banker life style. No tears for Cyprus. In a few years they will be on their feet again, just like Iceland.

Kenz300 on Sat, 30th Mar 2013 2:11 pm 



Too big to fail banks in Cyprus need to be broken up into 3 or 4 smaller banks.

Too big to fail banks in the US and the rest of Europe need to be broken up into 3 or 4 smaller banks.

Banksters need to be prosecuted.

Off shore tax havens that launder money need to be shut down.

These while collar criminals need to be treated like the criminals they are.

BillT on Sat, 30th Mar 2013 2:22 pm 



With branches of those two banks open all the time in the UK and two other countries, do you really believe that the Russians left their money in them? Do you think that the banksters in Cyprus would put their families lives on the table by really taking the billions of the Russian Mafia? I don’t. If they did, many people will ‘disappear’ this year and all will be tied to this theft.

Ah, and if you live in the Us, don’t think that it cannot happen here. It already has several times in our history. The President can close the banks anytime he wants, for any excuse, and when they are closed, ‘revalue/tax’ what is in there. Safety deposit boxes are easy for the FBI to access and confiscate what is in them. They declare you a ‘terrorist’ and you try to prove different, IF you ever see a court room. See “National Defense Authorization Act “ if you doubt his authority.

Cloud9 on Sat, 30th Mar 2013 3:11 pm 



If you own one McDonalds store, your monthly operating capital could very well exceed $250,000. That money resides in an account that could be frozen or confiscated. Freeze it and the business shuts down. Consider for a moment the accounts of Lowes or Home Depot or a host of other business. Cyprus small business is collapsing as we speak.

Plantagenet on Sat, 30th Mar 2013 3:51 pm 



Its amazing how many people are gullible enough to believe the MSM reports that only rich Russians are affected by the theft of bank deposits in Cyprus. There are also retirees, hotel owners, grocery stores, restaurants, shipping companies, taxi companies and dozens of other Cyprus businesses with accounts over 100,000 Euros whose money is being stolen by the EU.

Arthur on Sat, 30th Mar 2013 4:04 pm 



“taxi companies and dozens of other Cyprus businesses with accounts over 100,000 Euros whose money is being stolen by the EU.”

Absolute rubbish. The EU stole nothing. The clients brought their savings/black money to a bank in Cyprus and the bank put this money in bad investments and now the money is gone. The EU kept it’s word by garanteeing up to 100k and that’s all there is to it. You cannot blame the EU for anything in this case. In fact it is rather surprising that the EU did not attempt to bail out, which would be basically a step towards communism. The EU backed off from that temptation, chapeau.

DC on Sat, 30th Mar 2013 4:25 pm 



You would think, that the recent spate of bank failures would lead to people everywhere asking the inevitable question, namely, perhaps our current banking model is simply flawed? I know most of us here know this, but the question is seriously avoided in all this. It was avoided in the US collapse, it never came up in the US-lead EU banking problems, and it isnt coming up in Cyprus either. Iceland refused to bail out the banks, and Iceland didnt sink to the bottom of the Altantic ocean. Maybe thats why the press prefers not to bring that case up at all.

Stephen on Sat, 30th Mar 2013 7:02 pm 



This is the failure of partial reserve banking.

Norm on Sat, 30th Mar 2013 10:35 pm 



Hmmmm, the middle class, or the former middle class, don’t have no $100,000 to put into no bank account.

Its the rich who put $100,000 into a bank account. People who hoard up money usually by being too cheap to pay fair wages to people who mow their 5 acre lawn.

Now the money is getting frozen, confiscated, or its taking a haircut. Tell me again, why should I care?

J-Gav on Sat, 30th Mar 2013 11:01 pm 



Oh yes, it can happen here . BillT’s right. Read Ellen Brown’s latest article on the subject, showing that the plan dates from 2011 (at least) and intends to eventually hold just about everybody by the throat! They’ll try and squeeze every last penny out of anything that moves – if you haven’t understood that about this system, you have understood nothing.

dissident on Sun, 31st Mar 2013 12:14 am 



Put a sock in it Arthur. You don’t even know how much money parked in Cyprus was Russian mafia money. And BTW, sunshine, if it was stolen in Russia then it does not belong to EU scumbag commie-wannabes.

It is clear that the two banks that are affected by the expropriation, namely Bank of Cyprus and Laiki were the main repositories for *Cypriot* money and not some fictional Russian mob. So the Russian mob lost nothing but Cyprus businesses got f*cked. Zerohedge has some examples of the people affected by this EU rape (why wasn’t Ireland subjected to the same conditions when it got much more money than Cyprus). They aren’t Russian mobsters.

Thank God Russia has signed long term natural gas contracts with China. The EU would have demanded Russian gas for a tenth the cost next. “Since it is all stolen by evil Putler”.

BillT on Sun, 31st Mar 2013 2:41 am 



dissident, too many westerners are still in the cold war frame of mind. They want to believe that it is all the Russians or the Chinese or … but they never look in the mirror at the real culprit. The failure is in letting the government get away with it in the first place, but as long as they were personally benefiting from it is was ok.

NOW the screws are being turned on them and they are whining. Wait until it is Arthur’s pocket they are in or Norm’s. Wait until it is THEIR retirement plans that get ‘nationalized’ and they have no control over their money. Wait until it all collapses and the world returns to the middle ages. Just wait. It’s coming.

Arthur on Sun, 31st Mar 2013 12:26 pm 



“Put a sock in it Arthur. You don’t even know how much money parked in Cyprus was Russian mafia money. And BTW, sunshine, if it was stolen in Russia then it does not belong to EU scumbag commie-wannabes.”

Again, not a single euro went from Cyprus into the coffers of the EU.

The money was not necessarily stolen in Russia, it was merely parked in Cyprus to evade Russian taxes.

The EU in this case behaved exactly the opposite of commie-wannabees by refusing to bail out the Cypriot banks.

“Wait until it is Arthur’s pocket they are in or Norm’s. Wait until it is THEIR retirement”

I am a life long freelancer and have no retirement, other than hard assets, about three times Dutch average. Paper assets were abandoned by me by 2004, as a result of a considerable number of hours spend on the internet. Good investment.

Per capita net worth Europeans 2013 (euro=1.3$):
France 104k
Spain 106K
Holland 112k
West-Germany 115k
Austria 115k
Italy 164k

http://www.spiegel.de/politik/deutschland/faktencheck-zur-bundesbank-studie-private-haushalte-und-ihre-finanzen-a-890877.html

According to the NYT/2012 it is 154k euro for Americans

tinyurl . com / cbu57g6

…as long as the $ value will hold, totally dependent on the willingness of foreigners to keep touching the money, tendency downwards. A dumping of the dollar by the rest of the world, for instance at the start of WW3 in the Gulf, will put the average American in a position where he can only dream of being a ‘raped’ 100k Cypriot.