EU screw every Cyprus citizen to protect the senior bondholders.

Évidemment les banques européennes ont retiré leurs billes dans les banques de Chypre avant qu’elle éclate.

Pour le peuple chypriote, un simple tampon pour réparer les pots cassés des gestionnaires financiers de leurs banques qui préféraient faire de la spéculation à haute voltige que de passer de l’argent à l’économie réel.

Cyprus Bailout Math

I object to the entire scheme. First the bondholders should have been wiped out. If that was not enough then the deposits above the €100,000 deposit guarantee should have been hit. Then and only then should the average citizen been hit.

And guess what. The average Cyprus citizen would likely not have been hit.

Instead, the EU mandated a "screw every citizen" policy to protect the senior bondholders.

What I wrote above was a guess, but an accurate one. Reader Jeff Baryshnik, Baryshnik Capital Management Inc., in Toronto provides some specifics in an email to me a few hours ago.

Hi Mish

I read with interest your article on the Cyprus bailout deal.  After a quick review of the most recent financial statements of the four publicly listed Cypriot banks as shown on their websites, it is notable that a simple alternative proposal could protect the country from bankruptcy and make its depositors whole.

By wiping out 100% of the equity, 100% of the bondholders, and 17% of the banks’ liability to central banks, the Cypriots could stabilize their banking system (based on the 5.8Bn EUR figure being discussed) without penalizing local savers. 

Instead of raising 5.8Bn EUR from depositors,

1) it could raise 1.4Bn from combined market cap,

2) 2.0Bn from bondholders and preferred shareholders, and

3) 2.4Bn of the 14.3Bn in combined Central Bank loans (Cypriot and ECB) it has on its books.

This assumes zero contribution from the Cypriot subsidiaries of foreign banks so it may be conservative. 

If the banking system is bankrupt, anything other than an Alice-in-Wonderland recovery system suggests that the order of liquidation is shareholders, preferred shareholders, debt holders, Central Bank creditors, and THEN depositors. If 10Bn or even 17Bn EUR is truly required, then coincidentally up to 17.7Bn EUR is available from equity holders, debt holders, and Central Bank creditors without impairing a euro cent from depositors

Extrait de: Cyprus Bailout Math; Can Depositors Be Left Whole?, Mish Global Economic

Extrait de : The Real Cyprus Template (The One You're Not Supposed To Notice), Tyler Durden, Zero Hedge,  04/08/2013

It appears the key preliminary step of the Real Cyprus Template is that money-center banks in Germany and other "core" Eurozone nations pull their money out of the soon-to-implode "periphery" nation's banks before the banking crisis is announced.

The Cyprus situation had been simmering for at least a year when in March of 2013 it finally broke; Cyprus had a week to take care of its banking situation or else face a cutoff of access to the eurosystem by the ECB. This brought matters to a head; the Cyprus Bail-In was finally settled upon, where uninsured depositors in the two largest banks in Cyprus took major haircuts, and must wait for return of their money until the assets of the banks are run down.

The banking problems in Cyprus had their roots in the Greek Sovereign Default, and were known by the general public for about a year prior to the recent default; a New York Times article dated April 11, 2012 lays out the particulars.

Looking at Cyprus bank security assets in data provided by the ECB, the problems were visible earlier - right after the first Greek haircut in mid 2011, and a second haircut finalized in early 2012. This was a 11 billion euro hole in a system with 100 billion in assets total, centered upon two banks that held half the deposits in the system.

Greek Crisis Timeline



April 2010

Greek Sovereign Bonds Declared Junk

May 2010

110 Euro bailout, no haircut

July 2011

"Private Sector Involvement" decided at EU Summit

Oct 2011

130 Euro bailout, 53% face value haircut

Mar 2012

Haircuts take effect; actual haircut 85%

You can see the effects of the increasing haircuts in the chart below. The chart lists all types of bonds owned by all the banks on Cyprus.

The red line is the important one. It shows "all off-island Eurozone Government Bonds."

Cypriot banks

Put more simply, that red line represents Greek Government debt owned by the two banks on Cyprus that failed.

It went from a 12 billion euro value in mid 2011, down to a 1 billion euro value in early 2012. That's an 11 billion haircut - all due to the Greek Default.

So why did the eurozone wait so long to resolve the problematic Cypriot banks with their 11 billion euro hole that was clearly serious in the middle of 2011, and becoming blindingly obvious by 2012?

Therein lies a story - it has to do with banking, and how banks make money. The explanation is a bit complicated, but bear with me.

But the key to this free money is, your bank must be able to get its money out
of Cyprus prior to any trouble

So in order to avoid loss, you have to see into the future one year and stop rolling your bank's time deposits one year before those Cyprus banks go under. Otherwise you will have collected that 4.9%, then suffered a 30-60% uninsured depositor haircut. And a haircut is not a good way to ensure your banker bonus for the year.

So with this hypothetical strategy in mind and being mindful of the dangers of default and the timeline of when things occurred, take a look at the following chart of "foreign deposit sources" (deposits in Cyprus banks that originated from outside Cyprus) and see for yourself how well each foreign participant did in anticipating the eventual banking system crisis.

·         Black: Eurozone [German & French] Banks

·         Red: Cyprus people and businesses

·         Blue: Cyprus Banks

·         Green: Banks outside the Eurozone

·         Orange: Russian "Mobsters" & Brits

Select Deposit source Cyprus

But as time passed, those Eurozone bank deposits were slowly reduced down to 10 billion euros, a reduction of 50%. Presumably, as the time deposits expired, the money was brought back to the fatherland.

And then suddenly the President of Cyprus was informed he had 1 week to solve the banking situation that had been pending for more than a year.

In looking at the movement of capital prior to the default, we can give a grade to each participant, as a result of their apparent ability to assess the the danger to their deposits.

The clear winner: Eurozone Banks.

Those guys were geniuses. They were the only participant to seriously reduce holdings prior to the default.



Eurozone [German & French] Banks

B+/A-: almost perfect

Cyprus People & Businesses

F: completely unaware

Cyprus Banks

C-: slightly more aware

Banks Outside Eurozone

F: completely unaware

Russian Mobsters

F: completely unaware


So it is expected (and a bit sad) that households and businesses don't leave their banks readily, so its not surprising they stayed on board right up until the end.

What is fascinating to me is that the banks that were NOT in the eurozone clearly had no idea what was coming, and the banks actually ON Cyprus only had an inkling, and that only at the last minute.

Given both the timing and the form of the Cyprus bank resolution was in the hands of the ECB, as well as French and German politicians, is this astounding ability of the Eurozone banks to avoid losses truly a surprise?