Home > Uncategorized > A letter from the president of Cyprus, about the bail-in of his country

A letter from the president of Cyprus, about the bail-in of his country

The president of Cyprus has written a letter reconsidering the clumsy and deeply deflationary bail-in of Cyprus. You can read the whole letter here. Two paragraphs are reproduced below (emphasis added)

2. Application of bail-in was implemented without careful preparation

It is my humble submission that the bail-in was implemented without careful preparation. Its form was changed drastically within a week. Originally designed as a general bail-in across the banking system, it eventually became focused on the two distressed banks, the Laiki Bank and the Bank of Cyprus (BOC). There was no clear understanding of how a bail-in was to be implemented, legal issues are being raised and major delays in completing the process are being observed. Moreover, no distinction was made between long-term deposits earning high returns and money flowing through current accounts, such as firms’ working capital. This amounted to a significant loss of working capital for businesses. An alternative, Ionger-term, downsizing of the banking system away from publicity and without bank-runs was a credible alternative that would not have produced such a deep recession and loss of confidence in the banking system.

3. Cyprus was forced to pay the cost to ring-fence Greece but no reciprocity has been granted

Another feature of the current solution was that deposits at the branches of Laiki and Bank of Cyprus in Greece were spared from a haircut to prevent contagion. These deposits amounted to €15 billion. The wish to avoid contagion to Greece was also evident in the Eurogroup’s insistence that Cypriot banks sell their Greek branches. In addition and as a result of the sale, the Cypriot banks have lost their Greek deferred tax assets. As understandable as ring-fencing may be, this was absent at the time of deciding the Greek PSI in relation to the Greek Government Bonds which cost Cyprus 25% of its GDP (€4.5 billion). The heavy burden placed on Cyprus by the restructuring of Greek debt was not taken into consideration when it was Cyprus’ turn to seek help.

  1. Mark Friedman
    June 19, 2013 at 12:45 pm

    I happen to be in Aya Napa, Cyprus on vaca. If anyone has any requests/recommendations for places to visit, people to see and speak with, I could try.

    In the case of Cyprus, my 2 cents is money doesn’t disappear into thin air. Maybe this is sort of abstract but in the case of the financial sector it resides in collateral.

    Thought experiment:
    Can I have a loan for a billion euros? I’d even settle for less.

    Thanks,
    thirdculture

  2. Herb Wiseman
    June 19, 2013 at 8:30 pm

    Mark, If money is created out of thin air why can it not disappear into thin air? Indeed is that not what happens when a loan is repaid?

    • thirdculture
      June 20, 2013 at 5:22 am

      The Cyprus loans and investments were not repaid.

      When a loan is made, the money gets disbursed in all different directions. There are obligations and responsibilities on the part of all cash recipients. What!? The collateral was not properly valued!

      a similar train of events took place with Cyprus investments.

  3. davetaylor1
    June 19, 2013 at 9:34 pm

    Herb, the money which is repaid does disappear into thin air, but not the much larger proportion claimed by the banks not as repayment but as interest, commissions and forfeiture of collaterals. Of course banking has to be paid for, while private pensions and insurance industries are all bound up with their sideline of gambling with other people’s money, but Mark is right, the collateral claimed by the banks doesn’t decrease in proportion to their gambling losses. The UK government is, belatedly, trying to get tough with the banksters, but all praise to the President of little Cyprus, who has shown more guts, understanding and imagination than any other leader of Europe’s banks, Commission and Governments. With the possible exception of Iceland, where I understand the women have kicked the men out and told the bankers to get lost.

    http://www.spiegel.de/international/europe/cleaning-up-the-men-s-mess-iceland-s-women-reach-for-power-a-620544.html

  4. davetaylor1
    June 20, 2013 at 10:16 am

    Merijn, thanks for this interesting post, but having seen the injustices, perhaps we should focus on the concluding section of the President’s letter:

    “5. Urgent need for Troika to provide a long-term sustainable and viable solution to the liquidity issues Bank of Cyprus is facing as a result of the Eurogroup decisions”.

    In light of an on-going crisis and now shocking revelations in the UK National Health Service, referring to the Troika here as the authority responsible for resolving poor Eurogroup decisions suggests its role is analogous with that of the NHS Care Quality Commission. That was so appalled at the bad care standards it found, and it not having a clue as to how to resolve the situation, that it hadn’t the guts to publish its own report; thus little changed. The “long-term, sustainable and viable solution” being proposed is to name, shame and at least disbar not only those responsible in the Hospital (c.f. ECB) but also those in the Commission (c.f. Troika); and to take great care to ensure future Commissioners are both technically and morally up to the job.

    In hospitals I suspect those named will not be managers without the guts to object to inadequate budgets, nor servile politicians imposing unnecessary austerity. In the economy there are probably too many self-serving financiers and economists “without a clue” to name.

    A comment under the President’s letter objects to its opening: “It is my humble submission”. Obviously someone doesn’t understand irony.

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