Steen's Chronicle: Cyprus: The deal that is not a deal but an understanding.......

Cyprus: The deal that is not a deal but an understanding.......

Non-Independent Investment Research

Let's talk about what we do know, which is very different from what the Troika and Cypriot government wants us to believe:

·         Cyprus will be in a three-year program – The Troika will provide EUR 10 billion which can not be used for recapitalising the two biggest banks.

·         Cyprus needs to bring its government debt down to 100 percent of GDP by 2020.

·         The banking sector need to be at European average level by 2018.

·         Laiki bank will be split in a good and a bad bank. The "good" bank will be folded into Bank of Cyprus including the ELA funding (approximately nine billion EUR). This should raise roughly four billion EUR according to EU Group.

·         Bank of Cyprus will need to be capitalised to have a core capital ratio of nine percent which means a serious amount of bail-ins from its equity, bond and depositors with in excess of  EUR 100,000 in their accounts. Estimates run from a conservative 20 percent to a draconian 50 depending on the model used and the future impairment of the loan book.

·         Time-line: By Mid-April (Note: not this week but by Mid-April) a memorandum of understanding needs to be signed by the Troika and the Cypriot government. Then this MoU needs to ratified by all members of the Eurozone including Germany by late April/early May for the first installment to be paid out by May.

This is the facts as I see them. From now until mid-April is a very long time, especially for a country which just introduced three "firsts" in EU history:

1.    Capital control. One euro in Cyprus is not the same as one euro in Berlin or Paris any more. You cannot move your money off the island.

2.    Bail-in of senior bondholders – In Greece it was only junior bondholderss

3.    Bail-in of depositors with more than EUR 100,000 in their accounts.

Leaving aside the fact that "capital controls" are only supposed to be for EMERGENCY circumstances, it is, like most solutions from the EU, a direct violation of the bloc's own treaties which enshrine the free movement of capital.

In Europe, it's been over a generation since anybody who was voted into office on a mandate for change actually came tru on their promise. Yes, the Lady with the handbag, Margaret Thatcher in 1979, but it was also in 1979 that the UK abolished its last capital controls. Have we gone full circle back to the 1970s? If so, let's hope that somewhere in Europe there's a new Baroness Thatcher waiting in the wings who is willing and able to see beyond the next ECOFIN or EU Council Meeting. With the current rate of policy backsliding and regression the EU is destined only for one thing: decade after decade of lost opportunities and a social fabric that will be hard to sustain in the face of rising unemployment, capital controls and a general attitude that more macro is needed and not less.

The German election can't come soon enough. We need to break this negative cycle which is spiraling out of control while politicians stands idly by. This weekend's 'deal' has no winners  - only losers. And it has left European decision-making bleeding and without hope of recovery as the EU commission and IMF exchanged harsh words all in the name of a power game, never for the sake of future Europeans.

Postscript: Following the publication of this article, the Eurogroup confirmed its intension on using the above template for future bail-outs:  (This is MUST READ material)

http://uk.reuters.com/article/2013/03/25/eurogroup-cyprus-dijsselbloem-idUKL5N0CH2TJ20130325

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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