Ouch!

Under the arrangement, depositors in Bank of Cyprus will receive shares in the lender worth 37.5pc of any savings over €100,000, while the rest may never be paid back, according to a statement from the Cypriot central bank.

Of the 62.5pc of uninsured deposits not converted to bank shares, about 40pc will continue to accrue interest but will not be repaid unless the bank does well, while the final 22.5pc will cease to attract interest.

Government figures, including finance minister Michalis Sarris and central bank governor Panicos Demetriades, had previously indicated that depositors in the island\’s largest lender would lose around 40pc of their uninsured savings as part of an 11th hour agreement reached in Brussels in the early hours of Monday.

Meanwhile, account holders in Laiki Bank, the country\’s second largest, stand to lose up to 80pc of their money as the lender is wound down and insured deposits transferred to Bank of Cyprus.

I\’m not really sure how these numbers stack up.

From the original numbers they needed to find €6 billion or so to prop up the banks. There\’s €30 odd billion in accounts over €100,000. Thus the haircut shouldn\’t need to be that large. 20% or so would see it right.

However, those are the numbers for the entire banking system. And now they\’re only resolving the two main banks, the two which are actually bust. And I suppose it\’s possible that the two bust banks were the two retail banks. It\’s the other banks that have been catering to the offshore big hitters with the large deposits. They\’re not bust, they don\’t need resolving, but that\’s also where most of the large deposits are.

That\’s all supposition of course but it does explain the observable facts. And that leads to a very interesting outcome as well.

That means that it wasn\’t Cyprus\’ home for hot Russian money that was the problem. They\’re not the banks that went bust. What did go bust was the plain vanilla domestic banking system. Largely by putting all the depositors cash into Greek Government bonds. And that would be very interesting indeed, wouldn\’t it?

So, does anyone know where one can find the actual figures for deposits? By bank? Can we see how much Laiki and B of Cyprus had in those large offshore deposits? As I say, if the haircuts have to be this large to raise the €6 billion then those large deposits can\’t have been all that large. But is it possible to find out?

13 comments on “Ouch!

  1. All of which sort of reminds us that an investment can only pay interest if it has an ROI. And there isn’t an ROI on government bonds, because they aren’t an investment in anything. Just an aspiration that bondholders will be given some part of future taxation. If there is any to be given.

  2. @Ian B – a government bond is an investment in a country as company – taxation receipts are a form of income and government spending pays for salaries and cap ex. And also benefits.

    The main difference is that governments can print money to repay the debt.

  3. A country isn’t a company. There isn’t any “Great Britain PLC” and all that nonsense. Government borrowing pays for consumption. It isn’t an investment.

  4. Government borrowing pays for consumption. It isn-t an investment.

    You’re being simplistic and absolutist again. Not all government spending is consumption. Some (although nowhere near as much as the pols or the LHTD claim) is, genuinely, investment. Being the govt, probably not very sensible investment but, hey …

  5. I’d expect the usual Pareto ratio to apply. If it doesn’t here, with more severe haircuts than expected, then it is very suspicious and they need to start an investigation into insider trading.

    To avoid a libel action I should point out that it might not be the bankers who tipped off their favoured clients. It might also be the newspaper boy.

  6. I was making a point, SE. That isn’t “simplistic”. It is simple. There is a difference.

    The interest paid on government bonds etc is not return on investment. It is paid for with taxation. The government did have some productive capacity (coal etc) but sold that, and left us only with consumption (health, welfare).

    The point is that “investment” lending is when you lend someone some money so they can create the means of production, gain a profit, and pay you a share of that profit back as interest. Consumption lending is when you lend someone some money, they buy some shit with it (like a new stereo or something) then they pay the interest from an unrelated income (going to work, for instance). These are different things.

    Lend me a thousand so I can buy a PC, draw

  7. draw [pound sign]10,000 worth of cartoons and give you some of that profit as interest, that’s investment. Lend me a thousand so I can buy a PC and look at porn and lolcats, that’s consumption.

  8. Mike – “A lot of the Russian money in Cyprus has been withdrawn from London and Moscow Cypriut Banks”

    I have said before, we are being ruled by the C Team. The sort of people who couldn-t cut it as sociology lecturers. Never has the quality of Europe-s leaders been so pathetic as now. Did it not occur to them that the Russians would do this? Did they not think to check? No doubt some Cypriot bank officials will retire in a little more comfort than they might have before.

    In the meantime we can rest assured that the best minds in Europe are in charge. Not just the Great and the Good, but the top minds. No need to worry.

    Top. Men.

  9. I do not know of a breakdown by bank.

    However, like most countries, Cyprus only has a handful of banks. Since BoC and Laiki are the largest, the aggregated data should give you a decent idea of what you’re looking for.

    You can find that data at http://sdw.ecb.europa.eu/reports.do?node=1000003192.

    You can start there. If you download the data instead of viewing it online, you get a very detailed pivot table that might have what you’re looking for.

  10. What Tim s suggesting sounds very much like what a remarkably pissed off Russian was describing to me last night.
    He s put a fair amount of his/her/somebody’s warmish or at least room temperature but hard grafted for/looted dosh in what is supposed to be a kosher bank & because some other bank has made a bollox bailing out Athens it’s his pockets look like being looted.
    I do wonder if there are going to be consequences. Russians I know are great people but they seriously don t like being had over. And they do tend to regard things as being very personal when it comes to being had over. I really wouldn t like to be the Cyp/Greek(s) who they decides to blame. Like I said. They may make it personal.

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