That conceivably could happen under the terms by which big depositors in the Bank of Cyprus, the country’s biggest, will be forced to help pay for the international bailout of the Cypriot banking industry.
Even as European and Cypriot officials put controls in place to keep depositors from sending their money abroad, one fact has become clear: when the bank does resume trading on the local stock exchange, it will be the bank’s largest depositors who will receive commanding stakes in the revamped Bank of Cyprus. For each euro seized from them, they are supposed to get a corresponding amount of stock.
By Wednesday evening it was not known how much of a loss, or haircut, would be demanded from depositors on their amounts exceeding €100,000, or $128,000. The figure of 40 percent was commonly cited by people involved in the assessment, but that number could go higher as government number crunchers try to predict the impact of Cyprus’s troubles on the value of the bank’s assets.
Making the haircut calculations all the harder to calculate is that for the first time in the euro currency union’s short history a member country will be forced to curtail the free movement of capital — one of the core precepts that underpins the ideal of monetary union in Europe. Those restrictions will have a further negative economic impact on Cyprus, a small trading nation that is deeply reliant on cross-border capital flows.
Bankers involved in the discussions say that, with companies closing down by the day and money disappearing under mattresses, the previous assumption that Cyprus’s economy might contract by only 3 percent this year has been discarded. A contraction of 10 percent or more is not out of the question.
And, oh yes, there will be at least one more factor in the equation: Besides its own deteriorating loan book, Bank of Cyprus will also be getting a chunk of problematic loans from the recently shut down Laiki Bank — as well as €9 billion in liabilities that Laiki owed to the central bank of Cyprus.
“To be safe I think you need a haircut of 60 percent,” said one person involved in the discussions. “But that is very hard for the Cypriots to accept.”
No one knows who the single largest depositor is among the €14 billion in deposits at the Bank of Cyprus that will be subjected to haircuts. So that angry Russian oligarch is purely theoretical at this point. What is clear is that, once the smoke and ashes from this meltdown begin to settle, the country’s bank will be owned largely by individuals and entities that have just had significant amounts of their wealth wiped out. If nothing else, it should make for some interesting shareholder meetings.
But at least that new class of stockholders will be better off than the bank’s shareholders before the overhaul and bailout — some 118,000 individuals, who had invested in the country’s biggest bank either directly or through retirement funds. Their shares are now virtually worthless, and they will receive nothing in compensation.
“These people were not speculative investors; they were told to act like Germans and to save for retirement which they did,” said George Vasiliou, who was president of Cyprus from 1988 to 1993 and who later played a key role in negotiating the country’s entry to the European Union in 2004. “Now their savings are wiped out.”
It is, in many respects, for this very reason that institutions like the International Monetary Fund have been so adamant that the new and improved version of Bank of Cyprus be adequately capitalized — that is, having enough of a cash cushion to avoid future collapses. Even if that means big depositors are now being asked to pay for that cushion by giving up a more sizable share of their savings.
Article source: http://www.nytimes.com/2013/03/28/business/global/big-depositors-stand-to-gain-most-in-cypriot-bailout.html?partner=rss&emc=rss
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