December 14, 2018

Cyprus Gets First Installment of Bailout Funds

PARIS — After striking an unprecedented deal in March to make many bank depositors help pay for an international bailout, Cyprus on Monday received €2 billion, the first installment of that money, aimed at buttressing the economy after the near-collapse of its banking sector.

European officials say the release of the funds, equivalent to $2.6 billion, was recently approved by a working group of the 17 euro zone finance ministers, who gathered Monday evening in Brussels for their regular monthly meeting. Cypriot efforts to stabilize the economy may be on the agenda. A second allocation of up to €1 billion will be transferred by June 30, officials said.

That session was a prelude to the planned meeting Tuesday of all 27 European Union finance ministers, where the focus is expected to be on proceeding with a European banking union that could stabilize the financial system and avoid future debacles like the one in Cyprus. Officials on Tuesday were to consider a single set of rules for dealing with failing banks throughout Europe, as well as discuss continuing efforts to curb tax havens.

The thorniest issue revolves around whether depositors in any other European country should be made to suffer losses if their banks require an international rescue, as happened in Cyprus in an unprecedented and still controversial provision for a euro zone bailout.

In exchange for a €10 billion emergency aid package, Cyprus in March agreed to E.U. demands to effectively confiscate up to 60 percent of any depositor’s holdings above €100,000 held in two of the country’s largest banks, Bank of Cyprus and Laiki Bank. At the same time, Laiki Bank was forced to fold, merging into the Bank of Cyprus.

On Tuesday in Brussels, part of the debate will involve where depositors should be placed in the hierarchy of creditors in the future rules on shutting down failing banks. The main focus is what to do with depositors holding more than €100,000. Some countries want all E.U. members to have the same rules, while others want the flexibility to decide where savers should be in the hierarchy.

The president of the European Central Bank, Mario Draghi, said at his recent monthly news conference that ordinary depositors should be affected only after people who took risks by buying bonds in banks were forced to take losses. “If it can be avoided,” he said, “uninsured depositors should not be touched.”

In Cyprus, the issue came to a head after Germany and some other E.U. countries insisted on finding a new way to pay for a bailout of troubled Cypriot banks, which held large deposits from wealthy Russians. There were questions about the origins of some of the money, meaning it would be hard for Berlin to justify using German taxpayer funds to clean up Cyprus’s mess. In the end, E.U. and Cypriot officials agreed that wealthy depositors would effectively have to help foot the cleanup bill.

The president of the Cypriot central bank, Panicos Demetriades, said last week that most of the depositors who lost money under the deposit-seizure system were foreigners. “Seventy percent of the value of the deposits concerned overseas residents, leaving Cypriot households and businesses unaffected to a greater extent than was possibly expected,” he said at a news conference.

Cypriot and Brussels officials had abandoned an earlier, even more controversial plan to skim a percentage of insured deposits — those under €100,000 in Cypriot banks. They pulled back that proposal after it set off tremors in global financial markets and raised the specter of a run on euro zone banks because of concerns that even insured deposits might not be safe.

It was still in an emergency atmosphere, though, that Cyprus imposed capital controls in March to prevent a flood of money from leaving banks operating there. Those restrictions have been eased gradually since then, but remain in place for all but a handful of foreign banks, despite initial promises by the government that the strictures might be quickly removed.

The entire episode has dealt a sharp blow to the Cypriot economy.

With restrictions on how much money individuals and businesses can withdraw or transfer from their Cypriot bank accounts, spending has been sharply curtailed. The economy, already in recession, is expected to contract at least 12.5 percent in the next two years. Unemployment, at 12 percent, is forecast to rise as the shrinking of the outsize banking system, demanded by Cyprus’s creditors, curtails lending and leads to job losses.

The bailout has also set off geopolitical tension over a trove of natural gas recently found in Cypriot waters, which the country’s creditors hope could be tapped in the future to help pay off the country’s loans. Last week, the E.U. commissioner for economic and monetary affairs, Olli Rehn, pressed for the four-decade-old division of Cyprus into Greek and Turkish territories to be abolished, saying reunification would give Cyprus a “major boost to economic and social development.”

Such a move could also pave the way for faster exploration of extensive natural gas reserves off the coast of Cyprus, which Turkey, Russia and the European Union are all interested in pursuing.

Cyprus has been divided since 1974, after Turkey invaded the north. Turkish officials have warned the Cypriot government in recent months not to proceed with gas extraction unilaterally, saying it would risk further inflaming political tension with Ankara.

James Kanter contributed reporting from Brussels.

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In Europe, Growing Concern Slovenia Is Next to Need Bailout

The rewards of success included an imposing mountainside retreat and frequent mention of his name as a possible future finance minister of this small, idyllic Alpine country.

Now, though, Mr. Kordez stands convicted of forgery and abuse of office for financial dealings as Merkur struggled under a mountain of debt.

“My mistake and the mistake of the banks was to vastly underestimate the risk,” Mr. Kordez, 56, said in a recent interview at his home near the picturesque town of Bled, with a view of Slovenia’s highest peak. He awaits a decision later this month on an appeal of his conviction, which could send him to prison for five years.

As fears grow that Slovenia could follow Cyprus and become the sixth euro zone country to seek a bailout, his rise and fall have come to symbolize the way easy and cheap credit, combined with Balkan-style crony capitalism and corporate mismanagement, fueled a banking crisis that has unhinged a country previously praised as a regional model of peaceful prosperity.

The recent bailout of Cyprus at a cost of €10 billion, or $13 billion, which included stringent conditions forcing losses on bank depositors, has focused minds in Ljubljana, the Slovenian capital. Slovenia’s struggling banking sector is saddled with about €6.8 billion worth of nonperforming loans, about one-fifth of the national economy. Slovenia is now in recession, and the gloom across the euro zone shows little sign of abating. A European Commission forecast released Friday said that France, Spain, Italy and the Netherlands — four of the five largest euro zone economies — will be in recession through 2013.

Last Thursday, Slovenia bought time by borrowing $3.5 billion on international markets. That was two days after Moody’s Investors Service cut the country’s credit rating to junk status, citing the banking turmoil and a deteriorating national balance sheet. Analysts said the bond sale would probably enable the government of the new prime minister, Alenka Bratusek, to stay afloat at least through the end of the year.

The Cypriot debacle has shown how bailing out even a small country can damage the credibility of the euro currency union. But Slovenia, with two million people, insists that it is not Cyprus and will not seek emergency aid.

“For the time being, I have a sound sleep,” Ms. Bratusek, the 42-year-old prime minister, said in a recent interview.

This week, on Thursday, Ms. Bratusek, only a little more than a month in office, is expected to present a financial turnaround plan to the European Commission, the executive arm of the European Union. She said that privatizing Slovenia’s largely state-owned banking sector was a priority, along with creating a “bad bank” to take over nonperforming loans.

Her government, she said, will also unveil plans by July to sell the country’s second-largest bank, Nova Kreditna Banka Maribor, along with two large state companies that she declined to specify. The sales could raise up to €2 billion, she said.

Ms. Bratusek, who once headed the state budget office at the Finance Ministry, said Slovenia’s government debt, which analysts say rose from about 54 percent of gross domestic product to around 64 percent with last week’s bond sale, still ranked at the lower end of that scale in the euro area.

But the 6 percent interest rate Slovenia offered on the 10-year bonds in last week’s debt sale, at a time when some euro zone countries are enjoying historically low borrowing costs — Germany’s equivalent bond is trading below 1.2 percent — might only add to the country’s financial problems.

Mujtaba Rahman, director of Europe at Eurasia Group, a political risk consulting firm, said the new financing could backfire if it lulled the government into laxity about making vital structural changes.

“The new financing was not a vote of confidence in the Slovenian government or in the economy, but rather reflects investors attracted by high bond yields,” Mr. Rahman said. “A bailout could still prove inevitable.”

What went wrong in Slovenia? The country, wedged between Italy, Austria, Hungary and Croatia, was considered the most promising among the 10 new European Union entrants when it joined in 2004. That was 13 years after it declared independence from Yugoslavia, avoiding a bloody Balkan war that had swept up other countries in the region.

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Shares Dip on Cyprus News

The stock market lost ground Monday as investors worried that a proposal to seize money from bank depositors in Cyprus could cause more anxiety over the fate of the euro, Europe’s shared currency.

The Dow Jones industrial average fell 62.05 points, or 0.4 percent, to close at 14,452.06 Monday. It plunged as much as 110 points early, briefly turned positive in the afternoon, then fell again in the last hour of trading.

The Standard Poor’s 500-stock index fell 8.60 points, or 0.6 percent, to 1,552.10, moving further from its high of 1,565.15, set in 2007. The Nasdaq composite index dropped 11.48 points, or 0.4 percent, to 3,237.59.

European markets recovered most of an early decline and closed with modest losses. Yields on government bonds issued by Spain and Italy edged up, and the euro fell to a three-month low against the dollar.

The market rally that has pushed the Dow to record levels this year has been punctuated by concerns about the euro zone’s lingering debt crisis.

“Europe has got problems,” said Uri Landesman, president of the hedge fund Platinum Partners. “You could get more stuff like this, and the market isn’t priced to handle that.”

Cyprus reached an agreement last weekend with its European partners for its government to raid bank accounts as part of a 15.8 billion-euro ($20.7 billion) financial bailout, the first time in the euro zone crisis that the prospect of seizing individuals’ savings has been raised. The measures are stoking fears of bank runs in the other 16 nations that use the euro.

Cypriot authorities, facing an uproar, delayed a parliamentary vote on the seizure and ordered the country’s banks to remain closed until Thursday while they try to modify the deal to lessen its impact on small depositors.

Markets in Europe and Asia also fell during early trading, before retracing some of their losses later in the day. Germany’s DAX index dropped 0.4 percent and Spain’s main stock index shed 1.3 percent. Indexes in Britain and France each lost 0.5 percent.

The American stock market’s reaction to euro zone developments has eased over time.

The Dow slumped more than 8 percent last year from May 1 to June 1 on concerns that Spain and Italy would be dragged into Europe’s debt crisis. While the Dow initially dropped last month in reaction to the unsettled Italian election results, which threw the country into political paralysis, it has since gained 4.6 percent. Likewise the market recovered much of the early loss on Monday prompted by the Cyprus bailout deal.

Even with the stock market’s pullback Friday and Monday, the Dow is still up 10.3 percent this year, while the S. P. 500 is up 8.8 percent.

The stock market’s resilience suggests that traders consider the Cyprus situation to be contained for now, said Quincy Krosby, a market strategist for Prudential. The threat of rising volatility may also deter the Fed from thinking about ending its economic stimulus program. The central bank starts its second two-day policy meeting of the year Tuesday.

“Absent the Cyprus flare-up, the markets were slowing a bit and it looked as if investors were digesting the gains and waiting for the next catalyst,” Ms. Krosby said.

Financial stocks were among the biggest decliners in the S. P. 500. Morgan Stanley fell 60 cents, or 2.5 percent, to $22.99. Citigroup dropped $1.02, or 2.2 percent, to $46.24.

Goldman Sachs said Monday that it had lifted its year-end target for the S. P. 500 to 1,625 from 1,575. The investment bank is forecasting that the United States economy will grow 2 percent this year and 2.9 percent next year. It also is predicting increases in corporate deals and dividend payments.

Deutsche Bank also said Monday that it was lifting its year-end prediction for the S. P. 500 to 1,625 from 1,600, forecasting an upturn in business spending.

In the bond market in the United States, interest rates slipped. The price of the Treasury’s 10-year note rose 10/32, to 100 13/32, while its yield fell to 1.96 percent from 1.99 percent as investors moved into low-risk investments.

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