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News Analysis: Big Depositors May Become Big, Angry Shareholders in Cyprus

March 27, 2013 by Leave a Comment

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

Filed Under: Economy News Tagged With: , ,

In Cyprus, Big Losses Expected on Deposits

March 26, 2013 by Leave a Comment

But the situation is now looking even worse than anticipated. Instead of the relatively modest decline of 3 percent that is built into the forecast that underpins the country’s international bailout package, many economists say that estimate will need to be revised sharply downward given the shock that the island’s small economy has endured from the extended closure of its banks.

The bailout package being put together by the troika of international lenders — the International Monetary Fund, the European Central Bank and the European Commission — will consist of about 10 billion euros ($12.9 billion) in loans for Cyprus itself. But the cost of bailing out the island’s two largest banks, Bank of Cyprus and Laiki Bank, is to be borne by the banks’ large, uninsured depositors.

At a news conference on Tuesday, the governor of Cyprus’s central bank, Panicos O. Demetriades, said that he expected big depositors at the Bank of Cyprus to get a “haircut,” or loss, of about 40 percent on their 14 billion euros in long-term deposits. In exchange, depositors will receive shares in a recapitalized bank.

But with many economists now estimating that the Cypriot economy will contract 5 percent to 10 percent this year, it could well be that the depositors will have to take a bigger loss so that the bank can free up cash to protect its rapidly deteriorating loan book.

At Laiki Bank, which is even worse off, about 4 billion euros of deposits will be put in a bad bank and are most likely to be wiped out as the bank is wound down.

Debt experts say that as painful as such a trimming may be, it still may not be enough to guarantee the viability of the Bank of Cyprus, given the state of the economy.

“If you are not hugely conservative with regard to valuing Bank of Cyprus’s loans, the bank will be bankrupt in 12 months,” said Adam Lerrick, a sovereign debt specialist at the American Enterprise Institute in Washington.

As of the third quarter of 2012, problem loans for the bank were 22 percent of the total, one of the highest ratios in the euro zone. That figure will have grown significantly over the last several months, economists here say.

Adding to the sense of confusion enfolding the country’s financial sector, the chairman of the Bank of Cyprus resigned abruptly Tuesday after a showdown with Mr. Demetriades, the head of the central bank, and the finance ministry.

The bank chairman, Andreas Artemis, complained that the authorities rode roughshod over him and his board by moving unilaterally to sell off units of the bank in Greece and for planning to impose the devastating haircut on big depositors.

In a statement later in the day, the bank said Mr. Artemis’s resignation had not been accepted and “will only apply if not withdrawn within one week.”

The government is also struggling to come up with some form of capital controls in a bid to prevent too much money from draining from the banks and leaving the country. Given that more than 30 percent of the Bank of Cyprus’s 14 billion euros in long-term deposits belongs to foreigners — mostly Russians and Greeks — who would not hesitate to take their money out of the country, the restrictions on those funds are likely to be onerous, bankers say.

“That money is going to stay there for a very long time,” said one person who has been involved in the discussions, but who requested anonymity because he was not authorized to speak publicly.

On Tuesday, the Cypriot central bank said it had appointed Dinos Christofides, a well-known local business executive, to act as special administrator for Bank of Cyprus. Mr. Christofides has long experience in auditing and advising major local and international companies.

Landon Thomas Jr. reported from Nicosia; Stephen Castle contributed reporting from London, Liz Alderman from Nicosia and David Jolly from Paris.

Article source: http://www.nytimes.com/2013/03/27/business/global/bailout-grows-riskier-as-cypriot-economy-stumbles.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Bailout Grows Riskier as Cypriot Economy Stumbles

March 26, 2013 by Leave a Comment

With time running out until Cyprus’s devastated banks must reopen their doors to the public, Cypriot and European officials are scrambling to put in place a set of measures that would allow jittery depositors access to their savings while preventing many billions of euros from fleeing the country.

But as officials grind yet again through their economic models, they are confronting a disturbing prospect: Estimates that the Cypriot economy would shrink about 3 percent this year, a forecast that underpins the country’s controversial international bailout package, will need to be revised drastically given the shock that the island’s small economy has endured from the extended closure of its banks.

The bailout package being put together by the troika of international lenders — the International Monetary Fund, the European Central Bank and the European Commission — will consist of about €10 billion, or $13 billion, in loans for Cyprus itself. But the cost of bailing out the island’s two largest banks, Bank of Cyprus and Laiki Bank, is to be borne by the banks’ large, uninsured depositors.

At a news conference on Tuesday, the governor of Cyprus’s central bank, Panicos O. Demetriades, said that he expected big depositors at the Bank of Cyprus to get a “haircut,” or loss, of about 40 percent on their €14 billion in long-term deposits. In exchange, depositors will receive shares in a recapitalized bank.

But with many economists now estimating that the Cypriot economy will contract 5 percent to 10 percent this year, it could well be that the depositors will have to take an even bigger haircut so that the bank can free up cash to protect its rapidly deteriorating loan book.

At Laiki Bank, which is even worse off, about €4 billion of deposits will be put in a bad bank and are most likely to be wiped out as the bank is wound down.

Debt experts say that as painful as such a trimming might be, it may not be enough to guarantee the viability of the Bank of Cyprus, given the state of the economy.

“If you are not hugely conservative with regard to valuing Bank of Cyprus’s loans, the bank will be bankrupt in 12 months,” said Adam Lerrick, a sovereign debt specialist at the American Enterprise Institute.

Indeed, as of the third quarter of 2012, problem loans for the bank were 22 percent of the total, one of the highest ratios in the euro zone. That figure will have grown significantly over the past several months, economists here say.

Adding to the sense of confusion enfolding the country’s financial sector, the chairman of the Bank of Cyprus resigned abruptly Tuesday following a showdown with Mr. Demetriades, the head of the central bank, and the Finance Ministry.

The bank chairman, Antreas Artemis, complained that the authorities rode roughshod over him and his board of directors by moving unilaterally to sell off units of the bank in Greece and for planning to impose a devastating haircut on big depositors.

In a statement later in the day, the bank said Mr. Artemis’s resignation had not been accepted and “will only apply if not withdrawn within one week,” Reuters reported.

On Tuesday, the Cypriot central bank said it had appointed Dinos Christofides, a well-known local businessman, to act as special administrator for Bank of Cyprus. Mr. Christofides has long experience in auditing and advising major local and international companies.

Also Tuesday, Fitch Ratings said it was cutting its credit grades on Cypriot banks because of the losses imposed by the bailout deal on senior creditors. Fitch said it was cutting its rating on Laiki to “default” and its rating on Bank of Cyprus to “restricted default,” a grade Fitch said means the bank has experienced a payment default on a bond, loan or other material obligation but has “not entered into liquidation or ceased operating.”

Article source: http://www.nytimes.com/2013/03/27/business/global/bailout-grows-riskier-as-cypriot-economy-stumbles.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,