€urosclerosis: Cyprus, and Spain

Two related stories from THE WALL STREET JOURNAL:

Cyprus Gets New Bailout Deal

Bid to Remain in Euro Imposes Bank Controls, Steep Losses on Large Depositors

THE WALL STREET JOURNAL. Monday, 25 March 2013

By Matthew Dalton and Gabrielle Steinhauser in Brussels and Alkman Granitsas in Athens

Cyprus secured a bailout from its international creditors early Monday, ending a week of financial panic that threatened to see the small island nation become the first government to leave the euro zone.

But lasting damage has likely been inflicted on the Cypriot economy. Officials said they believe the country will now need strict controls on money transfers in and out of the economy in the coming weeks or possibly months, cutting off its citizens and companies from much of the rest of the euro zone’s financial system. And the bailout program aims to slash the size of Cypriot banks, perhaps forever ending the country’s status as an offshore tax haven and financial-services center.

Cyprus could see its economy contract by 10% or more in the years ahead, economists said.

“The near future will be very difficult for the country and its people,” Europe’s economics commissioner, Olli Rehn, said after the negotiations ended.

More at the link.

Cyprus largest bank, Bank of Cyprus PCL will be significantly downsized, but still remain open; large depositors will suffer the losses. The second largest bank, Cyprus Popular Bank PCL, will be closed, and deposits in excess of the EU deposit insurance limit of €100,000 will be partially or totally lost; secure deposits of less than €100,000 will be transferred to stronger banks.

But it isn’t just Cyprus:

Spain Brings the Pain to Bank Investors

Government to Impose Heavy Losses on Shareholders and Bondholders, Hire Advisers to Help Manage Lenders’ Assets
By Jonathan House and Christopher Bjork

MADRID—The Spanish government will impose heavy losses on investors at nationalized banks and hire external advisers to help it manage these banks’ assets, its latest efforts to overhaul a financial sector battered by the collapse of a decadelong housing boom.

Forcing shareholders and bondholders to share the cost of restructuring the country’s five nationalized banks was a politically costly step for the government of Prime Minister Mariano Rajoy, but one that was required under the terms of a European Union bailout of Spain’s ailing lenders. The decision to solicit advice in drafting a long-term strategy for these lenders came after the state-backed Fund for Orderly Bank Restructuring failed to sell one of them, midsize Catalunya Banc SA.

The bailout fund, known as the FROB, has decided to hire consultancy McKinsey Co. and investment bank Nomura International PLC as advisers, say people close to the situation.

More at the link.

Spain’s largest nationalized banks will see major losses, up to 61%, borne by investors. Bankia SA’s shareholders will lose virtually everything, their shares reduced from €2 to €0.01 in value, and junior bondholders will lose around 30% of their original investment. While the word “investor” conjures images of wealthy people, many of the shareholders in Spain’s banks are smaller savers. A mechanism is being set up under which investors who claim that they were misled into believing that the shares were very low risk can have their sales annulled and investment euros returned, if their claims are upheld. While THE WALL STREET JOURNAL does not state that such a system will wind up politicized, and virtually every small claimant will have his case upheld, THE FIRST STREET JOURNAL certainly does.

The causes of the various problems of the southern European nations appear varied, but they are all interrelated. Cyprus problems stemmed from its outsized financial institutions, as Cyprus had set itself up as a few-questions-asked tax shelter, which attracted many foreign depositors. But to be able to make profits and pay interest, Cyprus’ banks had to invest, and many invested in Greek bonds. When Greece got into trouble, for continually borrowing and spending more than the country’s production could support, all to pay socialist-style benefits, Cypriot banks suffered major losses. Spain’s problems were due more to an unsupportable construction boom with overvalued properties; I’m sure that was all George Bush’s fault.

With Cyprus’ troubles dominating the economic news recently — and moving into the more general news category due to the now-abandoned bank account levy proposal — we haven’t heard than much about the other sick men of Europe, Italy and Portugal and even France recently. But we will, we will.

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