€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.

11 Comments

  1. Pingback: Cyprus Reaches Deal, Deposits Over 100K To Be Seized | The Lonely Conservative

  2. From THE WALL STREET JOURNAL:

    Cyprus as Template? Report Stokes Market’s Fears

    By Paul Vigna | March 25, 2013, 2:07 PM

    Well, that didn’t take long now, did it?

    The relief rally over the Cyprus bailout that started last night was already flagging, but then the new head of the Eurogroup doused it even further, saying the Cyprus terms, which include sharp haircuts for bondholders and depositors of private banks, could be a “template” for future bailouts.

    The comments were since denied by a spokeswoman, as Dow Jones reported. Still, the market didn’t like the template comment one bit, since it basically confirmed what many had been thinking even last week. Nobody’s sure what will be the ramifications of this messy, protracted, and ugly bailout fight. But there are likely to be ramifications.

    One of the biggest fears was that the measures of this bailout–the hit that depositors and senior bondholders of private banks are taking–would be replicated elsewhere. The party line among the troika crowd has been that Cyprus is unique, a “one-off,” that bank creditors in other countries won’t have anything to worry about.

    Yeah, uh huh, right. Follow the link and keep reading.

    Jeroen Dijsselbloem, the Dutch finance minister who is relatively new head of the Eurogroup. Reuters and the Financial Times, in the wake of the bailout news, both reported that he said the Cyprus plan should be a blueprint, a template, for future bank restructurings.

  3. “Wonderwhen BO gets this idea?”

    You wonderwhen what? Are you kidding? Where do you think the idea of “You didn’t build that” comes from? If “you didn’t build it” then you don’t own it and if you don’t own it the state (or any other liberal thief) can take it.

    Watch for the coming confiscation of our IRA’s.

  4. Thanks for reminding me of that Yorkshire. Got your email too. I think you get my point though. This whole Cyprus crap is just a mini-run for what’s to come from the socialist pigs out there. They’ve caused unimaginable financial harm the world over for fifty years and now it’s “blame the capitalists” time again. They create ponzi schemes for the “Poor”, or the children or the uninsured or the hungry or whatever, then tax the shit out of everyone and when it all goes to crap they blame the wokers/businessmen/ corporations. Everyone but themselves, government and their corrupt entitlement atitudes.

  5. Another thing. Since the start of this Cyprus stuff the oft repeated mantra has been the rich “Russian mobsters” were going to loose their money. Anybody believe that? Cause I don’t. First off I don’t believe Russian mobsters would be dumb enough to park large sums in banks in a shit hole like Cyprus when Switzerland and Grand Cayman are around. Second, I don’t believe for one moment that had real Russian mobsters put their money in Cyprus the government there is willing to die, watch their families die and everone they ever knew die to confiscate the money of a mobster. Cause I guarantee one thing, if they took mobsters money the mobsters will retaliate with force if only to send a message NEVER to try that again…anywhere. If I were a mobster I would. And I’d start with the head of Cyprus banking and his family and work my way down to the tellars.

  6. Hoagie: It didn’t really matter what the Cyprus officials wanted: either they took the bailout in some form, or those banks would have failed, and the depositors still lost their money. And I’m sure that the Russians “diversified.” I know that I would have.

  7. This whole Cyprus crap is just a mini-run for what’s to come from the socialist pigs out there. They’ve caused unimaginable financial harm the world over for fifty years and now it’s “blame the capitalists” time again.

    More like the last 80 years, back to FDR’s first term, really. Roosevelt HATED business and businessmen, then wondered why the Depression raged on for his whole first two terms. What business would want to expand and hire, knowing our own homegrown Mussolini would tax all their profits and regulate them to death?

  8. “… either they took the bailout in some form, or those banks would have failed, and the depositors still lost their money.”

    I’m sorry Mr. Editor but it seems you’re saying the Cyprus officials either took the bailout and screwed their depositors or they didn’t take the bailout and screwed their depositors. The key phrase here is either way they “screwed their depositors” and therefore from that moment on the banks of Cyprus are unreliable and untrustworthy and no one should ever bank there again. Including Cypriots.

    BTW, if taking or not taking a bailout from the EU has the same results then by heaven don’t take the bailout… they’re just gonna have a repeat anyway. When, we don’t know, but they will. Plus they showed the world any banking system attached to the EU is now untrustworthy in the event of a financial problem. They will screw you.

    Let the damn banks fail just like any other business and then let the new, purged system rebuild itself. Stop propping up loosers. Stop allowing politicians to regulate finance, industry and labor. They don’t know Jack Shit about any of it and it shows in crisis after crisis.

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