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Sunday, March 17, 2013 8:36 PM

Cyprus Bailout Math; Can Depositors Be Left Whole?

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Inquiring minds are wondering about the terms of the bailouts imposed upon citizens of Cyprus. I am one of them.

In Cyprus Details: Blackmail, Bulldozer Threats, Bank Holiday to Tuesday; Reflections on Arrogance and Idiocy, I made the claim that Cyprus depositors need not be liable for any of this.

Many people have emailed that much of the money in Cyrus accounts was via illegal inflows from Russia. OK, is that a reason to screw every Cyprus depositor, even the small accounts below the €100,000 deposit guarantee?

I suggest not. I object to the entire scheme. First the bondholders should have been wiped out. If that was not enough then the deposits above the €100,000 deposit guarantee should have been hit. Then and only then should the average citizen been hit.

And guess what. The average Cyprus citizen would likely not have been hit. Instead, the EU mandated a "screw every citizen" policy to protect the senior bondholders.
Cyprus Bailout Math

What I wrote above was a guess, but an accurate one. Reader Jeff Baryshnik, Baryshnik Capital Management Inc., in Toronto provides some specifics in an email to me a few hours ago.
Hi Mish

I read with interest your article on the Cyprus bailout deal.  After a quick review of the most recent financial statements of the four publicly listed Cypriot banks as shown on their websites, it is notable that a simple alternative proposal could protect the country from bankruptcy and make its depositors whole.

By wiping out 100% of the equity, 100% of the bondholders, and 17% of the banks’ liability to central banks, the Cypriots could stabilize their banking system (based on the 5.8Bn EUR figure being discussed) without penalizing local savers. 

Instead of raising 5.8Bn EUR from depositors, it could raise 1.4Bn from combined market cap, 2.0Bn from bondholders and preferred shareholders, and 2.4Bn of the 14.3Bn in combined Central Bank loans (Cypriot and ECB) it has on its books. This assumes zero contribution from the Cypriot subsidiaries of foreign banks so it may be conservative. 

If the banking system is bankrupt, anything other than an Alice-in-Wonderland recovery system suggests that the order of liquidation is shareholders, preferred shareholders, debt holders, Central Bank creditors, and THEN depositors. If 10Bn or even 17Bn EUR is truly required, then coincidentally up to 17.7Bn EUR is available from equity holders, debt holders, and Central Bank creditors without impairing a euro cent from depositors.
I received other emails noting that much of the money in Cyprus was "hot money" from Russia seeing unfair tax advantages.

So what? Is that any reason to punish every Cyprus citizen? Clearly the answer must be "no".

Perhaps one can create additional spots for illegal deposits (if they could be proven), and one could (and should) distinguish between deposits above and below the deposit guarantee limit, but otherwise, the order suggested by Baryshnik seems quite reasonable.

Mike "Mish" Shedlock

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