Economic lesson# Cyprus’developments

Sviluppi ciprioti: l’economia dell’isola si ridurrà di 12 punti nei prossimi due anni, il presidente Anastasiades chiama “ipocriti” i paesi UE che accusano Nicosia di riciclaggio.

Last Wednesday April 10th Europe estimated that Cyprus is gonna loose the 12,5 % of GDP in the next 2 years “as the country reduces a banking sector that had ballooned to more than five times its gross domestic product”, reported the New York Times days ago. Nicosia needs now 13 billions euro and not around 7, as thought a month ago to meet the terms of a 10 billion euro Troika’s bailout. To raise money, Cyprus is under pressure to sell its prize asset (“Cyprus had already agreed to sell 400 million euros worth of gold, or an estimated 10 tons from its 13-ton reserve”) and to develop natural gas reserves. This last things makes Turkey disappointed, especially if means Russian involvement (it may “act against such initiatives if necessary”). If the island’s corporate tax increases to 12,5 and apply restrictions on withdrawals many company registered in Cyprus will leave, as other lucrative business, and many companies will close as banks cut back on issuing credit.

The Wall Street Journal graphic

The same day the Wall Street Journal wrote: “Never in the field of government bailouts have so many lost so much credibility over such a small sum of money”. “All of those involved were losers”, it concluded. WSJ remembers how German and IMF wanted to keep the bailout size down to 10 billion, and the ECB role in force Nicosia to accept and limiting the other countries’ fallout (an institution “supposedly free of political interference” making “decisions of major political significance”). “Still, at what costs”, asks himself Stephen Fidler reading the official economic forecasts. For him, the euro-zone management of the crisis, with his austerity, “has devastated growth and confidence. The usual policy options to revive economies—monetary, fiscal or exchange-rate policy—aren’t available to euro-zone countries that need it”. For Cyprus “the depositor losses were an IMF initiative from the start”, EU officials say. In addiction the Euro-zone decision-making is a mess, where the finance ministers of the Euro Group, lead by President Dijsselbloem, are insignificants and the Austrian minister Thomas Wieser oversees alone the Eurogroup Working Group that carries all the technical work; Wieser has no a direct line to the European Council President Van Rompuy, who really negotiate the final deal, but he has it with the Dutch government, and that make everything worse.

Today Reuters (and Chicago Tribune) reported that, “in prepared remarks to Russian businesspeople in the port city of Limassol, Cyprus President Nicos Anastasiades said his cabinet would this week approve the relaxation of restrictions on foreigners seeking citizenship of Cyprus”. In attempt to keep foreigners interested in investing in the island, non-resident investors who held deposits before the bailout agreement would become citizens. Anastasiades added that Countries who accused Cyprus of being a money laundering hub were “hypocrites”, since “some EU partners’ businesses involved in the financial services industry have been preying upon our financial services sector, in order to encourage a relocation of funds into their economies”. Today Nicosia also eased capital controls, making people able to transfer domestically 3.000 euros in a month and companies 50.000 euros (The Economic Times).

Russian-EU lesson# The Cyprus case again

Stanotte si cerca di capire se andrà in porto definitivamente l’accordo Troika-Cipro, che già avrebbe accettato un prelievo forzoso sui conti superiori ai 100.000 euro (del 20% se presso la Banca di Cipro, e del 4% per le altre). I Russi (meno gli oligarchi, più i “medi” investitori) temono le misure di controllo che verrebbero adottate in caso di vittoria UE: così si indebolirebbero notevolmente i flussi di capitale da casa loro. Questo, comunque, non danneggerebbe il sistema bancario, fa sapere la Banca Centrale Russa.

Bank union leader speaks to workers in Cyprus

Brussels: today is the second day of meetings between Cyprus government (president Anastadies) and the so called “troika” (EU + ECB + IMF, here represented by the Presidents of the Euopean Council Van Rompuy, of the European Commission Barroso, and of the Euro Group Dijsselbloem; the European Central Bank’s President Draghi; the International Monetary Fund’s director Lagarde). The situation is more or less the same of days ago: EU will borrow 10 billion euro to Nicosia if the island rakes together other 7 billion euro, in order not to go bankrupt and leave the euro system. ECB said on Monday will stop financing Cyprus banks without a quick agreement.

Yesterday, March 23, a first pact was reached, as reported by the Cyprus national Tv Rik: Nicosia said “yes” to obliged withdrawal from the current accounts superior to 100 thousands euro, retirement fund excluded. The State will take the 20% from the accounts in the Cyprus Bank and the 4% from the ones in other island’s bank.

In the night, from 10.00 pm, the Finance ministers of the Euro Zone are meeting up to talk about compromises, for being more conciliatory with Cyprus’s position.

Arriving in Brussels, the French minister Moscovici said the solution for the Nicosia’s problem should make the richest pay and not the poorest. The richest people in the island are probably Russian businessmen, attracted by the “off-shore” Cyprus fame. Are they worried about the situation? “You must be out of your mind!”: this is what the tycoon Igor Zyuzin, main owner of New York-listed coal-to-steel groupMechel, would said, the Moscow Times reported. “The collapse of an economy 75 times smaller than its own may not have much impact in Russia”, the article said, but “pain for the Russian economy could come from a disruption in money flows between Russians that pass through the island”, much bigger than Cyprus’s own national income. Russians’ money in Cypriot banks seems to value 19 billion euros “of non-EU, non-bank money”, ore more (for a senior financial source in Moscow). “It depends how you count it”, said Cypriot central bank chief Panicos Demetriades when asked by Russia’s Vedomosti newspaper how much money Russians held on the island. Russian business leaders criticized the EU bailout plan and the withdrawal idea, but maybe they fear more Cyprus outcome from Europe. For Vladimir Potanin, the chief executive of Norilsk Nickel (the world’s largest nickel and palladium miner) “there will be a serious outflow of capital from Cyprus” in that case. “Sources in the wealth management, advisory and banking industries in Nicosia say Russian depositors are typically smaller savers and entrepreneurs”, and Russia is particularly concerned about any imposition of controls on capital movements. For the former economy minister, if adopted these controls will stop investment in Cyprus. On the other end, Russia’s Central Bank gave a public assurance on Friday that it did not see Cyprus posing a meaningful danger for the Russian banking system.

EU-Russian lesson# The Cyprus case

Il caso Cipro, che oggi ha rifiutato di prelevare forzosamente più del 6% dell’importo dai conti correnti delle sue banche. Ciò le avrebbe consentito di accedere a un prestito di 10 miliardi dall’Europa per salvarsi dal default. Se il piano B era ottenere prestiti dalla Russia, i cui miliardari sono i maggiori correntisti dell’isola, pare che Nicosia non andrà lontano (forse). Neanche i depositi, comunque, perché le banche saranno chiuse fino a martedì.

Sign with Cirillic writing in Cyprus

On March 16 Cyprus – Mediterranean Island and EU member with a 18 billion euro GNP and a 17 billion euro debt – came to face something similar to an ultimatum: bankruptcy or  EU aid with heavy provisions. Europe would have borrowed to Nicosia 10 billion euro if Cyprus added 5.8 billion taken from the country’s current accounts. It  would have been a 6.75% withdrawal for bank deposits under 100 thousands euro, and a 9,9% withdrawal for the bigger ones, usually owned by Russian people (they have the 37% of the 69 billion euro deposited in the island Bank).

Today Cyprus government refused to sign this conditions. It took more time, prolonging the bank holiday till Tuesday (the country’s central bank governor warned that “at much as 10% of banking deposits could flee when banks reopen”). “Cyprus’s counterproposals include tapping the country’s pension-fund assets, restructuring and selling the island’s two biggest banks, and offering Russia a sweetheart deal to the island’s natural-gas reserves in exchange for a multibillion-euro loan”, wrote the Wall Street Journal. But a Gazprombank spokesman said there are no talk, and the same do VTB, Sberbank and Alfa Group (Russian banks). That means Russia seems not to be interested, despite contacts between Nicosia and the First Deputy Prime Minister Igor Shuvalov and the Finance Minister Anton Siluanov, and a verbal kind of defense by Russian Prime Minister Dmitry Medvedev (he said the EU proposal is “undermining trust in financial institutions as a whole”).

For the FT “officials in Moscow were privately sceptical Russia would bail out Cyprus or even provide further bridging loans. Russian business leaders have made it clear they would insist on cold-eyed, commercial criteria for any investments”.

But Peter Westin, chief strategist at the Aton brokerage firm in Moscow, said to the WSJ: “Russia is likely to wait for the Europeans to come through with the money, and then step in if they think it’s not enough”.