March 25 2013

Bailout deal for Cyprus agreed in the early hours of this morning. Heavy losses for depositors with over €100,000. Laiki’s face wipeout. Smaller savers protected. Germany: new deal is much better. Early analysis. How the drama unfolded…



Powered by Guardian.co.ukThis article titled “Cyprus agrees bailout deal with the eurozone – live” was written by Graeme Wearden, for guardian.co.uk on Monday 25th March 2013 14.20 UTC

2.20pm GMT

Irish economy shows scars of austerity

If Cyprus wants a taste of life after a few years under an IMF-led austerity package it could turn to Ireland. One fifth of shops in Ireland’s second city Cork are now vacant as the Republic suffers its worst six months of high street trading.

From Dublin, Henry McDonald reports:

The closure of Cork based electrical retailer Flor Griffin as well as UK companies like HMV and Game on Irish main streets reflects continued depressed demand among still debt ridden consumers.

The Republic’s Chambers of Commerce and Retail Excellence Ireland are demanding action such as lower rents and commercial rates to halt the retail downturn.

Evidence from trade groups over the first quarter of this year reveal that in parts of central Dublin 24% of retail units lie empty.

Overall more than ten per recent of retail units in the Irish capital lie idle while in Athlone, a town in central Ireland that successfully attracted foreign multi national investment nearly 20 per cent of shops are empty.

The ongoing downturn in domestic demand is due to frugal Irish consumers worried over mortgage and other personal debts being too frightened to spend.

Alan McQuaid, chief economist at Merrion Stockbrokers, believes the Irish government was on its way to reaching its target of 1.5% growth this year.

But McQuaid issued a warning that the Cypriot fiscal crisis could have a ripple effect on the Irish economy at the other end of the EU.

“Assuming the Cyprus problem doesn’t blow up into a full scale Eurozone crisis, then there is no reason why the Irish government can’t meet its official growth target for the second year running,” he said.

1.51pm GMT

On Wall Street the Dow Jones industrial average is up just 40 points higher at 14552, with news of last night’s deal failing to spark much of a rally.

US markets have been largely untroubled by the Cyprus news in recent weeks. Dominic Rushe reports:

Unlike the roller coaster ride US markets endured during the height of the Greek crisis, there doesn’t seem to be much fear of contagion. During the Greek crisis investors liked to point out that the Greek economy was worth about the same as the Dallas/Fort Worth area. Cyprus’s GDP at $23.57bn is a little bit more than Goodyear, the tire company, brings in in revenues each year.

The Dow snapped a four week winning streak last week, closing down 2.08 points. But that’s a mere 0.01% for the week and it actually closed up on Friday.

Updated at 1.52pm GMT

1.40pm GMT

EC: capital controls will be temporary…

European Commission officials told reporters in Brussels this lunchtime that capital controls in Cyprus are only likely to be implemented for a short time.

Commissioner Michel Barnier told reporters that:

Any measures to restrict or limit freedom of movement may only be enacted exceptionally and temporarily and that is what has been requested by the Cypriot authorities.

Capital controls will mean very tough restrictions on bank account access and the movement of cash out of Cyprus, to help prevent a bank run.

James Mackintosh of the FT points out that capital controls can be a hard habit to break:

Updated at 1.42pm GMT

12.56pm GMT

Parents fear for their children’s future in Cyprus

There were peaceful protests against the bailout deal outside Greece’s embassy in Nicosia this morning, during a parade of high school students to mark Greek independence day:

Faisal Islam, Channel 4′s economics editor, was there – and reported that parents were desperately worried about how the crisis will affect their children’s lives.

12.28pm GMT

Putin: we can restructure Cyprus’s loan

Despite describing the haircut for wealthy savers as stealing (see 11.31am), Russia has signaled that it will support Cyprus by agreeing to relax the terms of its existing loan.

President Vladimir Putin announced a little while ago that Russia will restructure the €2.5bn euro loan made to Cyprus in December 2011.

Howard Amos has the details:

“In light of the decision taken by the Eurogroup, President Putin considers it possible to support the efforts of the President of Cyprus, and also the European Commission, directed at overcoming the economic and systemic banking crisis of this island state,” Putin’s spokesman Dmitry Peskov told journalists, Interfax reported.

Cypriot Finance Minister Michalis Sarris visited Moscow last week to seek financial support from the Kremlin, but was sent away apparently empty handed. A re-negotiation of the loan, including reducing the interest rate and extending its duration beyond 2016, was one of the items discussed.

“I think the loan will be extended and the conditions adjusted,” Sarris said as he was leaving Moscow on Friday.

12.07pm GMT

President Anastasiades to address the nation tonight

The government has just announced that the Cypriot president Nicos Anastasiades will make a televised statement at 7pm today (5pm GMT), with regard to the results of the Eurogroup meeting yesterday on Cyprus.

The statement will be televised live by the Cyprus Broadcasting Corporation (Cybc).

My colleague Helena Smith adds that the government has been arguing that it did the best it could:

The Interior minister Sokratis Hasiko has said the banks will open in Cyprus tomorrow calling the deal “the best solution possible.”

“The no vote had its own negative effects and banks were put under pressure,” he said this morning. “We had got to the point where were discussing a haircut of between 50 and 60 percent … so this is the best possible solution.”

Updated at 1.31pm GMT

11.56am GMT

Poll: Is the worst over for Cyprus?

Around 90% of readers fear that worse times are ahead for Cyprus, according to a poll launched this morning (which already has hundreds of votes).

Vote here:

Does the bailout deal mean the worst is over for Cyprus? – poll

Updated at 11.58am GMT

11.31am GMT

Medvedev: Cyprus is stealing from large depositors

Russian prime minister Dmitry Medvedev has accused Cypus of agreeing to “steal” from big deposit-holders at Laiki Bank and Bank of Cyprus.

It’s the first official signal of Moscow’s displeasure.

From the Russian capital, Howard Amos reports (and explains that Medvedev was channeling Lenin):

Medvedev is the first Russian official to speak out about the Cyprus deal announced early this morning.

“They are continuing to steal what has already been stolen,” Medvedev told a government meeting, using a phrase Vladimir Lenin to answer the allegation that the Bolsheviks were thieves.

Russian officials have repeatedly compared the Cypriot bank levy to Soviet-era expropriation.

But he added the impact on Russian companies and Russian money was not yet fully clear. “We need to understand how this story will develop.”

Medvedev was an outspoken critic of the initial agreement between Cyprus and the troika of the European Commission, IMF and European Central Bank to levy a compulsory tax on deposits, describing the plan as “absurd” last week and accusing the EU of behaving like “an elephant in a china shop.”

Updated at 11.40am GMT

11.19am GMT

Larry Elliott: Cyprus could suffer a worse economic collapse than Greece

It’s a bad deal — although probably the best deal in the circumstances — and Cyprus will probably need a second rescue package, says our economics editor, Larry Elliott.

Larry writes:

For a start, Cyprus faces a bleak economic future in which the need for a second bailout looks a strong probability. It is not just that the country’s economic model has been destroyed. Nor is it simply that a brutal austerity programme is the condition for the €10bn loan.

These will both hurt, but be compounded by a ferocious credit crunch as the banks seek to shore up their balance sheets by lending less and at higher rates of interest. The risk is of a full-scale economic collapse that will result in Cyprus having a debt problem worse than that in Greece.

More here: Cyprus bailout: deeply flawed – but a best effort in desperate times

11.07am GMT

11.02am GMT

Miriam Elder: anger in Cyprus today

The long lines that we’ve seen at Cyprus ATMs have dissipated this morning, now that regular Cypriots know they won’t be immediately affected by the haircut agreed in Brussels.

But from Limassol, my colleague Miriam Elder reports that people remain distressed by the situation:

It’s also a holiday here, but the mood is pretty grim. Cypriots realise that their economy will take a huge hit — there are worries of long-term unemployment as big foreign investors are expected to seek ways to flee from the country.

Anger remains directed at the EU, and Germany in particular.

I talked to one woman who works at a hotel – she moved to Cyprus eight months ago to escape the financial crisis in Greece.

“We came here to find a better life, and it’s exactly the same thing as in Greece. Everywhere I go there’s crisis — I’m telling all my friends that I’ll go to Germany next,” said Alexandra Salmani, 32.

“Someone has to learn to say no to Merkel. They saw a rich country, decided to take their money, and destroy them. They are not human.”

As I type, newsflashes from Berlin are coming in. Angela Merkel’s spokesman is telling a press briefing that the Cypriot government must now explain to the people “why this path is difficult but right”….

10.11am GMT

Here’s video footage of last night’s eurogroup press conference where the deal was announced (for anyone who had better things to do around 2am GMT)

10.02am GMT

The Cyprus crisis has permanently changed the nature of the eurozone and and left small countries such as Luxembourg (which also has an out-sized financial sector) extremely jittery, says our Europe editor, Ian Traynor:

9.53am GMT

Schäuble: this deal is ‘much better’

The German finance minister, Wolfgang Schäuble, has declared that the deal agreed in Brussels overnight is “much better” from a German point of view than the original plan.

Speaking at a press conference in Berlin, Schäuble said that Cyprus had finally recognised that large depositors must make a much larger contribution to the bailout:

[Cypriot President] Anastasiades came to understand that it was not just Germany and the IMF that wanted a bail-in, but also the others.

Here are more newswire snaps from Reuters:

• GERMANY’S SCHAEUBLE SAYS CYPRUS DEAL IS “FAIR” FOR ALL INVOLVED

• GERMANY’S SCHAEUBLE SAYS GOAL IS TO REDUCE CYPRIOT BANKING SECTOR TO EUROPEAN AVERAGE OF THREE-TIMES NATIONAL OUTPUT

•GERMANY’S SCHAEUBLE SAYS CYPRIOT BANKS SHOULD BE REOPENED AS SOON AS POSSIBLE, TALKS ON THIS TO TAKE PLACE TODAY

• GERMANY’S SCHAEUBLE SAYS GOAL IS TO COMPLETE EUROPEAN PARLIAMENTARY APPROVALS OF CYPRUS DEAL IN THIRD WEEK OF APRIL

Updated at 10.53am GMT

9.42am GMT

Nicos Anastasiades, Cyprus’s president, just issued a short statement thanking people for their support during yesterday’s negotiations in Brussels:

No mention of the reports that he threatened to resign during the negotiations…

9.18am GMT

Michelle Caruso-Cabrera of CNBC has been taking a photo of the same ATM machine in Nicosia in recent today. This morning, it’s pretty quiet.

Updated at 9.37am GMT

9.15am GMT

Gary Jenkins: this is just the start of Cyprus’s problems

So, is this the end of Cyprus’s problems? My colleague Josephine Moulds just put that question to bond analyst Gary Jenkins of Swordfish Research, prompting a huge laugh from the other end of the phone. He said (once he’d recovered himself):

In a way this is just the beginning of their problems. They’ve stopped the old business model [attracting deposits from wealthy individuals] but it hasn’t been replaced with anything else.

He notes that the EU has made no economic projections for Cyprus, so has no idea how or when it will get its €10bn back from this country.

They are never going to see that €10bn back. The economy is crushed for the next God knows how many years. As soon as people can take their money out the banks, they will take it out. If I’ve €10,000 in the Bank of Cyprus, why would I leave it there?

Anyone’s guess would be that the economy is going to crash in these circumstances. Confidence has disappeared. What is the impact on Cypriot companies? Has noone looked at how many corporates have over €100,000 in the bank? Who’s going to want to do business with Cypriot corporates right now?

Gary’s conclusion…

It’s a nuclear bomb to crack a nut. If you’re worried about money laundering go after money launderers. Don’t go after Cypriot nationals.

The deal will also have a major impact on banks in Spain and Italy, he says.

If you’re a US company, US politicians have been talking about how to get the money back from overseas. No non-Italian and non-Spanish companies are going to keep their money there.

Similarly, he says, normal people banking in Spain and Italy will now likely pull their money out of the bank at the first sign of trouble, prompting disastrous bank runs.

With regard to this subject I must say I have found some of the comments as to why this wouldn’t happen interesting. Many have said how much better capitalised Italian and Spanish banks are, and how it is well known that the Cypriot banking system as a percentage of GDP was way bigger than other European countries.

Quite right (although I have my doubts as to the real strength of many of these banks) but do they really think that the average person in the street has any interest about such statistics? In the event of a major problem do you think that people will say ‘oh I will leave my money in the bank because their tier one ratio is 10% and as our banking system is nowhere near as big as the Cypriot one on a relative scale?’ If they do they are likely to be crushed underfoot in the rush as others decide not to take any chances.

9.11am GMT

European Commission President Jose Manuel Barroso looked satisfied, and tired, as the Eurozone meeting broke up early this morning:

9.08am GMT

The best early reaction

Joseph Cotterill of FT Alphaville has written the best detailed analysis of the Cyprus deal: Scratch one stupid idea [Updated]:

Here are the key points (head over to AV for the full read (then come back!))

1) In case you didn’t get the memo the first time, this still isn’t about spanking money-launderers. (because there’s no differentiation between foreign and domestic customers with over €100k)

2) It’s a depositor bail-in — for two specific banks, one of which is in full resolution. (rather than forcing all customers at all banks to contribute, as in the first – hated – bailout plan)

3) It’s also a senior bank bond bail-in. (Holders of Laiki’s senior unsecured debt look fully wiped out – those at Bank of Cyprus will take a brisk haircut)

4) Emergency Liquidity Assistance. — Was this the week we found out that ELA will be protected from default no matter what? (under the deal, the assistance supplied by the European Central Bank to Laiki is now transferred to Bank of Cyprus)

* * * * * *

And over at Reuters, Felix Salmon points out that the winding-down of Laiki is a rather big deal for a rather small country:

The resolution of Laiki is going to give the world a very real example of what happens when a too-big-to-fail bank is allowed to fail.

Laiki is small by global standards, but very large by comparison with Cyprus’s GDP. If Cyprus can survive Laiki’s collapse, then maybe — just maybe — the world could cope with the “resolution” of a big bank like Citigroup. But that’s a very big “if”.

More likely, the costs to Cyprus of allowing Laiki to fail will be enormous, both politically and economically. And 800,000 Cypriots will for years to come be paying the price of what Mohamed El-Erian elegantly calls “bailout fatigue”.

More here: Cyprus: It’s not over yet

8.52am GMT

There’s no sign of celebration in Cyprus this morning, as people digest the news that the bailout has been secured in return for the downsizing of its banking system and heavy losses for wealthy savers:

8.38am GMT

30% haircut for Bank of Cyprus’s wealthy savers

Just in: Depositors in Bank of Cyprus with over €100,000 are likely to lose 30% on their holdings, the chairman of the island’s parliamentary finance committee has predicted.

Nicholas Papadopoulos made the prediction to Irish radio this morning, saying:

I haven’t heard a formal announcement about the haircut, but this is the figure I heard.

No update on the position for big depositors at Laiki — but clearly they’ll lose more than the crowd at BoC, and they could lose the lot (over €100k).

Updated at 8.40am GMT

8.24am GMT

European shares gain

European markets have risen in early trading as investors react to the news from Brussels.

FTSE 100: up 40 points at 6432, + 0.6%

German DAX: up 77 points at 7989, +1%

French CAC: up 53 points at 3823, + 1.5%

Italian FTSE MIB: up 121 points at 16166, + 0.75%

Spanish IBEX: up 79 points at 8403, +0.89%

And in Asia, the Japanese Nikkei finished 1.7% higher.

The euro, though, is bobbing around $1.30 — just 0.1 cents higher than on Friday night. Not exactly a monster rally….

8.06am GMT

Capital controls loom

The deal won’t prevent tough capital controls being imposed on Cypriots. We saw an early taste of it yesterday, when ATM cash withdrawal limits were cut to €100 per day

The controls will also make it hard, or impossible, to transfer money between accounts or out of the country – to avoid a bank run draining the country’s remaining banks.

During this morning’s press conference, EC commissioner Olli Rehn said he hoped Cyprus would be able to raise them soon, but the reality could be months of restrictions.

7.53am GMT

7.51am GMT

The bank restructuring deal

Full details of the Cyprus deal are still emerging this morning, but the top line is that wealthy depositors are being hit much harder than in the original plan.

Here’s what we understand:

• All deposits under €100k have been protected.

Laiki Bank (or Popular Bank) will be wound down and split into a ‘good’ and ‘bad’ bank. Thousands of jobs are likely to be lost.

• The ‘good’ bit of Laiki (smaller savers) will being moulded into Bank of Cyprus.

• The bad bit, containing its uninsured deposits and toxic assets, will be wound down over time.

• Those with savings over €100,000 at Laiki, along with bond holders and shareholders, will all make a “full contribution” to the restructuring. That is being taken as a signal that wealthy depositors could be wiped out completely – but the full picture may take a while to emerge.

As Gary Jenkins of Swordfish Research put it:

Whilst there was no official confirmation I assume that deposit holders over €100k in Laiki Bank will be totally wiped out, but that is just an assumption from the language used.

• Uninsured deposits (€100k and above) in Bank of Cyprus will be frozen, and remain suspended until the bank has been recapitalised. It’s not clear what haircut they will suffer — there was talk of 40% plus in Brussels last night.

7.36am GMT

You can read the statement released by the eurogroup (eurozone finance ministers) here.

7.28am GMT

Key event

if you missed Sunday’s bailout drama, you can relive all the excitement in yesterday’s Cyprus crisis liveblog:

Cyprus bailout: last-ditch deal agreed – as it happened

Highlights of the press conference start at 1.30am (it’s been quite a night)

7.13am GMT

Last-minute Cyprus deal agreed

Good morning. Cyprus has struck a last-gasp draft deal with its international lenders overnight which should mean it secures its desperately needed €10bn bailout and avoids crashing out of the eurozone.

In return for the aid, the Cyprus government has committed to imposing very heavy losses on depositors with over €100,000 in the bank. Its second-largest bank, Laiki, will be shut down while the country’s largest lender, Bank of Cyprus, is being heavily restructured.

The agreement was hammered out after a classic marathon session of talks in Brussels from Sunday lunchtime, in which Cyprus’s president Nicos Anastasiades reportedly threatened to resign rather than accept the terms demanded by the country’s lenders.

But a deal was finally put together out, culminating in a press conference at 1.30am GMT.

There was relief in Brussels early this morning, but Cyprus still faces a troubled future, with its banks remaining closed today.

Cyprus’ finance minister Michalis Sarris told reporters:

It’s not that we won a battle, but we really have avoided a disastrous exit from the eurozone.

The deal should mean that the European Central Bank lifts its threat to withdraw liquidity from the Cypriot banking sector.

It also appears that the deal will not need the approval of the Cypriot parliament.

But many questions remain: how will the Russians react? Will the deal be acceptable in Cyprus?…

….And just how much damage has the chaos and confusion of the last week caused to Cyprus, and the rest of the eurozone?

We’ll be tracking all the developments throughout the day.

Updated at 7.22am GMT

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