Thursday 28 March 2013

Media Pushback against the Eurozone Omnishambles in Cyprus

The pushback by more informed or at least more lucid commentators on the Eurozone’s failed bail-out of Cyprus continued over the past two days.

Holman Jenkings, Wall Street Journal

Holman Jenkings identified both the hypocrisy of Eurozone leaders and a major factor in the need to Cypriot bank recapitalisation—the Greek government bond write-down--in the Wall Street Journal in an article entitled “The World Needs a Cyprus” (March 26th 2013):

Mixed in with every analysis of Europe's latest blowup are disapproving asides about how Cyprus's banking sector is many times the size of Cyprus's economy. If this is proof of pathology, it extends to Britain, Germany, France, Austria, Spain, Luxembourg, the Netherlands and others, all of whose GDP is a fraction of their banking assets. Is the implication that banks should only serve the countries in which they happen to be domiciled? Then we might as well kiss global trade and investment goodbye.

Of course not. The bank-to-GDP ratio becomes a pejorative only when international civil servants are casting around for someone to bail out an inconveniently troubled bank when the domiciling country can't afford to.

Cyprus turns out not to be an island of special iniquity at all—just another instance of the European problem of insolvent governments trying to prop up insolvent banks.

Cypriot banks were large holders of Greek government debt—the same Greek government debt that the European Union insisted would never be allowed to default, that the European Central Bank blessed as collateral equal to the best in Europe. Then the EU reversed course and insisted on a Greek default. Cypriot banks, already reeling from business-loan losses due to the Greek depression prompted partly by the EU's previous bailouts, faced calamitous write-downs.

Clive Crook, Bloomberg

Clive Crook hit the nail on the head in his Bloomberg article “Cyprus’Plan B is still a Disaster” (March 28th 2013). His conclusion is spot-on:

Bailout fatigue says: “The Cypriots got themselves into this mess, and they should get themselves out. We’ll lend them a bit more, but only if we’re sure they’ll pay us back.” Cyprus didn’t get itself into this mess. It joined the euro system in 2008 with low public debt and a clean bill of health from EU governments (back then, not a word was said about shady Russians). Its banks are in trouble not because they accepted too many overseas deposits but because they bought too many Greek bonds -- an investment sanctified by international banking rules (which called such investments riskless) that was destroyed by the EU’s ham-fisted resolution of Greece’s threatened default.

Europe’s sense of “we’re all in this together” seems to have evaporated entirely. Now one has to ask not merely what the euro is for, but what the EU itself is for.

Please refer back to these last two sentences in the months and years that come. Speaking for myself, and looking back at the EU’s role in Cyprus and Greece, I am surprised that more people are not asking this question.

Pawel Morski, Blogger

Pawel Morski, with his typical no-holds-barred writing, assesses just why the Eurozone solution is a failure in policy and banking terms in his blog post Europe:No Need to Worry, the Fire’s Downstairs (27 March 2013):

To raise the issue of depositor bailins now – five years ahead of schedule and with nothing in the way of a resolution regime would show impressive hubris had the Cyprus operation gone well. It didn’t. It was a complete disaster. If I had been in charge of European policy for the last week, I’d like to think I’d be suicidally depressed. I would be stuck in bed with a bottle of vodka, refusing to emerge unless finally coaxed out by someone willing to lie that the Cypriots would be willing to forgive me. From undermining the EUR100,000 deposit guarantee, to wiping out and freezing business working capital, to hammering businesses ahead of the April VAT payment, the execution alone is crammed with unforced errors A politically stupid plan, rejected by an equally culpable Cypriot parliament, was replaced with a worse one has inflicted massive, irretrievable destruction on the economy of Cyprus. There’s a great deal to be said for commercial experience and gradual rollout. If Coca-Cola had tested a new product that killed 10% of the focus group, it’s reasonable to assume that they’d hesitate with the global rollout of Cyprus Cola. Instead, Mr Dijsselbloem is clapping the dust off his hands, announcing that he thinks this all went rather well, and looking to have another crack somewhere else. And it appears he’s decided to start with further scaring already skittish large depositors.

I often wonder how Mr. Dijsselbloem can look in the mirror every morning and complain about a Cyprus offshoretax haven, when The Netherlands has a far, far greater one and when this country is at the beginning of its own economic crash. 

Nikos Malkoutzis, Kathimerini

One of the most objective and most precise commentators about Greece and Cyprus, Nikos Malkoutzis, had this to say in Kathimerini’s English edition (Cyprus:The Eurozone's Omnishambles Moment, March 26th, 2013):

The eurozone had no qualms about pushing to the edge its only member to be involved in a war in the last 50 years, to have part of its territory occupied by a foreign army, to be still suffering the effect of an intercommunal divide and to have a capital in which passports must be shown to pass from one side to the other.

It is in this environment that Cyprus, a semi-arid island that is surrounded by competing states, must survive. It has taken years for Nicosia to negotiate agreements that would allow it access to the island’s natural resources, but even now Turkey is threatening a “new crisis” if Cyprus seeks to collateralize future gas revenues before there is a settlement on the island.

It is these challenges and the hope of being able to gain a security and stability dividend that brought Cyprus to the eurozone. For all its failings, it did not deserve the treatment it got. With some horror, Cyprus has now realized that the euro area’s interpretation of its central tenet of convergence has become warped. It is not the compact structure many had envisioned. The fissures are now clear.

Ignoring the failure of banks all over Europe over the past few years and the fact that finance was one of the few activities Cyprus could turn to after the Turkish invasion in 1974, French Finance Minister Pierre Moscovici refers to the country’s “casino” banking system.

It remains to be seen whether even one iota of logic will enter into the next Eurozone decision. Something tells me it will not. The problems of Italy, France, and Spain are far higher than those of the smaller periphery.

The Eurozone decision has fundamentally altered the equation of banking in the European Union. It has destroyed trust, and will cause increasing insecurity in the months to come, complicating any further attempts at solving the very real sovereign and banking problems which exist.

Moreover, it is certain that by branding Cyprus “non-systemically relevant”, Wolfgang Schauble has destroyed the European currency and the very idea of European unity. He has shown that there are three types of states in Europe:

·       The solvent debtors who are in debt, but who’s credit rating permits them to borrow. This dwindling group is led by Germany.

·       The insolvent debtors, such as France, Italy and Spain, who are at the precipice and waiting to be pushed over, but are too big to fail. Bailing out (or “bailing in”) the depositors of banks in these countries is a non-starter, and so any bank recap will be done at different terms from that of Cyprus.

·       Smaller, insolvent debtors, who are “non-systemically relevant”, or against whom German public or political opinion harbours an irrational grudge. Cyprus, Ireland and Greece feature prominently on this list. 

It also appears that the only reason Germany backed off over Ireland and Irish corporate income tax levels is because these are too important to suppress. So perhaps Ireland is in a special category of its own: the “we have you by the balls” or “we have powerful friends” category. Not that Germany didn’t try, of course.

The destructive “solution” reached by the Eurozone on Cyprus casts these divisions in stark relief. It is only a question of time before European banks and sovereigns pay the price.

© Philip Ammerman, 2013 

Wednesday 27 March 2013

Germany and Money Laundering

As is by now well-known, German politicians and journalists have been slandering Cyprus about its “money laundering” practise quite intensively these past two weeks.

Money laundering is, however, a fundamentally simple concept. It is the process by which proceeds from a criminal activity are disguised to conceal their illicit origins. Basically, money laundering involves the proceeds of criminally derived property rather than the property itself.

The large majority of depositors and “round-trippers” in Cyprus are legitimate companies that include some of the biggest names in business: Gazprom, Itera, Columbia Ship Management, FXPro, and many others (whom I will not name here), who use the entirely legal transfer-pricing and holding company structures in Cyprus for their activities.

There are similar legal tax structures in place in “onshore” jurisdictions such as the UK, Ireland, The Netherlands, Switzerland, Austria, Luxembourg, Malta, Bulgaria, Latvia, Delaware, Hong Kong, Singapore, and others, not to mention “offshore” jurisdictions within the EU, such as Jersey, Guernsey, Isle of Man, Monaco and British Virgin Islands (BVI).

Until now, there have been several Euroval audits of Cyprus: there has been no evidence of money laundering discovered, although this is not to say that it does not exist.

Give the German “sensitivity” to this issue, it’s interesting to read how Deutsche Welle reports on Germany's own record on money laundering:

"Many trading transactions and commodity deals are becoming more and more intransparent," said BKA President Jörg Ziercke. That's why controls need to be tightened further.

According to experts of the Organization for Economic Cooperation and Development (OECD) and the European Commission in Brussels, it's more than necessary to step up the game. Both institutions have repeatedly accused Germany of not doing enough to counter money laundering.

Annually, about 50 to 60 billion euros ($65 billion to $78 billion) that stem from illegal activities such as blackmailing, drug or arms trading are whitewashed through legal businesses, estimates the trade union representing German police investigators. Worse still: not even one percent of these sums can be recovered by the authorities, the union adds.

They say they are  able to manage criminal prosecution in the banking sector, but state surveillance and control should be extended into other parts of the industry. But so far this idea hasn't received the necessary political backing, said criminalist Sebastian Fiedler.

The European Commission has already launched an infringement procedure because of Germany's hesitant behavior; its main argument being that non- pursuit of money laundering would enable the funding of terroristic activities. According to figures issued by the OECD's Financial Action Task Force (FATF), other countries do investigate more thoroughly and detect crimes four to 20 times more frequently than German authorities do.

It remains to be seen whether German, Finnish and Dutch politicians will raise the issue in the next Eurogroup meeting with precisely the same energy and vehemence they used doing their level best to destroy Cyprus

© Philip Ammerman, 2013 

Philip is Managing Partner of Navigator Consulting Group. The opinions expressed here are his own. 

Tuesday 26 March 2013

Capital Flight from Cyprus Continues - Despite Capital Controls

Several news sources are reporting that despite capital controls in Cyprus, numerous payments have been made over the past week.
Reuters reported yesterday that Bank of Cyprus and Cyprus Popular Bank branches or subsidiaries in the UK and Russia have not had capital controls imposed:
No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis - Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus - have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors.
The Frankfurter Allgemeine Zeitung reported on March 24th that Cypriot obligations to the ECB’s Target system doubled from their pre-crisis level of EUR 100-200 million per day, despite the capital controls on deposits.
Vor der Zuspitzung der Krise in Zypern waren die über das Zahlungsverkehrs-System „Target auflaufenden Verbindlichkeiten der zyprischen Notenbank gegenüber der Europäischen Zentralbank (EZB) täglich um etwa 100 bis 200 Millionen Euro gestiegen. In den vergangenen Tagen sei, nachdem das Parlament das Stabilisierungsprogramm zunächst hatte scheitern lassen, der tägliche Wert auf mehr als das Doppelte gestiegen. Allein in der vergangenen Woche könnten also Geldvermögen in Milliardenhöhe aus Zypern abgeflossen sein, obwohl die zyprische Notenbank eigentlich eine Sperre ausgesprochen hat.
Navigator Consulting is a Bank of Cyprus customer, and I can confirm from personal experience (and the experience of some friends) that:
  • International visa payments on items like hotel bills have been permitted in full
  • Cash withdrawals in certain countries, such as Germany, have been permitted apparently without restrictions.
ZeroHedge provides the best conclusion, with its customer candor:
The stealth withdrawals by Russians of course means that the two megabanks are now utterly drained of capital, and that the haircuts on those who still have unsecured deposits with the two banks will be so big it will likely mean a complete wipeout of all deposits. As in 0% recovery on your deposits!
In other words, by now any big Russian funds in Cyprus are long gone, and the only damage accrues to the locals: for one reason because their money over the critical EUR100K threshold has been "vaporized", and for another because the marginal driving force and loan demand creator in Cyprus, the Russians, are gone and are never coming back again.
This is what passes for monetary real-politik in the New Normal - an entire nation becomes collateral when pursuing a wealthy group of people. And the "wealthy group" is victorious in the end despite everything...
If we were Cypriots at this point we would be angry. Very, very angry

(c) Philip Ammerman, 2013 
Philip Ammerman is Managing Partner of Navigator Consulting Group and European Consulting Network
25 March 2013
24 March 2013
25 March 2013