We understand from press reports that at
Troika insistence, Cyprus Popular Bank (CBP) / Laiki Bank is going to be
liquidated. This may involve a “good bank”, with deposits up to EUR 100,000,
and performing loans, with non-performing loans and higher deposits being hived
off into a “bad bank”. The unsecured component of deposits over EUR 100,000
will first take a “haircut” of approximately 40%, with some form of relief
being issue in either bank bonds or natural gas-backed bonds.
Yet this creates an irreconcilable dilemma:
CPB apparently has EUR 9 billion of European Central Bank Emergency Liquidity
Assistance (ELA) loans. The Troika has been insisting that this ELA be handed
over to Bank of Cyprus, which of course would destroy that bank even faster
than the proposed 20-25% bail in of deposits over EUR 100,000.
Given that European Central Bank equity is
so low, a loss of EUR 9 billion in ELA will be a crippling event. Given just
how low the ECB’s equity is, it will be interesting to see how the IMF, ECB and
the Eurozone financial ministers squabble about how their own actions create
yet another financial crisis in the near future.
© Philip Ammerman, 2013
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