The ordeal of Cypriot depositors has been well-documented in the press over the past couple of weeks. With the European Central Bank threatening to cut off emergency financing for its ailing banking system, Cyprus’s leaders reached an agreement with the Eurogroup for a €10 billion bailout package over the weekend.
This sets a precedent for similar crisis situations – deposits are no longer ‘capital guaranteed’
The original agreement of taxing all bank deposit holders was quashed in the Cypriot Parliament. That agreement depended on Cyprus finding the extra €5.8 billion from within their own banking system – and the Eurogroup was agnostic as to which deposits were taxed. The new agreement at least makes good on guaranteeing deposits below €100,000, and while European investors in general were relieved that an agreement was reached, the damage to the system has been done.
Firstly, the very fact that “guaranteed” deposits were even being considered as possible candidates to make up the losses spooked the markets. The agreement now honours the guarantee at the expense of uninsured deposits. This sets a precedent for similar crisis situations – deposits are no longer “capital guaranteed”. Cash is no longer king.
There is also the risk of contagion to other eurozone peripherals where depositors might draw parallels with the situation in Cyprus. The problem in Cyprus started with the bulging size of the fragile banking industry on the island, which at circa 700 per cent of national GDP is on par with Ireland.
Senior bond holders are no longer safe either. In Ireland and Spain, banks risked bringing down their respective sovereigns, and were bailed out by the ESM, however senior bondholders and uninsured depositors remained intact. And when the funds were not available, taxpayers were forced to pay off senior bondholders in Anglo Irish Bank.
At the time of writing on Tuesday morning, the terms of the levy on large deposits is still unclear, with reports ranging from 25-40 per cent. Furthermore, Cyprus Popular Bank (84 per cent Government-owned and second largest banking group on the island) will be wound down and its exposure shifted into Bank of Cyprus. Uninsured depositors and bondholders will be largely wiped out. Senior bondholders will also contribute to the recapitalisation of BoC.
Incidentally, CPB is the main shareholder in Lombard Bank Malta. However, clients of the latter bank should not be concerned about CPB’s woes – it is Cyprus Popular Bank which has an exposure to Lombard, not vice versa. With respect to the bank’s shareholders, it remains to be seen how any sale or transfer of Lombard shares will be carried out (a sale of all Cypriot-held shares to one buyer would be different to the extreme distress sale into the market).
When banks reopen in Cyprus, depositors face strict capital controls. Even though it formally stays within the euro, as long as Cyprus keeps these restrictions in place, it is effectively not a full member of the currency union. A question comes to mind: are credit controls even legal in the EU? In its strictest sense, no, but may be enacted if there is an issue of “public security” and only temporarily. Cypriot authorities expect the restriction to last a “few days”.
The head of the group of euro- area finance ministers Jeroen Dijsselbloem, said that the Cypriot rescue plan may become a template for euro-area bank bailouts. When asked what this means for countries like Luxembourg and Malta, he said “…deal with it before you get in trouble. Strengthen your banks, fix your balance sheets, and realise if a bank gets in trouble, the response will no longer automatically be: we’ll come and take away your problems.”
Russian depositors will be the main losers of this levy (or expropriation?). Deposits held by Russian nationals in Cypriot banks could be anything between €10 billion to €20 billion – however there cannot be official figures given that in most instances, deposits are not held directly in the name of the beneficiary. Whatever the amount, my assumption is that these funds will all be looking for a new home. Watching CNBC’s Squawk Box on Monday, Robert Frank of CNBC Wealth suggested that the major jurisdictions which should benefit from the fallout are Latvia, Israel and Malta, citing Malta’s regulation as “light” and its Central Bank as “weak”.
These are harsh words to describe our industry captains. Malta has built a reputation as a solid jurisdiction and such comments are totally misplaced.
Curmi & Partners Ltd is a member of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business. This article is the objective and independent opinion of the author. The value of investments may fall as well as rise and past performance is no guarantee of future performance.
Vincent Micallef is an executive director at Curmi and Partners Ltd.