Eurozone | NWOTruth

Frontrunning: June 19

Wednesday, 19 June 2013 06:40
No Comments

China cash crunch deepens as PBOC withholds funding (FT), just a week behind ZH
Platts in hot manipulated crude again: Traders Try to Game Platts Oil-Price Benchmarks (WSJ)
Kabul Suspends Security Talks With U.S., jeopardizing plans to maintain a U. (Read more…)S. military presence (WSJ)
Afghan government irked over U.S. talks with Taliban (Reuters)
BOJ Kuroda: BOJ to Adjust Policy If Japan Econ Changes (MNI)
Google Considering Private-Equity Alliances (BBG)
Korean Air Buying 747-8s to End Boeing’s Sales Drought (BBG)
Syria’s Islamists seize control as moderates dither (Reuters)
SEC considers policy shift on admissions of wrongdoing (FT)
U.K. Banker Bonuses Face Decade Delays in Industry Overhaul (BBG)
French EU-wariness complicates life for Hollande (Reuters)
How China Fudges Its Numbers (WSJ)
House Votes to Ban Abortions After 20 Weeks of Pregnancy (BBG)
Deloitte banned for StanChart ‘violations’ (FT)

Overnight Media Digest

WSJ

* U.S. President Barack Obama will make the case for a new phase in nuclear weapons reductions that would reduce arsenals by another one-third in a major foreign policy speech in Berlin on Wednesday.

* Signs of a stronger U.S. economy are rippling through the bond markets, sending investors and corporate leaders racing to prepare for higher interest rates.

* Dish Network said it won’t submit a new offer for Sprint Nextel by its Tuesday deadline, a move that appears to clear the way for the third largest U.S. wireless carrier to be bought by SoftBank of Japan.

* The G-8 agreed to proposals to tackle tax avoidance and evasion that call for new laws to stop businesses from shifting profits across borders.

* Two of the largest independent U.S. high-frequency-trading firms are in early merger discussions, as a downturn in trading opportunities has spurred cutbacks and tie-up talks among rivals.

RGM Advisors LLC and Allston Trading LLC have discussed a deal that would combine their respective strengths in automated stock trading and futures markets, according to people close to the talks.

* U.S. securities regulators plan to require certain defendants to admit to wrongdoing as a condition of settling securities-fraud charges, SEC Chairman Mary Jo White said Tuesday.

* Some oil traders say they try to skew Platts oil-price benchmarks by offering to do small deals at a loss, with the goal of doing bigger ones at better prices.

* Billionaire investor Carl Icahn has emerged as the last potential foil standing between Michael Dell and his deal to buy his company, after Icahn bought nearly $1 billion of shares from another dissident investor.

* Smithfield Foods’s CEO could receive more than $46 million in merger-related payments after helping to orchestrate his company’s sale to China’s Shuanghui for $4.7 billion.

FT

Cyprus has asked leaders of the Eurozone to overhaul terms of its 10 billion euro bailout, warning that the country might not be able to meet the current rescue terms as it had harmed the country’s economy and banking system even more than expected.

Brazil’s largest cement producer, Votorantim Cimentos, has scrapped its plans to list in what would have been the second-largest initial public offering globally this year. Deloitte LLP’s financial advisory unit will pay $10 million and refrain for one year from new business with certain New York banks to settle accusations over its review of money laundering controls at Standard Chartered Bank.

Chinese network equipment and cellphone maker Huawei Technologies Co would consider buying Finland’s Nokia to help it expand its smartphone business, Huawei’s head of consumer business said, but added that Microsoft’s Windows phone platform used by Nokia as well as Huawei was “weak”.

Dutch engineering company Royal Imtech, grappling with fraud at its German and Polish operations that had cost the company hundreds of millions of euros, is considering pressing charges against some members of its former management in those countries.

Oscar-winning actress Angelina Jolie’s stunt double has sued Rupert Murdoch’s News Corp over allegations its British newspapers hacked her phone, opening up a new front in the litigation against the owner of The Sun and the now closed News of the World.

NYT

* Ben Bernanke faces the growing challenge of shaping investor expectations amid increasing signs that his era as Federal Reserve chairman is ending.

* Google may have pushed the boundaries of antitrust laws with its $1 billion buy of Israeli mapping startup Waze and Google’s effort to skirt regulation may invite more scrutiny.

* The American Medical Association has officially recognized obesity as a disease, a move that could induce physicians to pay more attention to the condition and spur more insurers to pay for treatments.

* In resisting calls to ban ads for nutritionally questionable food, Nickelodeon argued that its job was children’s entertainment, not nutrition.

* Chrysler and National Highway Traffic Safety Administration resolved their differences, and the automaker will inspect and upgrade 2.7 million Jeep sport utility vehicles for possible defects after the government had claimed they were prone to catastrophic fires in rear-end collisions.

* Tom Wheeler, President Obama’s nominee to head the Federal Communications Commission told a Senate committee on Tuesday that his top priorities, if he is confirmed, would be consumer protection, increasing competition and providing sufficient predictability so companies know what rulings to expect.

* Builders stepped up home construction in May and applied for permits to build single-family homes at the fastest pace in five years. The gains show housing remained a crucial source of growth for the economy. Housing starts rose 6.8 percent in May, to a seasonally adjusted annual rate of 914,000, the Commerce Department said on Tuesday.

* A federal appeals court ruled that Anthony Chiasson, the co-founder of Level Global Investors, and Todd Newman, a former portfolio manager at Diamondback Capital Management, will not have to report to prison while they fight their insider trading convictions.

* Federal and state regulators are united in their concern that outside consulting firms have produced some shoddy work for Wall Street banks. Yet on Tuesday, the regulators took starkly divergent stances toward the multibillion-dollar consulting industry: while federal authorities seemed to reinforce the industry’s power, a state agency tried to undercut it

Canada

THE GLOBE AND MAIL

* Amid questions about the Prime Minister’s Office, Senate spending, Justin Trudeau’s work for charities and Thomas Mulcair’s run-in with Mounties on Parliament Hill, MPs have agreed to adjourn the House of Commons.

* After offering to pay back charities and other organizations he gave speeches to, Liberal Party leader Justin Trudeau doesn’t appear to have many takers. Trudeau has come under fire from Conservatives who say he had no business accepting the money – from charities in particular.

* Canada’s tourism sector is being hit hard by a foreign-service job action. Walkouts in Canadian embassies and consulates, and especially at those with busy visa operations, have created backlogs for tourist visas – and the threat of long delays has put off many tourists thinking of travelling to Canada.

Reports in the business section:

* Verizon Communications Inc confirmed on Tuesday that it is considering an entry into Canada’s C$19 billion ($18.60 billion) wireless market in the wake of a report earlier this week by the Globe and Mail.

* U.S. President Barack Obama said in a television interview aired late Monday that Bernanke has served “longer than he wanted,” the latest sign that the Fed chairman is poised to leave after an epic struggle to keep the U.S. economy out of depression.

* Scotia Capital Inc has admitted it failed to adequately supervise clients who were doing “high closing” trading manipulations to boost share prices at the end of trading days in 2009. The Investment Industry Regulatory Organization of Canada, which is Canada’s brokerage industry regulator, approved the settlement details at a hearing Tuesday, requiring Scotia Capital to pay C$150,000 in penalties and C$10,000 to cover IIROC’s investigation costs.

NATIONAL POST

* Conservative Prime Minister Stephen Harper said Tuesday that it was inappropriate for Liberal Party leader Justin Trudeau to take money from charities, but refused to address claims that his taxpayer-funded office distributed documents to the media about the story. An Ontario newspaper revealed that the Prime Minister’s Office supplied it with documents purporting to show that three organizations that contracted Trudeau to speak at events in 2006 and 2007 ended up losing money.

* Canada’s Parliamentary Poet Laureate, wondering aloud why the government never asks him to write poems, has inadvertently answered his own question. “I wish that my government had asked me to write poetry about immigration policy, about Idle No More, about Canada’s complicity in the Middle East, the Enbridge pipeline,” Fred Wah, a Saskatchewan-born poet now living in Vancouver, recently told an audience at an Edmonton literary festival.

FINANCIAL POST

* Economists are recasting their forecasts upward for Canada and other countries after disappointing performances in 2012. Those turns of fortune hinge on a less crisis-challenged Europe and – critically – growing economic momentum in the United States.

China

CHINA SECURITIES JOURNAL

- The pilot property-tax scheme has been submitted to China’s State Council by local governments of Beijing, Shenzhen, Nanjing and Hangzhou, sources said, adding that the draft proposals are in the final stages.

- China’s cargo throughput by volume at major ports fell 1.8 percent in May from a month ago to 911.73 million tons, data from the ministry of transport showed.

SHANGHAI SECURITIES NEWS

- President Xi Jinping has launched a year-long campaign to clean up “undesirable work styles” within the Communist Party. Formalism, bureaucracy, hedonism and extravagance must be stamped out to ensure and win back public support, Xi said.

– Pollution cases that poison more than 30 people or cause an evacuation of over 5,000 will lead to criminal charges, an official at the ministry of environmental protection said, as it announced measures that included harsher punishments.

SHANGHAI DAILY

- A venture between Daimler AG and Warren Buffett-backed BYD Co aims to launch electric cars under the Denza brand by the end of July, the company said. Shenzhen BYD Daimler New Technology Co, owner of Denza, said its first mass-production model is scheduled to debut globally at the end of this year.

PEOPLE’S DAILY

- China’s State Council at its executive meeting expressed concerns raised by the poor quality of baby milk powder, saying it will undermine confidence in society, the newspaper said in a commentary

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

Adobe (ADBE) upgraded to Buy from Neutral at BofA/Merrill
Ball Corp. (BLL) upgraded to Outperform from Neutral at RW Baird
CEMEX (CX) upgraded to Overweight from Equal Weight at Barclays
Gevo (GEVO) upgraded to Outperform from Market Perform at Raymond James
Sonic (SONC) upgraded to Equal Weight from Underweight at Morgan Stanley
Tanger Factory (SKT) upgraded to Neutral from Sell at Goldman
United Natural Foods (UNFI) upgraded to Overweight from Neutral at Piper Jaffray

Downgrades

American Eagle (AEO) downgraded to Neutral from Buy at Citigroup
Arthur J. Gallagher (AJG) downgraded to Market Perform at William Blair
BlackBerry (BBRY) downgraded to Underperform from Market Perform at Bernstein
Brown & Brown (BRO) downgraded to Market Perform from Outperform at William Blair
Century Aluminum (CENX) downgraded to Underperform from Neutral at BofA/Merrill
Cliffs Natural (CLF) downgraded to Underperform from Neutral at BofA/Merrill
Nexstar (NXST) downgraded to Hold from Buy at Gabelli
Novo Nordisk (NVO) downgraded to Underperform from Neutral at Exane BNP Paribas
Sonoco Products (SON) downgraded to Neutral from Outperform at RW Baird
Sprint (S) downgraded to Neutral from Outperform at Macquarie
Tesaro (TSRO) downgraded to Market Perform from Outperform at BMO Capital
Tetra Tech (TTEK) downgraded to Hold from Buy at Brean Capital

Initiations

Coca-Cola (KO) initiated with an Outperform at Credit Suisse
Dr Pepper Snapple (DPS) initiated with a Neutral at Credit Suisse
Keryx (KERX) initiated with an Overweight at JPMorgan
Neurocrine Biosciences (NBIX) initiated with an Outperform at Oppenheimer
PepsiCo (PEP) initiated with a Neutral at Credit Suisse
Superior Energy (SPN) initiated with an Outperform at Cowen

HOT STOCKS

Southeastern Asset said Icahn in best position to lead alternative Dell (DELL) transaction
Southeastern lowered stake in Dell (DELL) to 4.1% after Icahn sale
Nvidia (NVDA) to begin licensing GPU cores, visual computing portfolio (SNE, INTC, GOOG)
American Medical Assn. backs ban of marketing energy drinks to children (MNST, PEP, KO)
Kodak (EKDKQ) seeks approval for $406M rights offering
CIT Group (CIT) ordered 30 737 MAX 8s from Boeing (BA)
Alcatel-Lucent (ALU) to sell assets, reduce costs in three-year plan
Netflix (NFLX) to launch in the Netherlands later this year
Live Nation (LYV) acquired majority stake in BDG Music, terms not disclosed

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
La-Z-Boy (LZB), Adobe (ADBE), China Cord Blood (CO)

NEWSPAPERS/WEBSITES

While Amazon.com (AMZN) has become the leader in online sales, Wal-Mart (WMT) doesn’t want to simply clone their model and is instead creating a vast new logistics system that includes building new warehouses for Web orders, but also uses workers in stores to pack and mail items to customers, the Wall Street Journal reports
RGM Advisors LLC and Allston Trading LLC, two of the largest independent U.S. high-frequency-trading firms, are in early merger discussions, as a downturn in trading opportunities has spurred cutbacks and tie-up talks among rivals, sources say, the Wall Street Journal reports
Federal Reserve policymakers will likely announce today that they will keep buying bonds at a monthly pace of $85B, while keeping their options open to scale back the program later this year if the U.S. labor market continues to improve, Reuters reports
SoftBank (SFTBF) cleared a major hurdle in its attempt to buy U.S. wireless provider Sprint Nextel (S), as rival bidder Dish Network (DISH) declined to make a new offer after SoftBank sweetened its own bid last week. SoftBank CEO Son is closer to sealing the largest overseas acquisition by a Japanese company in history, after winning support from a key shareholder by raising SoftBank’s offer to $21.6B, Reuters reports
Google (GOOG), actively on the lookout for acquisitions, is for the first time considering forging alliances with private-equity firms to help it structure deals, Bloomberg reports
Global telecommunications companies are chasing after deals from Kansas to Munich in a quest for revenue growth that could lead to the biggest year for mergers in the industry since at least 2006, Bloomberg reports

SYNDICATE

Biodel (BIOD) files to sell common stock
Bluebird Bio (BLUE) 5.94M share IPO priced at $17.00
Diamondback Energy (FANG) 6M share Secondary priced at $34.75
Gladstone (GOOD) to offer 1.1M shares of common stock
Intercept (ICPT) 1.73M share Secondary priced at $33.01
THL Credit (TCRD) files to sell 6.6M shares of common stock
Valeant (VRX) 23.53M share Secondary priced at $85.00
Virginia Heritage Bank (VGBK) 1.45M share Secondary priced at $14.25
Weyerhaeuser (WY) 29M share Secondary priced at $27.75

Follow The Bouncing Fed

Wednesday, 19 June 2013 06:04
No Comments

While all eyes and ears will conveniently and expectedly be on the Fed announcement and press conference in a few hours, the real action continues to take place in China, where the liquidity crunch is becoming unbearable for the local banks (and will only get worse the longer Bernanke and Kuroda keep their hot money policies). The CNY benchmark money-market one-week repo rate was 138bp higher overnight to a 2 year
high of 8.15%. The 7 day Interest-Rate swap rose for a record 13th day in a row jumping +10 bps to 4.08%, the highest since September 2011. (Read more…) China sold 10 Year bonds at a 3.50% yield, above the 3.47% expected, and at a bid to cover of 1.43 which was the lowest since August 2012. Moody’s commented that local government financing
vehicles (LGFVs) pose significant risks to Chinese banks. LGFVs
accounted for 14% of loan portfolios at end-2012 according to Moody’s.

Elsewhere, in Japan central printer Kuroda was speaking in parliament promising that Abenomics will return to normal and talking up the market once more, even as the USDJPY finds itself unable to regain the previous upward momentum despite the rhetoric. Japan reported a jump in May exports, which however was offset by imports, leading to a better than expected trade deficit at JPY 993.9 billion on expectations of JPY1.22 trillion. Still, this was the largest ever May deficit for Japan, and the third biggest ever. Good news then?

Little out of Europe, where several Eurozone and German speakers have poured hot water on the Cyprus request for a bailout modification, saying no change in hell. Even though stocks in Europe have recovered from a lower open, which was also marked by a sharp sell-off in stocks in thin markets, there is a distinct feel of unease, with credit spreads wider as market participants look forward to what is expected to be a crucial FOMC meeting. Wider credit spreads in Europe weighed on financials in Europe. Looking elsewhere, the release of the most recent MPC minutes showed that the MPC voted 6-3 to keep QE unchanged, as expected, with the majority stating that the QE and FLS are still working through economy.

And with all that out of the way: back to your regularly scheduled Fed watching which culminates with a 2pm announcement and a 2:30 pm press conference.

The main bulletin headlines via Bloomberg:

Dollar Index trades in a range as markets await clues from FOMC meeting with Bernanke’s press conference the highlight. Most major currencies also sidelined ahead of the U.S. event.
Swedish new consumer confidence at 98.2 in June vs 97.7 in May
Swedish unemployment rate at 8.2% in May vs est. 8.8%
Yen gains for first time in three days versus dollar on bets Bernanke won’t move toward tapering of QE
BoE June minutes show King lost his final BoE vote, as majority of committee blocked his bid for more stimulus as they saw economic strength
U.K. banker bonuses face decade delays in industry overhaul
Bloomberg JPMorgan Asia Dollar Index halts two-day decline before Fed ends two-day meeting today; Thailand’s baht leads gains
Korean Won gains on speculation that exporters repatriated income to benefit from currency’s decline to near 2-mo. low

SocGen recaps the layout of the macro and FX considerations on FOMC day:

Market tensions erupted across different asset classes last month and the nature of the Fed’s guidance today on the policy of asset purchases will help to decide whether (bond) markets have moved too far in too little time. In truth, the bank’s message at the previous FOMC meeting on 1 May was pretty clear: ‘The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes’. We see little incentive for the Fed to draw a different set of conclusions on the economy today (eg payrolls came in below 200k last month, probably insufficient to move the policy needle), but some changes to the statement or clarification in the press conference will have to be made to defuse tensions which have propelled 10y cash yields and mortgages 60bp higher since the last meeting. Bernanke made the observation in his JEC testimony to Congress last month that reducing QE purchases would be possible at the next few meetings. Since that testimony on 22 May, the S&P has lost over 1.5% and USD/Asia has gained 1.3%. Laying out the next steps without committing to a timetable to retain flexibility and data dependency is probably the best one can hope for today as the Fed tries to soothe the bond market. Clarifying the mechanics of an exit from stimulus should help volatility to ease off, at least for a while until the timetable for tapering becomes clearer. This may temporarily revive carry/commodity interest (AUD, ZAR) and support a bounce in EM assets more generally, but we see this relief, if it happens, as an occasion to reduce exposure to EM assets.

Reloading topside USD/JPY strikes and selling volatility are two strategies that could work in FX to benefit from today’s FOMC statement, whilst a temporary re-adjustment lower in rates and reduced volatility favours a tightening in spreads (receiving USD 1y2y swap forwards, still high vs USTs). In outright terms, 10y swaps still look set on extending above the 2.42% level above which they narrowly managed to close last week. Vols in USD/JPY have started to drift lower since Friday and the 1mth fell to a low of 15.215 yesterday vs a high of 18.90 last week. Unless AUD/USD slips back towards to 0.9400, vol should be a sell too.

The other focus of the day will be the BoE minutes. The 0.98% bounce yesterday in EUR/GBP was order-driven and does not strictly represent a change of sentiment towards the currency pair. Having been locked in the narrowest of ranges for the best part of the last two weeks, only on a close above 0.8606 is it worth considering raising the short-term target to 0.8650. This scenario would get a lift If it transpires that none of the three doves (including outgoing governor King) backed off from voting for an imminent £25bn QE increase despite the spate of stronger macro data of late.

Finally, DB’s Jim Reid with the full recap

The reality is that not much has changed data wise since Bernanke’s JEC testimony on May 22nd and therefore he has an opportunity to say that the Fed are still data dependant and leaving no set timetable for tapering. However we have to acknowledge that the minutes to the May 1st meeting were on the hawkish side and there are those in the Fed that want to start to pull back from the current levels of stimulus. Our best guess is that the FOMC statement will actually be pretty similar to the last one but that the Q&A will be where all the fun will start. Bernanke has to address asset purchases and every nuance in his replies will be seized upon by markets.

Our gut feel is that the Fed will err on the side of caution with regards to tapering talk and that no additional signal will be given by the Chairman to accelerate the market’s fears. However this view is more based on the fact that it’s a personal view that it would be a policy error to withdraw stimulus today. Indeed the last two quarters have seen the lowest US nominal GDP since Q1 in 2010 – some 13 quarters ago now. This is a weakening nominal recovery and one that even at its peak was still very weak relative to history. With a huge debt load nominal GDP is very important but it gets far less attention than it deserves. Nevertheless, the Fed may think very differently to us and their updated economic forecasts will shape their thinking to some degree. They may see the recent dip in inflation as transitory.

In terms of other things to look out for from meeting, DB’s Peter Hooper noted that if they do hint towards imminent tapering then they will stress that fed funds rate hikes are still a long way off and well into 2015 under the FOMC’s projections. Regarding the Fed’s Summary of Economic Projections (SEP) which are scheduled to be released with today’s policy statement, DB’s Joe Lavorgna thinks that the Fed’s forecast ranges for real GDP growth (2.3%-2.8%) and unemployment (7.3%- 7.5%) remain tenable, and thus are not likely to change meaningfully. Changes may occur in inflation forecasts given recent softening inflation indicators. In the last SEP, the year-end core inflation range was 1.5%-1.6% – currently, the core PCE deflator is running at 1.1%. As a result, our US economists would not be surprised to see the lower end of policymakers’ 2013 core inflation range be reduced by 20-30 basis points. We suspect Bernanke’s thoughts regarding the recent market volatility will also be closely watched and keenly interpreted. Finally, there will probably be some questioning around the Chairman’s plans when his tenure ends in January 2014.

On the topic of EM weakness we are seeing little respite from the price action overnight. Indeed, Asian equities are trading lower led by the Hang Seng (-1.2%) and KOSPI (-0.9%). This comes despite the S&P500 (+0.78%) closing near the highs yesterday. Chinese banks are again under some pressure today with banking shares 1-2% lower and CDS/bonds of some major banks 5-10bp wider in Asian trading amidst further reports of tight onshore interbank liquidity. China’s CNY one-week repo rate is 138bp higher overnight to a 2 year high of 8.15%. Moody’s commented that local government financing vehicles (LGFVs) pose significant risks to Chinese banks. LGFVs accounted for 14% of loan portfolios at end-2012 according to Moody’s. Although the risk is hardly news for markets, it’s adding to an increasingly cautious view of the sector. Elsewhere in Asia, Japanese equities are trading higher this morning, coming off a weaker yen (-0.1%) and better than expected export numbers (10.1% yoy vs 6.4% expected). The Nikkei is trading 1.3% higher with only utilities stocks in the red, weighed by TEPCO shares (-6.7%) after the company found high levels of radioactive materials in groundwater near its Fukushima power plant (Bloomberg). The Australian dollar continues to lose ground against the USD (-0.1%) at 94.8, after a 0.6% loss yesterday.

Turning to the day ahead, needless to say the attention will be focused squarely on the FOMC. The policy statement and Summary of Economic Projections are due at 7pm London time and the Chairman will be speaking from 7:30pm onwards. Ahead of that, in the UK the BoE publishes minutes from its MPC and Chancellor Osborne’s annual Mansion House speech is expected to outline a plan to sell down stakes in state-owned banks.

Guest Post: The Real Story Of The Cyprus Debt Crisis (Part 2)

Tuesday, 18 June 2013 13:52
No Comments

Perfectly timed given the Cypriot President's call for better terms, we look at what really went on to crush this tiny island nation…

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Not only is the bail-in a direct theft of depositors' money, the entire bailout of Cyprus is essentially a wholesale theft of national assets.

(Read more…)

Here is Part 2 of our comprehensive account of the banking/debt crisis in Cyprus. As noted yesterday, the debt crisis in Cyprus and the subsequent "bail-in" confiscation of bank depositors' money matter for two reasons:

1. The banking/debt crisis in Cyprus shares many characteristics with other banking/debt crises.

2. The official Eurozone resolution of the crisis may provide a template for future resolutions of other banking/debt crises.

It also matters for another reason: not only is the bail-in a direct theft of depositors' money, the entire bailout is essentially a wholesale theft of national assets. This is the inevitable result of political Elites swearing allegiance to the European Monetary Union.

History, geography and economy of Cyprus (Wikipedia)

I am honored to present Part 2 of Cyprus resident John H. Morgan's report.

The Cyprus Bank Deposit Bail-in

On 16 March 2013, the noose was tightened around Cyprus. Emergency Liquidity Assistance (ELA) was cut off. Banks remained closed while the Government negotiated with the Eurogroup of European finance ministers to save the Cyprus banking system. President Anastasiades announced the first proposal to the nation: he would tax all bank deposits in Cyprus to fund the recapitalisation of Laiki Bank. This plan was rejected by the Cypriot Parliament as it infringed the guarantee on all insured deposits up to €100,000. The Minister of Finance visited Russia to ask for financial assistance, to no avail.

On 25 March 2013, as Greece celebrated Independence Day, it was announced that Laiki Bank would be wound up and Bank of Cyprus would be restructured. All Cypriot depositors in Laiki Bank and Bank of Cyprus who held more than €100,000 would be forced to pay for Cypriot bank losses and withdrawals, mostly sustained in Greece (the so-called “bail-in” of depositors). Bank of Cyprus would be responsible for paying back Emergency Liquidity Assistance provided by the European Central Bank to Laiki Bank. It would also assume liability for all Laiki insured deposits up to €100,000.

The value of uninsured deposits over €100,000 held by Cypriot Banks came to €38bn (billion) out of a total €68bn in deposits. The governor of the Central Bank of Cyprus stated that 70% of all uninsured deposits were held by foreigners. There are an estimated 60 000 British citizens, 30,000 Russian citizens and 10,000 other European nationals living in Cyprus. Together with Cypriot-domiciled foreign firms (such as German shipping companies), they had deposited €30bn in Cypriot banks.

Cypriot Banks were closed for 10 days to prevent a bank-run. Their overseas branches stayed open to preserve a semblance of normality and avoid triggering a bank-run on Greek banks. Cash was rapidly withdrawn from the British, Greek and Russian branches of the Cypriot banks. The value of the assets held by the Greek branches of the Cypriot Banks was €23bn. These assets received huge haircuts as they were traded for €9.2bn of Emergency Liquidity Assistance (ELA). The ELA was provided by the European Central Bank to replace money withdrawn from Cypriot Banks via their Greek branches. To prevent further losses in Greece, the Central Bank of Cyprus was ordered to sell the Greek operations of the Cyprus Banks in a fire-sale.

Piraeus Bank of Athens paid €524m (million) for the remaining Greek assets of Laiki Bank, BoC and Hellenic Bank. The purchase was funded by the European Central Banks’ European Financial Stability Fund (EFSF), using Piraeus shares as collateral. The boards of Laiki Bank and BoC resigned immediately as they had been kept out of negotiations. The governor of the Central Bank of Cyprus confirmed that the deal was stitched together by the Cypriot and Greek governments and the Eurogroup of finance ministers. Piraeus Bank of Athens was even awarded a €3.1bn write-back on the purchase price for buying impaired assets. It recorded its first profit in years.

This massive mark-down of assets owned by Cypriot bank shareholders and bondholders (worth 75% of Cyprus’ annual GDP), was hushed up. Once again, Cyprus banks had been forced to make crippling sacrifices to support Greece’s ailing economy. Within weeks of the deal, the CEO of Piraeus Bank of Athens was in Cyprus touting for business.

In a radical departure from accepted practice, two major groups of creditors, financial institutions and government agencies, were exempted from the bail-in haircuts. This meant that Central Banks were refunded their liabilities ahead of uninsured depositors. The ECB would get 100% of its €9.2bn ELA and the Bundesbank would get 100% of its €7bn TARGET2 liability.

These loans had been given to Cypriot Banks to replace the cash withdrawn when depositors moved their money elsewhere, especially to Germany. Technically, ELA is no different from a bank bailout, apart from costing 4% interest compared to 2.5%. The TARGET2 component of the Eurosystem shifts Euros back to European banks whose deposits have been depleted by interstate transfers, in effect giving them a loan.

Under the Troika deal, the liquidity provided by the European Central Bank and Bundesbank would be refunded first. Uninsured depositors would receive worthless bank shares to replace the cash and assets confiscated to cover Central Bank liabilities. It would have caused massive scandal in the EU if Cyprus commercial banks defaulted on the liquidity assistance provided by European Central Banks. Politically, it was much easier to raid the uninsured deposits of Cyprus account-holders after accusing them of money-laundering.

This ruthless action by the Eurogroup reassured taxpayers of Germany, Finland, Netherlands and Austria, who saw Northern economies carrying ever-increasing risks of default by Southern European banks and governments. Currency controls were put in place to staunch the movement of capital out of Cyprus. Nevertheless, billions of Euros are leaving Cyprus on a monthly basis.
As a reward for its compliance with the conditions set by the Troika of lenders, the government of Cyprus was granted a soft loan of €10bn by the European Stability Mechanism and IMF. €4.1bn was made available to roll over Cyprus external sovereign debt; €3.4bn was given to President Anastasiades to spend on governance; €2.5bn could be used to re-capitalize Cyprus’ smaller banks, Hellenic Bank and the Co-op Bank.

The Cyprus government must start repaying the loan and interest back after 10 years. The interest bill will exceed €3bn. This will be enough time to fund loan repayments from offshore gas revenues, expected to be earned from 2018 onwards.

External bond-holders of Cypriot Government debt will be repaid 100% of their investment, courtesy of Cypriot taxpayers. This vindicates the promise made by EU Economic and Monetary Affairs Commissioner Olli Rehn of Finland. In a January 2013 interview with Handelsblatt daily, Rehn reassured financial markets that there would be no haircuts on Cyprus Government Bonds.
However, President of the European Central Bank, Mario Draghi, announced in May 2013 that Cyprus banks may use Cyprus Government Junk Bonds “guaranteed by the Cyprus Government, with the agreed haircuts” as collateral for ECB funding.

This means that uninsured depositors will pay off much of the Cyprus Government debt as the value of Cyprus Government Bonds has been written down. The ECB has agreed to accept lower quality Asset-Backed Securities as collateral. Uninsured depositors will lose yet more of their funds in order to pay out the billions of Euros of insured deposits that are being painstakingly withdrawn within the constraints of capital controls.

Slowly, brick by brick, the last remaining wealth of Cyprus is being wrung from its soil and auctioned off. Central banks are extracting every ounce of gold from an island that was once renowned for its copper in Roman times.

*********************************************************

Economic Effects of the Cyprus Bank Deposit Bail-in

Cypriot businesses have seen their working capital plundered. The country is increasingly reverting to a cash-economy with a consequent dive in tax revenues. Provident funds, including those of bank-employees, have been severely impaired.

Most companies have cut wages, leading to severe distress among families who are paying off housing loans. This is intended to achieve the Troika’s goal of “internal devaluation”. By cutting labour costs, it is hoped to make Cyprus as competitive as countries like Germany.

Cyprus Airways is undergoing restructuring. Half of its staff have been retrenched. €20m in severance pay will be paid out of future airline revenues as the European Commission has barred the state from subsidising a commercial airline. The three Lufthansa consultants in charge of the restructuring are set to receive €1.3m. The remaining staff will suffer a 25% salary cut.

Even charities have not been spared a deposit haircut. Soup-kitchens for the legions of unemployed rely on constant donations of food from the public. The Cyprus Olympic Committee has lost €600,000 from the bail-in.

In an act that beggars belief, the Cypriot Parliament has levied a 30% tax on the interest earned from bank deposits. This has made Cypriot banks totally uncompetitive and deposits are tapering off. Money is being deposited offshore and ELA requirements of the Bank of Cyprus are increasing. The Central Bank of Cyprus announced that €6.34bn or 9.96% of deposits were withdrawn from domestic banks in April 2013. Deposits had dropped by €14.23bn or 19.87% since April 2012. (This fall, in one year, is equivalent to 80% of Cyprus’ annual GDP.)

In another measure which defies logic, a property tax was insisted on by the Troika of international lenders. The government aims to extract maximum tax revenue by inflating property prices by the annual rate of consumer price inflation since 1980. Currently, property prices are at an all-time low. This tax will further depress the property market and withdraw large amounts of liquidity from the battered economy.

The reasons are not hard to fathom. A week after the Memorandum of Understanding was signed with the country’s lenders, President Anastasiades apologised to State employee unions that he had been forced to cut their salaries and pensions. He assured them that there would be no further cuts. The Minister of Finance assured government employees that their benefits would be maintained by reducing state expenditure on infrastructure. The opening of a new medical faculty at the University of Cyprus, costing €100m, would be funded, as it formed part of an election pledge.

Between January and May 2013, unemployment in the Cyprus private sector increased from 52,000 (11.8%) to 71,000 (16.1%), the steepest increase in the European Union. The EU has warned that Cyprus runs the greatest risk of social upheaval of all European countries.

*********************************************************

Economic and Political Prospects for Cyprus post-2013

Unable to devalue its currency to remain competitive, unable to print money to buy its citizens’ assets and stimulate its moribund economy, the Republic of Cyprus has come to realise that membership of the Eurozone is a poisoned chalice. The island has been cast adrift from Europe and left to sink or swim.

NATO continues to frame the geopolitical agenda of the Eastern Mediterranean, as it did when Turkey was allowed to invade the island in July 1974. In May 2013, two months after the Cypriot government had ceded control of its economy to the Troika of international lenders, Prime Minister Erdogan of Turkey listed 5 demands to President Barack Obama of the USA. One of those demands was that none of the estimated €200 billion of Cyprus offshore oil and gas reserves be sold to Russia. A week later, the Secretary General of NATO, Anders Fogh Rasmussen, warned the leaders of Cyprus that the island must settle the Cyprus Problem before it drills for oil and gas.

There is no need to bribe NATO member Turkey with trillions of cubic feet of hydrocarbons from the Levantine Basin to facilitate settlement of the Cyprus Problem. Turkey can use its military superiority to seize the island and its gas reserves. Despite reassuring noises that America will defend American energy companies drilling for hydrocarbons off the Cyprus coast, it is likely America would support its strategic ally Turkey, rather than side with insignificant Cyprus. In a display of solidarity, NATO allies in Europe have moved Patriot missiles to Turkey’s border with Syria.

Europe and Turkey are about to sign the aptly named “European Readmission Treaty” whereby Turkey has agreed to become a dumping ground for illegal migrants who have entered the EU through Turkey from countries to its east. This goes a long way towards reassuring German and French voters that the European Empire is spreading eastwards, rather than the Ottoman Empire spreading westwards.

During 2013, in a sign of Europe’s softening stance on Turkey, the European Court of Justice accorded Turkish Law primacy in settling all land restitution claims on the island of Cyprus.
Greek and Turkish speaking Cypriots have been promised a €200 billion bonanza from the discovery of hydrocarbons off the Cyprus coast. The use of most of the gas revenues to bankroll multinational energy conglomerates and to offset State “borrowings” will go largely unnoticed: a drop in the vast ocean of political corruption.

John Morgan is the director of a company based in Larnaca, Cyprus. He owns property in Cyprus and has lived there since 2004. He comes from the United Kingdom. He has also worked in Europe, Africa and the Middle East.

*********************************************************

The 2013 Cyprus Deposit Bail-in: POSTSCRIPT

"I run a Cypriot marine & diving company operating in the UAE in the Middle East. We have had €400,000 (a 90% retention) frozen by the Bank of Cyprus which was all the money we had to finish mobilizing for the final stage of a project. We desperately need that money to finish our mobilization and complete the project. We must finish the project in order to receive payment for all the work we have already done. We are now without funds in an Arab country that imprisons debtors and we have debts. We can't pay the salaries and wages of our people, and soon won't have enough money to feed them. We stand to lose our marine and equipment assets if we can't pay our debts. We are in very serious trouble and all the pleading and demands that at least some of our funds are released are ignored. We are desperate. We are the only company in this sort of trouble according to the Cypriot Ambassador. There is no protection for foreign nationals in this country. We need our money, we need help. Can you help us please by investigating or publishing our story?"Christopher M Penny

Bank of Cyprus starts process of turning uninsured deposits into stocks

Dubai Business Directory Listing for COMBINED DIVING & INSPECTION SERVICES

Popular News This Week

Daily Email Newsletter