Cyprus: It’s not over yet

By Felix Salmon
March 25, 2013

This was not a good weekend for Russian billionaires. First, Boris Berezovsky was found dead at his English country estate. Now, all the uninsured depositors (read: Russian plutocrats) at Cyprus’s two largest banks are going to be hit much, much harder than they feared they might be when the Cyprus crisis first erupted last week.

Back then — a long, long week ago — Cypriot president Nicos Anastasiades stood firm: there was no way he would allow uninsured depositors to lose more than 10% of their money. What a difference a week makes: now, if your uninsured deposits are at the Bank of Cyprus, you’re probably going to lose about 40% And if they’re at Laiki, you’re going to lose everything.

The agreement between the Cypriot government and the Troika of the EU, IMF, and ECB is a bold and brutal geopolitical power-play. There might be language in the official communiqué about how “The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution”, but given the billions of euros that Russians are being forced to contribute unwillingly, the chances that they’ll happily throw a bit more money into the pot have to be tiny.

In the Europe vs Russia poker game, the Europeans have played the most aggressive move they can, essentially forcing Russian depositors to contribute maximally to the bailout against their will. If this is how the game ends, it’s an unambiguous loss for Russia, and a win for the EU. For one thing, there won’t be any capital controls: that’s a good thing. (Some deposits at Bank of Cyprus will be frozen, which is a kind of capital control, but there aren’t corralito-style barriers on the general movement of euros in and out of the country.) On top of that, public markets have been left unruffled: there’s been no panic on Europe’s bolsas, partly because the biggest hit has been taken by private Russian citizens.

Much more importantly, the two main vectors of contagion — hitting insured deposits, and exiting the euro — have been avoided. And most elegantly of all, from the Troika’s point of view, the whole thing has been constructed under existing bank-resolution authorities, which means that no vote needs to be put to the Cypriot parliament, and therefore no amount of Russian pressure can veto the deal in Nicosia.

Of course, the game does not end here. It’s unlikely that Russia will appear bearing a better deal at some point in the next 24 hours, but the hit to Cyprus’s GDP is going to be so enormous that staying in the euro over the long term, absent another round or two of massive debt relief, is going to be extremely difficult. The deal as constructed is, in Pawelmorski’s wonderful phrase, “Iceland without the fish”: Cyprus, as Iceland did before it, is letting its banks fail, since they’re too big for the government to bail out. But Iceland has other industries besides banking — and, more importantly, has a floating currency as well, which by weakening can make those industries more competitive.

In order to truly become Iceland, then, Cyprus is going to need to devalue and default. If it doesn’t, then it will live unhappily under the yoke of Europe-imposed austerity until such a time as the parliament revolts, the austerity measures are revoked, and the island drops out of the euro, and probably out of the EU as well. Cyprus’s economy is going to suffer greatly over the next few years, and its citizens are going to blame Europe for their woes; it’s entirely possible that they will voluntarily leave the euro, if the alternative is negative economic growth as far as the eye can see, along with a massively overvalued currency. If and when those rumblings start appearing, expect the Russians to start being extremely nice to the Cypriots all over again.

Meanwhile, 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”.


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Bravo, EU ! Welcome to communism. Bolsheviks did exactly the same thing in 1917 by ‘expropriating expropriators’ or simply saying taking others money without permission.

EU ‘economical think tank’ is opened the Pandora box widely.
From now on , none of the bank deposits all over the world will be safe. That looks like the beginning of the end of capitalism and the beginning of chaos that is even much worse than communism.

Posted by nirvichara | Report as abusive

So where to invest now, will this fuel a property boom. maybe the old “safe as houses” saying will come back, especially now that mony isnt dafe in the bank. Turn to gold….maybe but thats a short term measure and it doesnt bear income.

Posted by cyprus.sun | Report as abusive

So where to invest now, will this fuel a property boom. maybe the old “safe as houses” saying will come back, especially now that money isnt safe in the bank. Turn to gold….maybe but thats a short term measure and it doesnt bear income.

Posted by cyprus.sun | Report as abusive

I wonder how long it will be before an EU bank find itself in difficulty in Russia and suddenly needs to be wound up with losses for EU creditors… so unfortunate…

Posted by HuwSayer | Report as abusive

too glum to be true

cyprus has sunshine, tourism and hospitality

the cypriot future may not be the bankster city of luxuries, living under the illusion as a putinesque czarist protectorate

but it will find a more modest, less pretentious economy
that puts its people first

and not the anglo-russian plutocracy



when eurozone taxpayers front up to lend the money to cyprus, that is capitalism, not communism

welcome to bankster economics – they lose, you pay

Posted by scythe | Report as abusive

there’s nothing worse than communism.

Posted by fetucaglauca | Report as abusive

A good agreement. No capital controls. We needed a first stop to offshore funding. We needed to get away from money of questionable origin. We need to get balanced economies. We need to concentrate on a sustainable and honest value added chain and earned and developed competitive advantages.

Russians will pay for their opportunism and recklessness and Cyprus president will pay for his recklessness of wanting to save his Russsian cronies and the business model of an offshore center for Cyprus. He should have negotiated today’s agreement from his own accord and from the start. Once again Cyprus shows that what is rotten at the core is our democratic governance model and I mean the governance in most EU countries. It is a model built on debt, easy money and easy promises.

Cyprus will go through deflation but it is so small that a sprinkle of EU funds can restart growth with infrastructure programs. Cyprus has two huge military bases which are a source of Euros/GBPs and it has natural gas. Get a move on and do not invite Russian companies…I wish Portugal or Spain had natural gas….

Posted by lisandro | Report as abusive

A union created by the elite and sustained by the elites
for the benefit of the elites.That it is not working for the common man, for whom it was supposedly created, is not (and this is very clear now) really an issue. This is going to end badly.

Posted by Biscayne | Report as abusive

What exactly do you mean by “no capital controls”? Cyprus is in the process of imposing extremely stringent capital contols, per article by Pawelmorski that you cite.

Posted by vassalos | Report as abusive

DEPOSITORS in Cyprus with accounts worth over 100000 cannot get their Euros out due to capital controls. Hence there are not real Euros but “Cyprus Euros” no doubt worth much less and not convertible into say German Euros. This means Cyprus has already left the Eurozone and is operating with its own currency, even if it calls that currency a Euro. If it had any sense it would start printing its own “Euros” and use them to pay off its debts. And tell its creditors that they are getting “Euros” so they have nothing to bitch about.

Posted by Chris08 | Report as abusive

To make it clearer if need be:

The most important characteristic of a monetary union is the ability to move money without any restrictions from any bank to any other bank in the entire currency area. If this is restricted, the value of a euro in a Cypriot bank becomes significantly inferior to the value of a euro in any other bank in the euro area. Effectively, it means that a Cypriot euro is not a euro anymore. By agreeing to this measure, the ECB has de-facto introduced a new currency in Cyprus.

Posted by Chris08 | Report as abusive

The Russian government does not throw any good money after bad;
Russian flight capital gets another huge stimulus to return home;
Stranded Cyprus gas in Aphrodite field remains stranded;
EU lends EUR 10 billion to a black hole that is about to experience a Great Depression-style contraction in GDP with further headlines to come.

Felix verdict: “it’s an unambiguous loss for Russia, and a win for the EU.”

Posted by johnhhaskell | Report as abusive

None of the euro zone crises are over yet, and bigger ones are yet to come.

Posted by reality-again | Report as abusive

This, deep haircuts, is what should have happened in America in 2008 when Lehman Brothers went broke.

All the very large uninsured depositors in the American banks that had gambled, and all the large gamblers in RMBS and CMBS derivatives, should have lost the money they had gambled.

Instead, the US Treasury, at the behest of Treasury Secretary Henry Paulson, stepped in and bailed them out with the 750 billion TARP legislation. That happened under Bush, but Obama voted for it.

Thus began America’s plunge into the abyss of bailing out the wealthy on the backs of the middle class. And today the wealthy, who deserved to lose everything, are wealthier than ever. And the American middle class has been destroyed.

Bush did it, and Obama voted for it.

Posted by AdamSmith | Report as abusive

Yes, uninsured depositors need to be skinned along with the equity holders, but also the senior bankers should have all professional licenses revoked and should be banned from the financial sector for at least a decade. As it is, the decision makers are insulated from the consequences of their decisions, which makes them irresponsible and reckless. In the USA, the financial elite “employees” of the major banks are the same people who have already caused a huge train wreck. Why should they not pay for their reckless actions?

But all of this calls into question the reliability of all banks that report to Governments, which is to say almost all banks on the planet. And brokers. And mutual funds. And other financial intermediaries. Government “guarantees” are not reliable. Remember!

Caveat emptor.

Posted by usagadfly | Report as abusive

Honestly, doesn’t the world (or at least the largest economies) need to develop an approach for dealing with nations like Cyprus — which include Andorra, the Isle of Jersey, Luxembourg and Switzerland — places where banking is not accompanied by much if any value added economic activity other than avoiding taxes elsewhere? I won’t call these places “parasite nations” because they have legitimate resource issues and they are generally speaking nice places that have lost their way as other countries with more resources are able to take over for what likely used to be farming or other economic activities that sustained them locally. But if you are going to bet the house on banking, then you better have good banking regulation so that you don’t find yourself in a bubble. Cyprus does not appear to have been very prescient in this regard. And I don’t think Euro participation has much to do with this aspect of it, although the Euro participation limits Cyprus’s options for handling the fall out, to the detriment of Cypriots — but the same thing (basically) happened in Iceland, without the Euro. Lots of unhappy Europeans lost money when Icelandic banks folded. It’s just that Icelandic people were not left with years of grinding internal devaluation because they were stuck with the Euro.

Posted by rb6 | Report as abusive

Are you sure that uninsured depositors = Russian plutocrats? Yves Smith has been attacking this chestnut for a couple of days. There seems to be good evidence that the big Russian money got out a while ago and the ones left are a considerably less exalted set. Then there are businesses with payrolls and so forth. I have nothing against taking uninsured deposits (they are, after all, uninsured) but let’s not be too fast and easy here.

Posted by f.fursty | Report as abusive

“For one thing, there won’t be any capital controls…” Are you sure? Without capital controls, won’t the banking system collapse as soon as the banks open? Absent capital controls, how do you avoid an immediate massive outflow of insured deposits?

Posted by AlfonseTarago | Report as abusive

How does this stuff work? I own a small business in the US and at any one time I owe my material suppliers and my customers owe me. Also I usually have a loan from the Bank on my account receivables. And I have cash, (in the bank). Now if I have $130,000 in cash, I owe $250,000 to my suppliers, my customers owe $325,000 and, I have borrowed $260,000. When the Government skims 40% from me and my customers, who in their right mind is going to straighten this mess out? I have a small construction co. 9 people total. I would be sued for the money I would owe my suppliers. And my customers would be sued by me. Multiply this by 2 million and the country would be destroyed.

Posted by pondliner | Report as abusive

The first comment in this thread, by nirvichara, says “Welcome to communism” and decrys “taking others money without permission”, but if the EU supplied a bailout, that would also be taking other’s money (other taxpayers in the EU, in other EU countries than Cyrpus) and handing it over to feckless banksters who made bad investments. How is that not communism, as well?

Actually, bailoutism is arguably worse than communism because in bailoutism capital gains are privatized and capital loses (by banks) are socialized, so you have the worse of both worlds. At least in a real communist system the ownership of the bank would be socialized and any upside from the bailout would be distributed equitably instead of being concentrated in the hands of bank shareholders and/or employees.

Posted by Strych09 | Report as abusive

Is the reason this is not expected to affect Spain or Italy that there isn’t proportionally enough uninsured money to be worth seizing?

Posted by MyLord | Report as abusive

pondliner, calling it skimming does not seem to acknowledge the fact that the money isn’t there. When a company goes bankrupt, all kinds of people are shortchanged, and there is often a domino effect such that even a healthy business can be seriously disrupted if its customers can’t pay, which means it can’t pay its suppliers or make payroll, etc. This is what INSOLVENCY

Posted by rb6 | Report as abusive

Hit send by mistake: This is what INSOLVENCY means. And what happens in bankruptcy is an equitable (or inequitable) allocation of whatever assets exist to all those creditors, everyone from retirees to suppliers to janitors to the IRS and on and on. Basically, in many instances, unless your debt was secured by collateral, the court rips contracts up and starts all over again. Just ask the many unions whose members have had to forego all kinds of wage and benefit promises during a bankruptcy proceeding. Whatever contract was in place between the bank and depositors or the bank and bondholders is out the window. My understanding is that the banks offered high interest to lure depositors and made risky investments. Let’s say you manufactured cars and took deposits and promised to deliver a car in 3 months at a given price and your cost of inputs became too high to meet that price. This is kind of what happened, and I have no doubt all kinds of people are going to be really hurt by the aftermath.

Posted by rb6 | Report as abusive

The thing to watch is how long capital controls remain so that Euros cannot be taken out of Cyprus. If they stay on for long (Ireland still has them years later) then Cyprus has really left the Euro zone whatever the official line is. PS If capital controls are removed soon, I would suspect Cyprus would be drained of most of the money there. Euros would flee.

Posted by Chris08 | Report as abusive

PS If Cyprus were smart it would use this opportunity of frozen deposits to exit the Euro and go back to a national currency. The frozen deposits would be exchanged at some rate for a new local money and then that would be the money of Cyprus. Period. Euroexit. People could then do what they want with the new money.

Posted by Chris08 | Report as abusive

I have to agree with f.fursty. The wealthiest Russians who had money deposited in Cypriot banks already moved it off the island. Moreover the bulk of the remaining Russian deposits are with the Cypriot subsidiary of VTB, which under this deal are left completely alone.

Posted by MSadowski | Report as abusive

Imagine you live in a prosperous country, with a lovely climate, beautiful beaches, blue seas. But there’s something funny about this country. It doesn’t have a functioning banking system.

You can put money into your bank, but you can’t get it out again. At least you can, through ATMs, but only in very small amounts.

If you have money on deposit, you can’t take the money out and close the account. And if it’s a time deposit, when it reaches the end of its life, you can’t have the money to spend. You have to roll it over into a new deposit.

You can’t cash a cheque in a high street bank. You can’t pay bills in a high street bank, either. And no high street bank is lending any money, so if you want a loan, forget it. In fact high street banks are not much use.

Your employer pays you in cash, because there are no electronic payments. Which is just as well, really, because you need cash. There are no automated payments such as direct debits, so you pay all your household bills in cash. Credit and debit cards are no longer accepted anywhere, so you buy all your shopping and petrol for your car with cash. You can’t make phone or internet purchases.

If you have more than one account, you can’t transfer money between your accounts. If only one of your accounts has ATM access, once that account is empty, you are stuck with no money.

You can’t go on holiday abroad because you can’t take any money out of the country. Your employer won’t send you abroad on business, either, because you might not come back…..

All the local shopkeepers will only accept cash, not cheques. That’s because they have to pay suppliers in cash, and once you put money in a bank, you can’t get it out again…..But all small businesses are having a very hard time. Shops are closing, businesses going bust, people losing their jobs. You’re not sure how much longer you will keep yours. You’ve taken a pay cut already, even though it means you struggle to pay your mortgage.

It would really help if lots of tourists would visit your beautiful sunny country. But the place is deserted. Tourists are unwilling to come here now….it’s very cheap, but they can only bring cash with them and whatever they bring must stay here – and if they run out of cash they can’t get any more.

This is Cyprus. Or rather, it will be – next week.

Posted by Chris08 | Report as abusive

This isn’t over yet. Wait till you see what happens to their economy. They are finished!!!
Eventually the entire Euro project will fail.
And you wi see the same problems surfacing in the US in a couple of years……..

Posted by KyleDexter | Report as abusive

Felix, I am wondering if you are familiar to the IMF document that appears to have set the notion of bail-ins into motion.

I would like to spread the word on this as many seem confused as to where this “directive, suggestion, mandate” is coming from. It might be of some value to your readers. Read Pg. 59 of the Document and the following sentence appears: “Ultimately, the breadth of the investment decisions that can be made by the ESM rests upon the decision of its member states, in due consideration of the risks and potential upside or downside inherent in such investments. It will be important to agree and clarify the investment mandate of the ESM, as well as the specifics of ESM recapitalization, including the definition of legacy assets, the pricing of assets, the role of bail-ins, the principle for access, and the design of instruments.”

You many download a copy of it at

Posted by PhilDyer | Report as abusive