Cyprus bail-in is spilling over and the 100% of added burden is falling on the country, with 70% of its gold reserves at risk and EUR 5.8 billion withheld from banks depositis. Small economies with a large financial sector are increasingly bullied by larger countries which are quick to find scapegoats

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http://www.pcgwm.com/
Cyprus bail-in revisited
Consequences for small economies
1. The news
European Commission draft documents leaked and released on the FT web site are
offering a different picture from the previously released details of the bail-in.
First and foremost, in 9 days the bill has spilled over by EUR 6 billion amounting to
a EUR 23 billion shortfalls to gap over a 3 years period. The additional burden falls on
Cyprus, the total reaching EUR 13 billion.
Second, it will be entirely born by the deposit-equity swap at the new Bank of
Cyprus (i.e. post acquisition of Laiki deposits), which nearly doubles to EUR 10.6
billion from EUR 5.8 previously: EUR 5 billion in 9 days (30% of 2012 EUR 17 billion
GDP) is quite a number…
Third, Cyprus will sell “excess” gold reserves for a total consideration of up to EUR
400 million: I like the term “excess” in a world of ever devaluing fiat currency and
“excess” represents 70% of its 13.9 t of gold! Since the leak, Cyprus has denied they
intended to sale gold: what is contained in the report is an hypothesis, of course…
Fourth, bond holders under Cypriot law will be “encouraged” to roll over up to
EUR 1 billion that mature until 2016, meaning that the EZ countries and the IMF will
only provide EUR 700 million. In 2011 this “encouragement” was deemed by rating
agencies (for whatever credibility they have) to lead to a selective default (rating
agencies must have learnt from politicians rhetoric: one meets its commitments or one
doesn’t; “selective” is bullshit), not talking about a credit event for CDS. Why what was
meant to apply to Greece would not for Cyprus?
Fifth, like all assumptions made about Greece by the EU, the ECB and the IMF
proved wrong, these will prove wrong for Cyprus: the economic situation will worsen
much more than expected the 8.7% real GDP fall in 2013 and 3.9% in 2014. The debt/GDP
ratio will go way above 130% in 2015, and not the 126% projected.
2. Cyprus other route
Cyprus lost its independence, like any over indebted country will, France included,
not being able to meet its commitments.
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To lose its independence, Cyprus had a better course of action: quickly negotiating
joining a ruble zone and offering Russia a naval base in Cyprus plus offshore gas rights.
Cyprus would have lost its independence but Cypriots would have been better
of.
Geopolitically this would have been a coup for Russia: it will loose its naval base in Syria
and would have replaced it with an even more strategically positioned one. Russia would
also have enjoyed privileged access to Cyprus gas, further surrounding the EU. This also
would have open the way for other disappointed countries with the EU to join the fray like
Serbia; and eventually why not Greece. The Orthodox church is a powerful cultural and
historical link between all these countries.
Cyprus cannot be kicked off the EU (well, European politicians and eurocrats are used to
twist and carve treaties and laws to their own advantage), and therefore it would have
allowed Russia to have a foothold in the house.
In any case, this would have been a trump card in the hands of Cyprus in its
negotiating positions with the troika.
3. The future of small countries
The crisis has demonstrated that all countries in the EU are not equal in
rights despite what is claimed (not surprising, it has always been the case: big boys
bullying feeble ones). Rules do not apply the same way depending on size: France has
hardly ever abided by Maastricht criteria, and always got away unarmed (we are nearing
the end of it, since eventually facts are always right over rhetoric). Greece was slammed
(they lied, so they got what they deserved), Cyprus walked over and Luxembourg is
bullied.
Cyprus and Luxembourg are criticized for over relying on the financial sector. I do not
know what makes Germany, France or the US to impose a business model to small
countries whose size limits their ability to enjoy a well diversified economy. If they do not
like money fleeing, they should offer a fiscal environment where money is happy at home:
there is no tax haven if there is not tax hell. With France’s banks over 3 x GDP
(more or less Cyprus post bail-in), the financial sector is much too leveraged. In the case of
France, the media are increasingly reporting that young educated French national are
going abroad to find a job (40-50,000 in 2012 – when one calculates the heavy cost of
education and no return from those leaving the country, it will become unbearable at some
point). These larges countries should first put their home in order before lecturing others.
A few examples: Delaware money laundering machine where the beneficiary owner of a
company does not need to be disclosed or the specific local laws that make it very difficult
to get rid off an incompetent board or special protections against takeovers; France with
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its free zones, special tax treatment of Corsica or no income tax in French Polynesia to
name a few; and what about the UK with the Channel Islands, The Netherlands with its
holding tax efficient regime, etc.
Small to medium size countries where the financial sector allowed them to prosper are
increasingly subject to bullying from large ones, the latter specializing in finding
scapegoats for their own economic sins.
We are entering a world where democracy is much talked about as never before, but where
reality contradicts the words. Small European countries beware, you have been warned.
Source:
European Commission: Assessment of the public debt sustainability of Cyprus
http://blogs.r.ftdata.co.uk/brusselsblog/files/2013/04/DSA-9-April2013.pdf
European Commission: Assessment of the actual or potential financing needs of Cyprus
http://blogs.r.ftdata.co.uk/brusselsblog/files/2013/04/Estimate-of-financing-needs-
ESMT-art-13-v09042013-1.pdf
Reuters: Cyprus to sell around 400 million euros worth of gold
http://uk.reuters.com/article/2013/04/10/uk-cyprus-bailout-gold-
idUKBRE9390NW20130410
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