Via Little Professor at HPC, from the BBC:
People in Cyprus have reacted with shock to news of a one-off levy of up to 10% on savings as part of a 10bn-euro (£8.7bn; $13bn) bailout agreed in Brussels.(1) Savers could be seen queuing at cash machines amid resentment at the charge.(2)
The deal reached with euro partners and the IMF marks a radical departure from previous international aid packages.(3) President Nicos Anastasiades defended it as a "painful" step, taken to avoid a disorderly bankruptcy. It had, he said in a statement, been a choice between the "catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis"...
Alan, a British expatriate saver in Cyprus, told BBC News: "This is robbery and we must get the EU to stop this. We retire and bring our savings to a bank in Cyprus and they can just take our money away without permission and then say we have shares in a bankrupt bank."(4)
Maria Zembyla, from Nicosia, said the levy would make a "big dent" in her family's savings and "erode the investor confidence".(5) "Russians that currently keep the economy afloat will leave the country along with their money,"(6) she added.
According to Reuters news agency, almost half of the depositors in Cyprus are believed to be non-resident Russians.(6)
1) It's not a "levy", it's a debt-for-equity swap, read the small print:
• Depositors with under 100,000 euros deposited must pay 6.75%
• Those with more than 100,000 in their accounts must pay 9.9%
• Depositors will be compensated with the equivalent amount in shares in their banks
• The levy is a one-off measure
A bank's gross assets (primarily money lent to borrowers) are worth whatever they are worth; if you deduct deposits (which are liabilities of the bank) and other liabilities (bonds etc), what you are left over with is net assets which 'belong' to shareholders and which (very broadly speaking) are equal to the value of the shares (plus or minus a bit). So all things being equal, if you cancel EUR 1 of deposits, the value of the shares goes up by (very broadly speaking) EUR 1. Nobody actually loses out from this. If the deposit cancellation is sufficiently large to turn an insolvent bank back into a solvent one, there might be a net overall gain; so you lose EUR1 of deposits and receive shares which you could sell for EUR 1.50. It all depends.
2) Clearly, you have to do these things overnight without prior warning.
3) Because this "package" is not international. It's the sort of thing which any country can do for itself.
4) Their country, their rules, Alan. Besides, the bank won't be bankrupt any more once the deposits have been partly converted into share capital.
5) "Investor confidence" evaporated years ago. And as Stillthinking says in a separate thread at HPC: "The real not nominal reduction is about the same as inflationary losses in the UK over a three year period. Personally I would prefer the "there you are we is having it sonny" approach to just cowardly underhand inflationary skanking."
6) That's the interesting bit, isn't it, will the Cyprus government allow the Russians to whip out their deposits first? If they do, then the proportion of deposits of residents is going to have to double; if they don't then Cyprus' reputation as a handy little tax haven/place for Russians to hide money might take a bit of a knock. Tough call.
Sunday, 17 March 2013
Cyprus does debt-for-equity swaps on a grand scale
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12 comments:
While we're on the subject, how do they work out how to equate the value of deposits with value of equity. Just go by the market share price? Seems a bit hit-or-miss to me.
By the way if you mention building societies in your reply there'll be tears before bedtime.
RA, it's not difficult.
Gross assets are whatever they are, that is a fixed figure A.
You draw a line at Friday's closing price for all quoted shares (or an average of the past couple of weeks) and then multiply that by the number of shares = figure B.
You do the same for the bonds etc = figure C.
Deposits are figure D.
You then add up B, C and D = E.
You divide A by E (hopefully it is ever so slightly larger than 1, but if not, it doesn't matter).
You then convert to a "building society" capital structure where ALL the finance ranks pari pass.
The depositors get A x E in nominal deposits.
The shareholders get deposits with a total nominal value of B.
The bondholders get deposits with a total nominal value of C.
So nobody is better or worse off as a result of the reshuffle.
Sorted. From there on in, there is no need to pay "interest" as such, the total profits sweated out of total assets A is simply credited to the depositors pro rata every three months (with a little bit siphoned off into reserves).
If the members of our new building society want to demutualise, then good luck to them.
Their country, their rules, Alan.
To some extent. EU rules require that all deposits up to 100,000 Euros are protected, so removing that protection is in breach of EU law. The real absurdity is that the EU appear to be perfectly fine with that.
PL, in which you are probably correct, hence the split rate for above and below EUR 100,000, but who's to say that depositors lose out?
If you compare A with B+C+D for most banks, you will end up with A/E being a positive figure, and it is quite likely that if you "lose" EUR 1 of deposits, you get shares worth EUR 1, so you haven't really lost very much.
On a practical level, it would be better to convert everything to deposits rather than convert some deposits to shares, but this is all to keep the bankers in power rather than chucking them out and starting again with a "building society".
Well, a know the address of my local bank, and if they decide to remove 6.75% of the money out of my account I will smash up 6.75% of their premises.
That's equity for you.
ALF, the bankers have been helping themselves to a few per cent of your savings each year via inflation, and to a few per cent of your earnings via income tax.
Have you smashed up anything in response to that?
By the way, under a debt for equity swap, you would own part of the bank, why smash it up?
The share price of banks is at the moment not a good guide for anything. They are nearly all trading at discounts to book value i.e. the individual parts are worth more than the whole. Sometimes the discounts are huge (around 50% for RBS) The Treasury sold Northern Rock to Virgin below book value. Regulatory uncertainty and its impact on asset prices causes the discount all over Europe. The Cyprus thing just adds to the regulatory uncertainty.
In theory, it's a debt-for-equity swap. In practice, it is swapping a liquid asset for an illiquid asset with uncertain value. The Germans will unfairly take the flak. However, the Cyprus government could have protected smaller depositors and imposed a larger levy on deposits over 100,000. It was the Cyprus government that chose not to do so to keep dodgy Russian money flowing.
Hmmm.
This is a compulsory debt for equity swap.
If the banks went bust, the depositors would be first in the queue for the banks' assets. The existing shareholders would be cleaned out.
With the swap, they lose some of their deposits (first-in-the-queue assets) and get shares (last in the queue assets) instead. The existing shareholders keep their shares and don't lose everything.
In other words this is same old protrction for the owners of the banks. The depositors are getting a worse deal than if the banks went into administration.
What is even more stupid about this is that a controlled administration of the banks in tiny Cyprus could probably be managed without destroying the banking system of Europe.
"Nobody actually loses out from this"
Mohamed El-Erian at the FT calls the debt equity swap an "out of the money equity option".
The deal is designed to ensure depositors do lose out.
R, yes,, most bank shares and bonds are trading at a discount to net assets or par value, which is why the reverse exercise, converting everything to building societies would have been preferable.
Who says that the bank shares are illiquid? Is there no stock exchange in Cyprus?
And it cannot be impossible to issue the depositors with new shares with the same market value as the amount of deposit they have lost.
AC, yes, depositors are not getting a very good deal (and the bankers are getting a very good deal as usual).
Anyway, this is all part and parcel of Home-Owner-Ism. All the Homeys who are now slagging off the banks are idiots. This is just what happens.
P156, I'm not really interested in what the FT says until I have read the article and checked the facts. Are the new shares worth less than the nominal value of deposits?
Quite possibly, but you shouldn't go round assuming stuff just because everybody else assumes it, every now and then you have to check FACTS.
According to the Beeb (who are not to be relied on necessarily, because they call this a levy and do not mention the issue of shares), although one set of creditors, the depositers, have been hit, another set, the bondholders, have been left untouched. Banker does not bite banker, it seems.
B, in City AM it said that only "junior" bondholders would be involved but "senior" bondholders are unaffected. Which is clearly an outrage.
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