27 Mar If I Were A Rich Man – Cyprus…???

Cyprus is a very small part of the Euro & the world. It has a population of < 850,000 (less than 75% of Adelaide’s population), annual GDP output of $18 bn Euros (compared to Adelaide equivalent $54 bn Euros), but it’s financial sector relative to it’s economy is absolutely massive – with deposits held in Cyprus’s financial institutions amounting to approx. $68 bn Euros (or roughly 4 times the size of the economy).

Of these deposits a whopping 30% of these holdings is held by foreigners (Russian investors & apparently a whole heap of British Pensioners). Cyprus has offered itself as a tax haven with very low rates of tax on income. This has come about as Cyprus encouraged many British pensioners to retire to the Mediterranean island with a fixed 5% tax rate in retirement and the ability to receive British State and company pensions without deduction of any tax. There is no Inheritance Tax nor any Wealth Tax in Cyprus. UK individuals with a large pension income stream could  exchange income tax at 40% in the UK for a rate of 5% in Cyprus. Similarly public companies were also offered very attractive corporate tax rates & well below the European average.

Cyprus’s Banks have been unwitting casualties of the restructuring of Greece’s public debt in 2012, as Greek bonds were a significant portion of their capital. The haircut on those holdings, combined with loan losses from Cyprus’ deepening recession and collapsing property market, have required a bailout of Cyprus’ financial institutions that is well beyond the means of its government.

In trying to shore up their position Cyprus first turned to the Russians & offered the security of future gas flows from their gas fields for monies which was knocked back by President Putin

Last week the “brain surgeons” at the EU and IMF then invoked a bailout that would have involved a one-off tax on bank depositors. This unsurprisingly caused a run on Banks & ATMs across the country and the government had to close all banks & the stock exchange for > 1 week to stop the panic. Sanity then prevailed as the deal was stopped by the parliament.

The revised deal (another ‘late night’ eurozone deal), will provide Cyprus with $10 bn euros in bailout funding. Laiki Bank, the country’s 2nd largest bank, will be shut down immediately. Insured deposits (those < $100K euros) will transfer to the Bank of Cyprus. Uninsured depositors and bondholders will bear the cost as the recapitalisation of the Bank of Cyprus will be funded by converting to equity of some of the uninsured deposits. Cyprus should receive the first tranche of the funding in early May. The deal at least avoids the precedent of an across the board tax on (or theft of?) bank deposits. 

What it means is that the Eurozone still has likely a fair way to go before they can see the economic light at the end of the tunnel, or once again a European nation learns the hard way as in the lyrics from Fiddler On The Roof

If I were a rich man,
Ya ha deedle deedle, bubba bubba deedle deedle dum.
All day long I’d biddy biddy bum.
If I were a wealthy man.
I wouldn’t have to work hard.