Cyprus does debt-for-equity swaps on a grand scale

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.