I received an email with the preliminary details of the bailout. I was with my family in a completely non banking related endeavour, enjoying Saturday lunch with a banker friends family and another family who has nothing to do with banking. While the host (the non-banker) was getting drinks and the wives were chatting, I whispered to my banker friend:
“Cyprus is done. Under 7% cut on deposits under 100k and around 10% on deposits above”
“Shit, that’s not good.” Replied my friend
“Nothing we can do today. By the sounds of it, it’ll be the little guy paying again. Bond holders should fine.”
Then our host came in with the drinks and we did our best not to discuss business while our minds (at least my mind was) were doing the calculations.
After sleeping on it (poorly) and pondering on it (heavily) this is what I have come up with. I will change my opinion in a heartbeat upon receiving better information:
In Cyprus many of the big clients and institutions were prepared for this. The smart bankers will have had their clients’ money out of cash already. This is what you do always and every time when there is a financial crisis. Some people incorrectly think you run for the gold, but that stuff's for speculators. Smart investors get the heck out of cash and into a safe haven equal currency.
What is a “safe haven equal currency”? Basically it is a cash equivalent, in your home currency that is not money deposited in bank account. In this case it is EUR denominated German government bonds. Bonds are not the same as cash in an account, hence making them exempt from the "tax" on depositors.
So who ends up paying? It’s the normal citizen. Not the wealthy Russian.
Us savvy private bankers knew when this European crisis started several years ago that cash was what you needed to be out of. I have experience of what happens when one bank buys the operations of a bankrupt bank: Those with cash had to wait, those with bonds got to trade their bonds immediately upon being registered with the new bank.
By 2013 surely even the slower bankers have cottoned on to what to do in a banking crisis: Sell cash and buy safe haven bonds. Why do you think bonds have had negative yields during this time? Smart people buy assets that they know will make them a loss for a reason: The other alternative means a bigger loss.
Coming back to Cyprus. Let’s just pull some major assumptions out of the hat and work with the very limited data we have. Let me stress again that these are broad assumption, made with limited data. (I am grateful to anyone providing me with more accurate data, contact me here)
In 2011 (yes I know it’s old but it’s the latest I could find) Cyprus had bank deposits of around EUR 70.8 billion. Since we are in a crisis let’s put in about 10 billion of capital flight in to there and agree that they have around 60 billion in deposits. The general consensus is that half of that money is foreign depositors, which would make 30 billion in deposits for Cypriot nationals and businesses. Let’s grab another 10 billion off for business deposits and that comes out to about an average of EUR 21 000 of savings per account for private citizens (of which they will now pay 6.75% "tax").
It just isn't fair is it?
(I repeat my request above. Any quality data on Cyprus you find I happily accept and then amend and update the above assumptions by sending it to me by email at bankersumbrellaATgmailDOTcom or use the contact form here.)