The government of Cyprus is desperate.
Enough so that it held its nose in June and requested aid from the Troika—those despised austerity thugs made up of the European Union, the European Central Bank, and International Monetary Fund that have, in Cypriot eyes, wreaked so much havoc in Greece.
And this week, once again, these despised Troika inspectors are swarming over Cyprus to find out how much money the banks would need to deal with their putrefying balance sheets, and how much the government would need to stay afloat.
If a deal is reached—sticking point are the conditions, namely structural reforms, budget cuts, privatizations, and tax increases—the first bailout money might arrive in October.
But Cyprus is bankrupt now! So, the government is raiding the “semi-state“ sector. Last week, it pilfered €101 million from the Cyprus Telecommunications Agency, €50 million from the Ports Authority, and €24 million from the Human Resource Development Authority. Now it’s going after the pension fund of the Electricity Authority to get a couple hundred million. This place is seriously out of money.
At first, it was just a funding crisis. After markets closed the door, Cyprus went begging to Russia and got €2.5 billion late last year. That money has now evaporated.
Then it was the banks. In June, the Bank of Cyprus needed €500 million and Popular Bank €1.8 billion—in total €2.3 billion. A black hole in their regulatory capital had developed when they were forced to write down the defaulted Greek government bonds on their balance sheets [“We owed it to our children and grandchildren to rid them of the burden of this debt,” sneered Greek Finance Minister Evangelos Venizelos at the time as private sector investors got whacked with a 74% loss. Read.... “A harder Default To Come”].
But the banks were joking about the €2.3 billion. They’ve also been eviscerated by Greek corporate debt—40% of the loans on their balance sheets. They’re turning to trash as Greece slithers deeper into its fifth year of recession. Then there are the loans left over from the real estate bubble and title-deed scandal that the banks themselves colluded in.
An estimated 130,000 properties are without title deeds—in a country with only 838,000 souls. Those who think they own these properties don’t legally own them. A nightmare gumming up the future of the country [I warned about it in October.... Another Eurozone Country Bites the Dust].
And so in June, as bailout talks with the Troika took off, the €2.3 billion were declared a joke. “Eurozone sources” mumbled something about €10 billion, including a government bailout, which hadn’t needed one before.
Cyprus has been trying to triangulate its bailout negotiations by adding China and Russia. They’re ogling the vast natural gas reserves found off the coast. Awash in natural gas, Russia is the major supplier to the EU through a system of pipelines, and it wants to keep control over its export market. China wants to grab resources around the world. And on July 6, Russian Finance Minister Anton Siluanov confirmed, “Yes, we have a request from Cyprus. They’re looking for €5 billion.”
So since Monday, the despised Troika inspectors have been plying their trade. And it didn’t take long for it to seep out that the banks alone would now need a bailout of €9 billion—a stunning amount for the banks in such a tiny country. Plus, the government would need €4 billion. For total package of €13 billion.
But the €9 billion for the banks is likely to grow even further—because bad debt isn’t bad debt in Cyprus. Under Cypriot rules, loans on the banks’ books that are over 90 days past due aren’t considered bad debt, and no losses have to be recognized, if the loans are secured. Hence, a mortgage that is in default doesn’t have to be written down because the bank might eventually obtain the property, which takes many years, and then sell it to recuperate its money. But property values have collapsed. And worse: the title-deed fiasco resulted in banks securing two or more mortgages with the same property—and only one of them has any value at all. But they’re all “secured”; hence, none have been written down.
The Troika inspectors are circling. They want those loans written down. Government and banks resist. The outcome of this clash will be a big factor in determining the bailout amount for the banks. And the government bailout of €4 billion will certainly rise. The first time is only the beginning—Greece, if it were to stay in the Eurozone, would require a third bailout. Standard and Poor’s tacked on some extra billions and came up with €15 billion. 83% of GDP. €18,000 ($22,000) per resident. Another bottomless pit. Is that why Russia and China haven’t jumped into the fray?
In the run-up to this crisis, people have gotten rich and taken their money to Switzerland. What’s left is debt. But instead of letting it blow up and disappear, wiping out creditors and equity holders in the process, it’s being replaced with new money, but from taxpayers elsewhere: 29% from Germany, 22% from France, even from teetering Italy and Spain....
But Spain is on the brink. The word is out: default. Or bailout. Read.... The Extortion Racket Shifts to Spain.
And here is a great perspective by George Dorgan, a portfolio manager in Switzerland who used to live in Italy. Read.... Italian Euro Exit: why it might come in 2-3 years and why it will help the Eurozone and Italy.
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