14 need to know points on Cyprus and how it affects business finance

by: John Thompson In Bank Lending, Eurozone, Turnaround, UK Economy

Could Cyprus be the trigger for yet another, potentially fatal Eurozone crisis?  This is a problem that the EU have tried to ignore, but to no avail, it is now coming back to bite them, and in particular the Germans, in a big way!

In a worst case scenario, this could lead to the exit of a number of countries, a split of the Eurozone into North and South as has been previously suggested, or even the withdrawal of Germany if the German taxpayer loses patience with this continual use of their money to bail out less well managed and more profligate nations.

Any of these scenarios would have a major detrimental effect on the turnaround of the UK economy and put our faltering recovery under even more pressure.

 The key points of this crisis are as follows:

  1. Cyprus represents approximately 0.2% of Eurozone GDP
  2. Cyprus was particularly badly hit by the failure of the Greek economy.  Their banks held significant numbers of Greek sovereign bonds
  3. Cyprus first asked the EU for a bail-out 8 months ago – nothing has been done
  4. The recent response to the crisis was the offer of a €10bn EU-IMF loan.
  5. To qualify for this loan, the Cypriot government needed to come up with €5.8bn of its own.
  6. Germany is the driving force of the bailout plan, and the German taxpayer is now unwilling to put out unlimited cash to failed Eurozone economies, as it has done in the case of other failed Eurozone economies.
  7. It is election year in Germany and Angele Merkel had to come up with a response that was acceptable to the German voter.
  8. Cyprus has attracted money through its low tax rates, with Russians holding between a third and a half of all Cypriot deposits.
  9. Russian private and corporate assets in Cypriot banks are believed to total about €23bn, including many larger deposits, and Russian officials had expressed anger at the bank levy plans.
  10. These significant deposits have raised suspicions amongst many within the EU leaders regarding the provenance of this money, hence the plan devised by the Germans to levy a tax on Cypriot deposit holders.
  11. Apparently, it was the Cypriots who changed the initial plan to include deposit holders below €100,000, to avoid a double digit tax on the wealthier deposit holders for fear it would damage the financial sector!
  12. Following a negative vote by the Cypriot government on Monday the original bank levy plan was altered to exempt savers with less than €20,000, but a 6.75% charge on deposits of €20,000-100,000; a 9.9% charge for those above €100,000 remained.
  13. However, parliament rejected the deal, with 36 MPs voting against it, 19 abstaining and none in favour.
  14. The €10bn bailout of Cyprus represents a massive 57% of GDP

The European Central Bank (ECB) has warned that it will continue providing emergency funding for Cypriot banks until Monday 25th March, but no longer – unless there is a bailout deal to ensure that the banks can be made financially viable.

The Cypriot Finance Minister has been in Moscow this week to negotiate assistance from Russia, which has multi-billion dollar investments in Cyprus.

Analysts had suggested Russia may provide more funding in return for interests in Cyprus’ offshore energy fields.  The Germans are very much against this due to the potential value of these natural resources, as shown below:

Cyprus’ offshore energy fields

  • The 13 exploratory energy blocks south of Cyprus could hold gas reserves of as much as 60 trillion cubic feet, the head of Kretyk, the country’s state hydrocarbons company said.
  • That would be worth about €475bn at today’s prices, according to Bloomberg.
  • Noble Energy granted first contract to explore Block 12 in October 2008.
  • Unresolved conflict with Turkey over issue of national sovereignty surrounds the field, dubbed Aphrodite, with Ankara objecting to tenders issued by Cyprus.

Sources: Cypriot government, Kretyk, Oxford Institute for Energy Studies

Latest

It appears these talks with the Russians have failed and Mr Sarris returned home on Thursday 21st March.

The Cypriot Parliament meets on Friday 22nd March to come up with an acceptable solution.

One of the suggested routes now is for all depositors over €100,000 to face a 40% tax on their savings. This will help meet the €5.8bn requirement set by the EU and IMF to qualify for the €10bn loan.

Summary

The Cypriots have been implementing a dangerous strategy. Trying to call the ECB’s bluff by taking funding from Russia would mean Europe losing control over the strategic bridge between them and the Middle East that Cyprus represents.

Watch this space.  It is ironic that such a small country is threatening the very essence of the Eurozone and the detrimental effect this would have on the turnaround of the UK economy.

As always if you would like to comment on or discuss anything in this article I can be contacted at john.thompson@transcapital.co.uk or on 0845 689 8750.

 

Image by: Yuryu.