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Streetwise Professor

March 24, 2013

The Boris Badinov Bank

Filed under: Economics,Financial Crisis II,Politics,Russia — The Professor @ 9:06 pm

The contours of the latest deal between the EU and Cyprus are becoming clear.  No “levy” on deposits.  Deposits under 100ks will not be touched.

In place of the levy, Cyprus will move to a good bank-bad bank structure.  All deposits less than 100k will go to the good bank.  All deposits over 100k will go to the bad bank.  Since the bad bank’s assets will be, well, really bad, its depositors will get cents on the euro.  Estimates are that the bad bank depositors will suffer losses of between 30 and 90 percent.

A large fraction (most?) of the bad bank deposits will be Russian.  Meaning that Russians will take a big hit.

This is pretty much what the IMF and the Germans wanted initially, but backed off from in the face of intense opposition from Cyprus-which didn’t want to shaft the Russians, in the hope of perpetuating its status as an offshore haven.

Imposing big losses on depositors, insured or not, makes runs in Spain and Italy more likely in the event that it appears that they will have to throw themselves on the tender mercies of the Europeans (read Germans).

The Russians will no doubt be furious, setting up potential confrontations going forward.  The Cyprus drama seems to be a proxy war between Russia and Germany, which is hard to explain given Germany’s previously benign approach to Russia: for instance, Germany scuppered US attempts to advance the progress of Georgia and Ukraine towards Nato membership.  So why is Germany so insistent on doing something that inflicts large losses on Russia-and elite Russians?  Can the impending German election explain it?  Or does Germany think that the fate of the Euro is on the line, and if saving the Euro p*sses off the Russians, so be it.  Or is it something else?  I wonder.

Regardless of the exact reason, Russians are now effectively the not so proud owners of a bad bank.  Bank Badinov, as it were:

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13 Comments »

  1. Boris Badinov – a good pun between Boris Godunov and Bad Enough. ’nuff said.

    Comment by Vlad Rutenburg — March 25, 2013 @ 4:30 am

  2. Perfessor, Rocky and Bullwinkle aside, there is an aspect to this that you mention, but which did not receive enough emphasis, IMHO.

    Russian and Ukrainian oligarchs robbed, raped and pillaged Russian and Ukraine at will, and have been doing so for over 20 years now.

    Putler, of course being among them.

    Where did they park their money? Among other places for tax evasion throughout the world – Cyprus, because there was a treaty with Cyprus even during sovok union times.

    The sovok mafia thugs grasped the principles of tax evasion and hiding and laundering money throughout the world instantly.

    So do I feel sorry for the over-100ks depositors, putting aside principles of law and the general stink of government grabitization, etc., in this situation? No, not at all.

    It amounts to a bunch of really vicious people crying and moaning about how their stolen money is now being “stolen” by a Cyprus bank, which sheltered their stolen money for a very long time.

    A phrase comes to mind from the Wild West when a really, really bad guy was killed, and noone really tried to find the killer, and the people didn’t really care who the killer was:

    “he needed killin’”

    The Russian depositors needed robbin’

    Maybe Putler will try to cut off the gas to Europe again, in retaliation?

    Comment by elmer — March 25, 2013 @ 7:35 am

  3. Watch what happens to natgas shipments next winter.

    Comment by markets.aurelius — March 25, 2013 @ 11:23 am

  4. Very entertaining post. As for Merkel it’s gotta be domestic politics.

    Comment by pahoben — March 25, 2013 @ 2:25 pm

  5. Far from 100% of large depositors in Cyprus banks are Russian criminals.

    The glee expressed here is the usual envy for the wealthy of the masses and the communist happiness to see rich people lose their money.

    Comment by Vlad Rutenburg — March 25, 2013 @ 2:57 pm

  6. @Vlad. Doesn’t matter if the money is criminal or not. Deposits are a claim on assets. If the assets, net of the value of senior claims, are less than the value of the deposits, the depositors should eat a loss.

    The ProfessorComment by The Professor — March 25, 2013 @ 4:07 pm

  7. A large fraction (most?) of the bad bank deposits will be Russian. Meaning that Russians will take a big hit.

    Sorry to disappoint the Professor, but no such luck. The banks to be restructured Laiki and the Bank of Cyprus are the old retail banks and serve primarily wealthy Cypriots and the Cypriot business community. Sucks for Cypriots and their economy, of indifferent significance to the vast majority of Russian depositors and investors in Cyprus. The value of Brit deposits with those two banks is actually equal to the value of Russian deposits.

    The vast majority of Russian deposits in Cyprus are held in newer structures such as the Russian Commercial Bank of Cyprus and VTB Cyprus which under the new plan are not going to be affected much.

    Comment by S/O — March 25, 2013 @ 9:51 pm

  8. Did you hear that Putin managed to sink $2.5 Russia’s money into loans to Cyprus earlier this month? I kid you not.

    BTW, Delyagin slams Putin’s team for total incompetence and predicts Russian economic crisis:

    http://www.youtube.com/watch?feature=player_embedded&v=yhnBmu70zI8
    Делягин про кризис

    Comment by Vlad Rutenburg — March 26, 2013 @ 1:39 am

  9. That’s $2.5 billion.

    Comment by Vlad Rutenburg — March 26, 2013 @ 1:40 am

  10. Kind of interesting, the Rashan “nothing can hurt us” attitude.

    Sort of reminds one of the Alfred E. Newman “what, me worry?” attitude from Mad Magazine.

    Putler screams about the Cyprus “tax” – but “nothing can hurt Rasha.”

    Even Ukraine says that “we’re not worried,” because even though there are “strong ties” with Cyprus, they keep “relatively little” money there.

    http://news.kievukraine.info/2013/03/ukraine-relatively-unworried-by-cyprus.html

    All of a sudden, there are no Rashan or Zookrainian oligarchs who keep – or kept – their stolen money in Cyprus!!!!

    Ain’t that amazin’?

    Comment by elmer — March 26, 2013 @ 6:56 am

  11. The banks to be restructured Laiki and the Bank of Cyprus are the old retail banks and serve primarily wealthy Cypriots and the Cypriot business community.

    Not according to this article (h/t to Mark Sleboda):

    A majority of the deposits of more than €100,000 at the Bank of Cyprus and Laiki Bank are ultimately owned by Russian beneficiaries, a person close to one of the lenders told the Financial Times – meaning that Russian businesses and individual depositors will be paying the lion’s share of the local bailout.

    Comment by peter — March 26, 2013 @ 7:54 am

  12. I haven’t been following this thing that closely, but a critical issue is constantly skipped over in commentary: What were the pre-crisis insurance promises? Are people who thought their deposits were insured getting the haircut? If not, then I have little sympathy. If yes, then the old “rule of law” argument rightly popular on this blog would make me think the haircuts are a bad idea.

    Comment by srp — March 26, 2013 @ 8:15 pm

  13. @srp-Cyprus Fix Version 1.0 did impose a “levy” on all deposits, including insured deposits. I criticized that in earlier posts, on rule of law grounds, as well as others. Cyprus Fix 2.0 imposes no haircut on insured deposits. Those deposits are moved to the “Good Bank” (Bank of Cyprus.) The haircuts-much larger than the original levy-are imposed on uninsured depositors, and vary by bank (which makes sense, given that Cypriot banks differed in the severity of their insolvency). The uninsured depositors are getting claims on the “bad bank” and will likely suffer losses in excess of 30 percent. But losses are being absorbed by order of seniority, with more junior claims getting wiped out before more senior claims take a hit. This is the way it should work. 2.0 therefore dominates 1.0.

    The ProfessorComment by The Professor — March 26, 2013 @ 9:22 pm

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