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)

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 assets are worth whatever they are worth; if you deduct deposits and other liabilities, what you are left over with is (very broadly speaking) the value of the shares. 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 cancelled.

5) “Investor confidence” evaporated years ago.

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.