A Plan to Save Cyprus

A Plan to Save Cyprus Posted: 20 Mar 2013 12:14 PM PDT After considering the current situation in Cyprus we have can up with the following plan: Instead of haircutting the depositors, use their funds as loans, i.e. hold them for 3-5 years until the economy starts growing again (if the natural gas investment starts earlier then we are looking at 2-3 years tops). During that time the deposits will receive interest (lower than the given market rate, approximately 1-2%) which they will be able to use freely. Our understanding is that most of the domestic money is in the form of term deposits; having the amount sitting at the bank or utilized by the government will make no difference to ordinary citizens. In this way, those who have taken out loans on existing deposits will not be gravely affected and in addition this would allow citizens to proceed with their everyday occupations. Next, depositors will receive bank shares at the rate of 1.5 share per 1 euro held by the government. Banks should be recapitalized by the state, although the shares should be made out in the names of the depositors whose deposits have been used (ordinary shares rather than preferred since preferred is debt which does not assit too much in capital adequacy ratios). Through this, the banks' equity will be increased, meaning that the capital adequacy ratios targets will be fulfilled. The ECB will have no reason to shut the ELA, especially since the amount will be much less after such a deal. As banks' share capital represents only the face value of the shares, the money given to the banks may be used two-fold: 1. Bring liquidity to the market thus boosting the economy 2. Rolling-over government debt, which will be decreased given that the deficit is expected to be less than 3% this year. If the interest rate on the government debt is reduced to 1-2% (or less) and a long maturity is used, although the burden will be increased the interest payments will be significantly lower. (Let us not forget that the current Russian loan has been issued with a 4,5% interest rate and it is higly unlikely that any new agreement will mean a lower rate. Lowering the interest rate by half will mean an additional reduction to the government budget.) If the government wishes, it can also give the depositors the rights to long-term bonds, with their rates dependent on the natural gas revenues. Imposting capital constraints on transfers to foreign banks and withdrawals will be suitable as a mechanism to avoid bank runs from foreign investors. No solution can occur without imposing severe capital control regulations. In case anyone has not heard, these regulations are in fact legal in the European Union. We cannot emphasize it more: with no capital controls there is no solution for the island. What we would propose is no cash withdrawals larger than 3,000-4,000 euros and not being able to transfer more than 5% (or 5,000 whichever is larger) of an account balance outside Cyprus unless it is payment of invoice (although the invoices should be carefully studied). Transfers between domestic banks and check issuance for deposit may take be issued for any account. Although there have been some talks about leaving the euro, we are largely unsure of the consequences of a Eurozone exit (which will not be a controlled one). However, we commit to study the subject with more detail and come back with an answer. P.S. Gas-linked bonds may be used as sweeteners only. Otherwise it would be mere speculation. Authors: -Euronomist -Alexander Apostolides