Wednesday, 20 March 2013

A Rational Solution to the Cyprus Issue

There is a lot of fluff and nonsense written about the Cyprus bail-out/bail-in deal. It's very difficult to get hard numbers about the depth of the funding problem.

Anyway here's my twopenn'orth:

The banks have bad loans on their books and are insolvent. All the remaining loans have been pledged to the Cypriot Central Bank in return for Emergency Loans Assistance (ELA). So the banks are bust and should be put into administration. They have no free assets left.

At that point the Cypriot government needs Euros to be able to recapitalise these banks and payout on the deposit insurance. Therefore in return for a tighter and narrower banking regulation system and sensible taxes the ECB, et al should purchase the required amount of Cyprus government bonds to cover that cost.

That then allows the transactional and lending functions of those banks to be resurrected by the new bank purchasing the infrastructure of the old bank out of administration. A wide discount window at the Cyprus central bank is likely required to handle the flights between the various banks in the Eurozone - until everything settles down again. That all nets off in the background.

The result is two nationalised banks back on sound footing, and an administration shell that can resolve in the usual fashion paying whatever creditor dividend remains. In due course the new banks can be privatised which would help repay that chunk of the government debt.

Yes this will mean that > 100,000EUR accounts will likely get wiped out. That is what should happen. Saving money in a foreign bank in a foreign currency and/or in excess of the deposit insurance is a risk investment and should be treated as such. To do otherwise is to distort wildly the investment process.

The savings have to come down because the investments failed - Russians or no Russians.

What I find amazing about this last five years is that there is still no rational administration procedure in place to deal with banks that are bust.  And that probably tells you a lot about the politics.