What Cyprus Means

The EU has come up with a novel way of trampling over depositors’ rights in Cyprus with their proposed “tax” on depositors of Cypriot banks. So far through the Eurozone crisis depositors have been left whole, but the news on Saturday suggests they’ll be unwilling participants in the latest bailout. One might expect senior and subordinated debtholders to be taking a loss as well before depositors. That would be the more appropriate treatment of their capital structure. However, their €19BN economy supports a banking system with €68BN in customer deposits, and this highly leveraged system has hardly any senior debt outstanding. So finding the €5.8BN needed requires going after the depositors.

Even more amazing is the reporting that the tiered haircut (latest proposal of 3.3% on deposits below €100,000, 9.9% from €100,000-500,000 and 15% above) is designed to grab a significant amount of Russian investors’ money. The Cypriot President Nicos Anastasiades is a brave man.

One would think that a logical consequence of this move would be for Greek depositors to pull their cash from the Greek banking system. It’s probably a stretch to assume a run on Italian and Spanish banks,  but it must be a good bet now that the next Greek bailout will place their depositors at risk. This particular genie is out of the bottle. It’s frankly amazing that anybody ever held more than €100,000 in Cypriot deposits to begin with, but it must be that the days of large, unsecured deposits being held in southern European banks are numbered.

We haven’t changed any positions on the back of this news. The US$ should benefit but we’re not yet short the Euro. We still like being long US$ versus the Yen. America’s respect for property rights rests on a more solid foundation than in some other countries. The biggest positions we own (CXW, BRK, MSFT) are not overly exposed to such turmoil. But this news does potentially complicate the investment outlook.


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