WHAT are the implications of the huge losses — 60 percent — that the Cypriot bailout is imposing on the biggest depositors of that country’s two largest banks?
The magnitude of the losses, disclosed late Friday and confirmed Saturday by Cypriot officials, has provoked concern that depositors in second-tier euro zone banks in Slovenia and Italy might withdraw their savings from those institutions.
It has also raised fears that countries like Malta and Luxembourg, which like Cyprus have banking sectors many times bigger than their economies, might soon find it harder to gain access to international bond markets.
One relevant lesson might lie not elsewhere in the euro zone but in the carcass of a Los Angeles-based savings and loan institution, IndyMac Bancorp, that failed five years ago and required a bailout.
IndyMac was about the size of the Bank of Cyprus, and its depositors ended up taking nearly as big a loss — 50 percent on deposits above the levels insured by the Federal Deposit Insurance Corporation.
Rather than causing a panic and a bank run elsewhere, IndyMac’s debacle proved to be a largely contained disaster with little fallout.
“Just as you did not see mass panic and deposit runs in the U.S. after IndyMac, what happened in Cyprus is not going to spill over into Europe,” said Jacob Funk Kirkegaard, a specialist in banking and government debt at the Peterson Institute for International Economics in Washington.
IndyMac needed rescuing because, like the Cypriot bank, it placed a large bet just before one of the biggest recent credit disasters.
For IndyMac, the calamity was the collapse of the subprime mortgage market in the United States.
For the Bank of Cyprus, it was the collapse of Greek government bonds, in which it and other Cypriot banks had invested heavily, seeking an adequate return on the billions of euros of deposits that had inflated their balance sheets.
“How unique is Cyprus? Pretty unique actually,” Mr. Kirkegaard wrote in a research note.
He pointed out that compared with other countries with huge banking systems relative to their economies — notably Malta, at about eight times gross domestic product, and Luxembourg at more than 22 times G.D.P.— Cypriot banks had much lower levels of equity to cushion against failing assets.
What is more, it is the subsidiaries of foreign banks, which have little or no exposure to the local economies, that make up the bulk of the Maltese and Luxembourg banking systems.
By comparison, many of the Cypriot banking assets that grew to be seven times the size of the country’s economy consisted of corporate, construction and mortgage loans to the Cypriot and Greek economies, which tied the health of these banks directly to those sagging economies.
As proponents of the Cypriot losses argue, just as it was fair that the large depositors that bankrolled IndyMac’s subprime excesses in 2008 pay the cost for the bank’s failure, so it is right that Cypriot savers — the largest of whom were Russian billionaires chasing high-yielding deposits — suffer a similar fate.
“There were stories of pain, too, at IndyMac, but in the U.S., we paid little attention to it,” Mr. Kirkegaard said. “This will impose a lot of pain on Cypriot society, but the outcome will not be that much different.”
IndyMac, when it was rescued by American regulators in July 2008, had become the ninth-largest originator of mortgage loans in the United States, relying largely on large, uninsured deposits to finance a lending spree in some of the riskiest areas of the housing market.
And while the American government backed savers with deposits of less than $100,000, those with more deposited at IndyMac were required to accept a loss of 50 percent when it declared bankruptcy. (The federal government helped prevent a broader panic by later raising the deposit insurance threshold to the current $250,000.)
As the Cypriot government begins investigating the misadventures of the Bank of Cyprus and the second-largest, Laiki, bankers and lawyers in Nicosia have begun to argue that the disastrous venture by the Bank of Cyprus into Greek bonds could well have been avoided.
Local bankers say the bank had more or less sold out of its Greek bond position by early 2010 as Greece’s problems became evident.
But then, in late spring of 2010, as an international bailout of Greece looked increasingly likely, the Bank of Cyprus plunged back into the market, buying 2.1 billion euros, $2.7 billion, worth of the troubled bonds, lured by the increasingly high yields that went with the risk.
At the time, the bonds were trading around 70 cents on the euro, and bankers say that, in essence, when the Bank of Cyprus bought the securities, it was betting that the loss, when it occurred, would be less than the market had expected.
Such a risky strategy is frequently used by hedge funds dabbling in distressed debt. But it is generally not seen as the expertise of large, deposit-reliant institutions like the Bank of Cyprus.
“This was pure speculation — European banks like Deutsche Bank were desperately trying to get rid of these things,” said a Cypriot banker familiar with the transactions who was not authorized to speak publicly.
Two years later, in March 2012, Greek bonds would be written down by 75 percent, saddling the Bank of Cyprus with a loss of about 1.6 billion euros — around 4.4 percent of its assets — from which it has yet to recover.
European officials and economists at the International Monetary Fund are therefore making the case that the risks the Cypriot banks took were not just egregious but unique, given the size of its banking sector.
This is not to say that there are no looming problems in Europe that could not become more dangerous in the days ahead as uncertainty over Cyprus continues.
A few weeks ago the I.M.F., in its annual economic survey of Slovenia, warned that the country’s banks, hobbled by increasing nonperforming loans, were under “severe distress” and would need 1 billion euros in fresh cash to keep them afloat.
Slovenia has large levels of understated debt that could attract investor scrutiny as broader finances continue to deteriorate.
Nonperforming loans in Italy are also persistently on the rise. And risk-averse investors are becoming more wary about buying the bonds of Italian banks in the fear that if these banks fail, investors will be required to share in the burden of bailing them out.
Nevertheless, those problems were endemic to Slovenia and Italy long before the Cyprus crisis emerged. If, as a result of Cyprus, bond investors and depositors become more discerning about where they put their money, European officials will see that as more positive than negative for the future of the euro zone.
nytimes.com
The magnitude of the losses, disclosed late Friday and confirmed Saturday by Cypriot officials, has provoked concern that depositors in second-tier euro zone banks in Slovenia and Italy might withdraw their savings from those institutions.
It has also raised fears that countries like Malta and Luxembourg, which like Cyprus have banking sectors many times bigger than their economies, might soon find it harder to gain access to international bond markets.
One relevant lesson might lie not elsewhere in the euro zone but in the carcass of a Los Angeles-based savings and loan institution, IndyMac Bancorp, that failed five years ago and required a bailout.
IndyMac was about the size of the Bank of Cyprus, and its depositors ended up taking nearly as big a loss — 50 percent on deposits above the levels insured by the Federal Deposit Insurance Corporation.
Rather than causing a panic and a bank run elsewhere, IndyMac’s debacle proved to be a largely contained disaster with little fallout.
“Just as you did not see mass panic and deposit runs in the U.S. after IndyMac, what happened in Cyprus is not going to spill over into Europe,” said Jacob Funk Kirkegaard, a specialist in banking and government debt at the Peterson Institute for International Economics in Washington.
IndyMac needed rescuing because, like the Cypriot bank, it placed a large bet just before one of the biggest recent credit disasters.
For IndyMac, the calamity was the collapse of the subprime mortgage market in the United States.
For the Bank of Cyprus, it was the collapse of Greek government bonds, in which it and other Cypriot banks had invested heavily, seeking an adequate return on the billions of euros of deposits that had inflated their balance sheets.
“How unique is Cyprus? Pretty unique actually,” Mr. Kirkegaard wrote in a research note.
He pointed out that compared with other countries with huge banking systems relative to their economies — notably Malta, at about eight times gross domestic product, and Luxembourg at more than 22 times G.D.P.— Cypriot banks had much lower levels of equity to cushion against failing assets.
What is more, it is the subsidiaries of foreign banks, which have little or no exposure to the local economies, that make up the bulk of the Maltese and Luxembourg banking systems.
By comparison, many of the Cypriot banking assets that grew to be seven times the size of the country’s economy consisted of corporate, construction and mortgage loans to the Cypriot and Greek economies, which tied the health of these banks directly to those sagging economies.
As proponents of the Cypriot losses argue, just as it was fair that the large depositors that bankrolled IndyMac’s subprime excesses in 2008 pay the cost for the bank’s failure, so it is right that Cypriot savers — the largest of whom were Russian billionaires chasing high-yielding deposits — suffer a similar fate.
“There were stories of pain, too, at IndyMac, but in the U.S., we paid little attention to it,” Mr. Kirkegaard said. “This will impose a lot of pain on Cypriot society, but the outcome will not be that much different.”
IndyMac, when it was rescued by American regulators in July 2008, had become the ninth-largest originator of mortgage loans in the United States, relying largely on large, uninsured deposits to finance a lending spree in some of the riskiest areas of the housing market.
And while the American government backed savers with deposits of less than $100,000, those with more deposited at IndyMac were required to accept a loss of 50 percent when it declared bankruptcy. (The federal government helped prevent a broader panic by later raising the deposit insurance threshold to the current $250,000.)
As the Cypriot government begins investigating the misadventures of the Bank of Cyprus and the second-largest, Laiki, bankers and lawyers in Nicosia have begun to argue that the disastrous venture by the Bank of Cyprus into Greek bonds could well have been avoided.
Local bankers say the bank had more or less sold out of its Greek bond position by early 2010 as Greece’s problems became evident.
But then, in late spring of 2010, as an international bailout of Greece looked increasingly likely, the Bank of Cyprus plunged back into the market, buying 2.1 billion euros, $2.7 billion, worth of the troubled bonds, lured by the increasingly high yields that went with the risk.
At the time, the bonds were trading around 70 cents on the euro, and bankers say that, in essence, when the Bank of Cyprus bought the securities, it was betting that the loss, when it occurred, would be less than the market had expected.
Such a risky strategy is frequently used by hedge funds dabbling in distressed debt. But it is generally not seen as the expertise of large, deposit-reliant institutions like the Bank of Cyprus.
“This was pure speculation — European banks like Deutsche Bank were desperately trying to get rid of these things,” said a Cypriot banker familiar with the transactions who was not authorized to speak publicly.
Two years later, in March 2012, Greek bonds would be written down by 75 percent, saddling the Bank of Cyprus with a loss of about 1.6 billion euros — around 4.4 percent of its assets — from which it has yet to recover.
European officials and economists at the International Monetary Fund are therefore making the case that the risks the Cypriot banks took were not just egregious but unique, given the size of its banking sector.
This is not to say that there are no looming problems in Europe that could not become more dangerous in the days ahead as uncertainty over Cyprus continues.
A few weeks ago the I.M.F., in its annual economic survey of Slovenia, warned that the country’s banks, hobbled by increasing nonperforming loans, were under “severe distress” and would need 1 billion euros in fresh cash to keep them afloat.
Slovenia has large levels of understated debt that could attract investor scrutiny as broader finances continue to deteriorate.
Nonperforming loans in Italy are also persistently on the rise. And risk-averse investors are becoming more wary about buying the bonds of Italian banks in the fear that if these banks fail, investors will be required to share in the burden of bailing them out.
Nevertheless, those problems were endemic to Slovenia and Italy long before the Cyprus crisis emerged. If, as a result of Cyprus, bond investors and depositors become more discerning about where they put their money, European officials will see that as more positive than negative for the future of the euro zone.
nytimes.com
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