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News : EU Economy Last Updated: Mar 21, 2013 - 9:42 AM

Cyprus crisis continues; 28% of Cypriot bank loans are made to Greek residents
By Finfacts Team
Mar 21, 2013 - 8:05 AM

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The Cyprus crisis continues with banks remaining shut until next Tuesday. So far, there are no signs of positive progress from meetings in Nicosia, Moscow, Brussels and Frankfurt. Some 28% of Cypriot bank loans are made to Greek residents. So apart from banks purchasing Greek sovereign debt, they are also exposed to private sector woes in Greece.

New proposals as an alternative to the bank deposit levies to raise almost €6bn, include using the country's pension-fund assets, selling a bond to the local population, and doing a deal with Russia by using untapped natural-gas reserves in exchange for a multibillion-euro loan.

Officials of the bailout troika of the European Commission, IMF and European Central Bank and Russian officials are reported to be cool to the proposals.

A proposal originally floated by Finland and Germany, would see a merger of Cyprus’ two largest banks Laiki and Bank of Cyprus. It would also create a new bank that would include all deposits of under €100,000 and a bad bank. The restructuring would mean much lower recapitalisation costs.

However, the Financial Times reports that Nicos Anastasiades, the Cypriot president, is resisting the merger plan, known among negotiators as the “Icelandic solution,” since it would put large uninsured deposits into the bad bank, effectively wiping them out.

On Wednesday, Michael Sarris, Cyprus’s finance minister, met senior Russian officials to seek aid from the Kremlin to bail out its struggling banking sector.

Sarris said his meeting with Russian counterpart Anton Siluanov, Russian finance minister, was "very constructive" and that the talks would continue "for as long as it takes." However, a later meeting with Igor Shuvalov, first deputy prime minister, appeared to go nowhere.

Some 28% of loans on the Cypriot banking system’s balance sheet with a value of 18.9bn have been made to Greek residents while 27% of all the loans issued by Cypriot banks, valued at €23bn, are non-performing. Greeks also account for 18.7% of total deposits in Cypriot banks.

“By June 2011, the exposure of domestic [Cypriot] banks to Greece amounted to €28bn, or one-third of total assets and 170% of GDP. Of the €28bn, government bonds amounted to €4.7bn; the rest were loans to Greek residents,” the Institute of International Finance (IIF), a lobby group for global banks said in a briefing note.

IIF: Cyprus: Just The Facts [pdf]

As a result of the restructuring of Greek government bonds. Cyprus’ two largest banks - - Bank of Cyprus (BoC) and Popular Bank (Laiki), - - together held €4.7bn of Greek government bonds at the end of 2011. The 75% private sector Greek haircut resulted in losses equal to roughly €3.5bn, or 33% of both banks’ aggregate capital and 20% of GDP.

A bailout for Cyprus should have coincided with the Greek one but who would trigger it?

Erik Nielsen, chief economist of UniCredit, the Italian bank, argues, depositors in Cyprus have benefited from higher rates of interest than elsewhere in the eurozone: “A Cypriot (or foreigner) who placed €100,000 in deposit in Cyprus in 2008 would by now have earned just around €15,000 more than if he had placed that money in Italy or Spain (and some €23,000 more than if he had placed it in Germany).

Why does the Cypriot parliament (and many commentators) seem to suggest that a 15% tax on such deposits (which would cover the bill also for the sub-€100,000 deposits) would be unreasonable now the banks are in trouble, but that German, Italian and other eurozone taxpayers should rather foot the bill? To me, the Cypriot position is simply unsellable in the rest of the Eurozone.”

Erik Nielsen speaking to Bloomberg Television on Monday

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