Weekend Economists Sit on a Wall August 23-25, 2013

[Demeter]

2. Cyprus Bank’s Bailout Hands Ownership to Russian Plutocrats THAT WORKED WELL, DIDN'T IT?

http://www.nytimes.com/2013/08/22/world/europe/russians-still-ride-high-in-cyprus-after-bailout.html

When European leaders engineered a harsh bailout deal for this tiny Mediterranean nation in March, they cheered the end of an economic model fueled by a flood of cash from Russia. Wealthy Russians with money in Cyprus’s sickly banks lost billions. But the Russians, though badly bruised, are now in a position to get something that has previously eluded even Moscow’s most audacious oligarchs: control of a so-called systemic financial institution in the European Union.

“They wanted to throw out the Russians but in the end, they delivered our main bank to the Russians,” said the Cypriot president, Nicos Anastasiades, in a June interview.

The March bailout hammered bank creditors and depositors in an early test of what has since become the official European Union policy of “bailing-in” banks. The policy is intended to force creditors and depositors to pay for a bank’s mistakes and to spare taxpayers from picking up the entire bill. The strategy, however, has generated unintended consequences in the case of Cyprus. The exercise was meant to banish what Germany and other Northern European nations viewed as dirty Russian money from Cyprus’s bloated banks. Instead, it has pulled Russia even deeper into Europe’s financial system by giving its plutocrats majority ownership, at least on paper, of the Bank of Cyprus, the country’s oldest, biggest and most important financial institution.

“Whoever controls the Bank of Cyprus controls the island,” said Andreas Marangos, a Limassol lawyer whose clients include many Russians.

The biggest single chunk of shares — around 18 percent — is supposed to go to depositors who lost money in Cyprus’s now-defunct Laiki Bank, but this stake is likely to be controlled by Cyprus’s central bank. As a result of a forced conversion of Bank of Cyprus deposits into shares, however, a diverse and so far unorganized group of depositors, most of them Russians, will end up with a controlling stake. Whether they want such a bank is another matter. Owning the Bank of Cyprus, which has been saddled with $11.7 billion in liabilities racked up by Laiki Bank, “is like owning cancer,” said Irakli Bukhashvili, the head of a financial services company serving Russians here in Limassol, the business capital of Cyprus....

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Moscow, though furious over the billions lost by Russians in Cypriot banks, still sees Cyprus as a prize worth courting. The Russian government has pushed for access for its military aircraft to an air base in Paphos and for its warships to Cypriot ports...Hardly anyone has yet received their share certificates. But, according to the nation’s finance minister, Harris Georgiades, foreign depositors, mainly Russians, will ultimately hold a majority of the Bank of Cyprus’s new voting shares. Lawyers representing clients with blocked money estimate that Russians as a group will end up with roughly 60 percent of the bank’s new shares. Cypriot media reports estimate that 53 percent of the shares will be held by foreigners, primarily Russians, either directly or through law firms representing their interests. Such an outcome, said Demetris Syllouris, a member of the Cypriot Parliament and president of the European Party, a once enthusiastic pro-Europe political group, is “exactly the opposite” of what European leaders, particularly Angela Merkel of Germany, wanted when they set out to cleanse Cyprus’s banking system in March. At that time, bailout-weary Northern European countries wanted not so much to rescue the banking sector here as to significantly shrink it, and end what they viewed as its reliance on suspect money from the former Soviet Union. A confidential report by the German foreign intelligence agency, known by its German initials as the B.N.D., painted the island as a haven for money-laundering. It is a picture that the government here has dismissed as grossly inaccurate, but one that has nonetheless helped shape perceptions of Cyprus’s banking ills and also its cure....These decisions initially caused outrage in Moscow, prompting angry protests from the Kremlin on behalf of Russians who lost money. But as the Russians’ ownership shares have swelled, the Kremlin, which in March denounced the troika’s approach as “unfair, unprofessional and dangerous,” has stopped complaining, at least in public. A spokesman for the monetary and economic affairs section of the European Commission, the union’s Brussels-based executive arm, declined to comment on the prospect of Russians gaining control of Cyprus’s principal bank. The Central Bank of Cyprus, which is overseeing efforts to salvage the Bank of Cyprus and to work out its new ownership, said it could not “speculate” about whether Russians will control the bank in future. The new shareholders, it added, will meet to appoint a new board on Sept. 9.

The bank’s former shareholders, meanwhile, have been mostly wiped out. The biggest was a Russian tycoon, Dmitry Rybolovlev, who at one point owned a nearly 10 percent stake and, if he had substantial deposits in the bank, would be among the new shareholders. A spokesman for Mr. Rybolovlev declined to comment on his current position...


SO MUCH MORE AT LINK....COULDN'T PUT CYPRUS TOGETHER AGAIN....