Cyprus is a small island in the Mediterranean Sea, located East of Greece and South of Turkey. Cyprus has always been a popular tourist destination receiving two million visitors who come to the beautiful white sand beaches to soak in the Mediterranean sun. Until a few weeks ago, Cyprus was a developed country well sought after as an offshore tax haven. As a member of the European Union, Cyprus had strict laws in place to protect the offshore financial sector. Cyprus could have been considered a low-tax haven since the country had a low tax regime in place for offshore companies and resident companies, paying just 10 percent, the lowest in the euro zone, below Ireland’s 12.5 percent and well under the 29.5 percent rate in Germany and 33.3 percent in France.
Fast forward to this Monday morning, and it was announced that the Eurogroup just reached an agreement with the Cypriot authorities on the key elements necessary for a macroeconomic adjustment program. The agreement was supported by all euro area member states (it was swiftly endorsed by euro zone finance ministers) as well as by the troika, the International Monetary Fund, European Central Bank and European Commission.
The program would address the exceptional challenges that Cyprus was facing and attempt to restore the viability of its financial sector, with the view of restoring sustainable growth and sound public finances over the coming years. How could they do that?
- Laiki (the second largest bank, also known as Cyprus Popular Bank, with a history that spanned beyond 110 years) is resolved immediately, with full contribution of equity shareholders, bond holders and uninsured depositors, based on a decision by the Central Bank of Cyprus.
- Laiki would be split into a good bank and a bad bank. The bad bank would be run down over time.
- The good bank would be folded into Bank of Cyprus (BoC), as one of its branches in Limassol experienced an explosion produced by a home-made bomb. It would take 9bn Euros of the Emergency Liquidity Assistance (ELA), the support given by central banks in exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets. Only uninsured deposits in BoC would remain frozen until recapitalization has been effected.
- The Governing Council of the ECB would provide liquidity to the BoC in line with applicable rules.
- BoC would be recapitalized through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders.
- The conversion would be such that a capital ratio of 9 percent is secured by the end of the program.
- All insured depositors in all banks would be fully protected in accordance with the relevant EU legislation.
- The program money (up to 10bn Euros) would not be used to recapitalize Laiki or Bank of Cyprus.
It was expected that these measures would form the basis for restoring the viability of the financial sector. In particular, they safeguard all deposits below 100.000 Euros in accordance with EU principles, which were initially at risk based on a prior proposal. The program stressed that there would be an appropriate downsizing of the financial sector (Cypriot banks had assets equal to 750 percent of the country’s gross domestic product), with the domestic banking sector reaching the EU average by 2018 (less than half of the current ratio), while encouraging Cypriot authorities to step up efforts in the areas of fiscal consolidation, structural reforms and privatization, in addition to increasing the withholding tax on capital income and of the statutory corporate income tax rate.
What is the message that the incidents of the last week tell depositors around the world? Move your deposits out of Greece, Italy and Spain; think about outside Europe. While in the case of Cyprus a significant component came from Russian companies and individuals (an estimated $31 billion, according to Moody’s Investors Service), it is clear that the attitude of the European authorities is now to consider public deposits as the new ATM for governments, at least the uninsured deposits of 100.000 Euros or more . No matter what the authorities say to coat the pill (black money might have been present, savers have enjoyed years of high interest rates, etc.), this is a clear message that will reverberate throughout the continent: deposits are not safe anymore. The strict enforcement of the rule of law is gone, and with that the tax haven status that Cyprus worked so hard to build; Cyprus bet its future on it and lost.
Where deposits will go? America. Why? Says FDIC spokesperson David Barr: “During the current economic crisis, consumers have seen firsthand how the FDIC protects their money by swiftly making deposits available when a bank is closed. In the FDIC’s 80-year history, not a single depositor has ever lost a penny of insured money as a result of a bank failure. Our proven track record has helped prevent bank runs during some very difficult economic times.” It doesn’t take a rocket scientist to understand that deposits will be coming to America shores to earn almost zero, courtesy of Fed Chairman Bernanke; depositors worldwide now know that earning zero is definitely better than experiencing a 40 percent haircut, too bad it is too late for Cypriot (and Russian) depositors.Read Full Post | Make a Comment ( None so far )
Real Time HFT Regulation Imperative for Edgar Perez at CME Group’s Global Financial Leadership Conference in Naples Beach, FL
In an area of finance predicated on speed, regulation must be as well, said Edgar Perez, author of The Speed Traders, An Insider’s Look at the New High-Frequency Trading Phenomenon That is Transforming the Investing World (http://www.TheSpeedTraders.com), at CME Group’s Global Financial Leadership Conference (GFLC), Nov. 12-14, 2012, at the Ritz-Carlton Beach Resort in Naples, Fla. The GFLC is an exclusive event that brings together decision-makers from the world’s leading financial institutions to discuss emerging geopolitical trends, debate critical economic issues and provide perspectives on future developments in the financial marketplace.
At panel Evolving Capital Market Dynamics: Volatility, Liquidity and High Frequency Trading, moderated by Michael Mackenzie, U.S. Markets Editor, Financial Times, Perez was joined by Daniel Coleman, Chief Executive Officer, GETCO, Jeff Jennings, Global Head of Listed Derivatives, Credit Suisse, and Richard Prager, Global Head of Trading and Capital Markets, BlackRock. Perez advocated for real-time information that would allow regulators to see everything that is occurring in the markets, no matter how quickly the order information is being posted and transactions are occurring. This would require significant commitments to invest in both human capital and information technology, but the investment is worthwhile: it is vital for regulators to level the playing field of high-frequency trading, concluded Perez.
Keynote speakers for this year’s conference include Sir Richard Branson, Founder, Virgin Group, and Condoleezza Rice, U.S. Secretary of State (2005-2009). Additional featured speakers include Madeleine Albright, former U.S. Secretary of State; James Carville, Political Strategist; Richard Kauffman, Senior Advisor to the U.S. Secretary of Energy; Ted Koppel, award-winning journalist; John Lipsky, First Deputy Managing Director, IMF (2006-2011); Karl Rove, former U.S. Deputy Chief of Staff to President George W. Bush; and Jimmy Wales, Founder, Wikipedia, and 2012 Fred Arditti Innovation Award Recipient.Read Full Post | Make a Comment ( None so far )
Edgar Perez, author of The Speed Traders, An Insider’s Look at the New High-Frequency Trading Phenomenon That is Transforming the Investing World, will join global thought leaders at CME Group’s Global Financial Leadership Conference (GFLC), Nov. 12-14, 2012, at the Ritz-Carlton Beach Resort in Naples, Fla. The GFLC is an exclusive event that brings together decision-makers from the world’s leading financial institutions to discuss emerging geopolitical trends, debate critical economic issues and provide perspectives on future developments in the financial marketplace.
Keynote speakers for this year’s conference include Sir Richard Branson, Founder, Virgin Group, and Condoleezza Rice, U.S. Secretary of State (2005-2009). Additional featured speakers include Madeleine Albright, former U.S. Secretary of State; James Carville, Political Strategist; Richard Kauffman, Senior Advisor to the U.S. Secretary of Energy; Ted Koppel, award-winning journalist; John Lipsky. First Deputy Managing Director, IMF (2006-2011); Karl Rove, former U.S. Deputy Chief of Staff to President George W. Bush; and Jimmy Wales, Founder, Wikipedia.
Previous GFLC events have hosted opinion leaders and luminaries such as President Bill Clinton, 42nd President of the United States and founder of The William J. Clinton Foundation; President George W. Bush, 43rd President of the United States of America and Founder of the George W. Bush Foundation; David Gergen, CNN senior political analyst; and Katie Couric, Award-Winning Journalist and Author. Other featured speakers include Arianna Huffington, President and Editor-in-Chief of Huffington Post Media Group; Robert Merton, Nobel Prize Winning Economist and Professor of Economics, MIT; Myron Scholes, Nobel Prize Winning Economist and Chairman, Platinum Grove Asset Management; Paul Tudor Jones, Founder of Tudor Investment Corporation; Michael Lewis, best-selling author of Liar’s Poker, Moneyball and The Big Short; Robert Rubin, former U.S. Treasury Secretary; and Daniel Yergin, Pulitzer prize-winning author and authority on international politics, economics and energy. To access previous GFLC video, photo and press highlights, as well as 2012 conference information, visit the conference website at http://www.gflc.com.Read Full Post | Make a Comment ( None so far )