Why Cyprus Losing its Tax Haven Status Will Surprise American Banks

Posted on March 25, 2013. Filed under: Economy, European Crisis, Financial Crisis | Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |

Madeleine Albright, Edgar Perez and Condoleezza Rice at CME Group's Global Financial Leadership Conference 2012

Madeleine Albright, Edgar Perez and Condoleezza Rice @CMEGroup’s GFLC12

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?

  1. 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.
  2. Laiki would be split into a good bank and a bad bank. The bad bank would be run down over time.
  3. 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.
  4. The Governing Council of the ECB would provide liquidity to the BoC in line with applicable rules.
  5. BoC would be recapitalized through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders.
  6. The conversion would be such that a capital ratio of 9 percent is secured by the end of the program.
  7. All insured depositors in all banks would be fully protected in accordance with the relevant EU legislation.
  8. 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.

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For Edgar Perez, Author, The Speed Traders, Increased Volumes and Volatility to Feed High-Frequency Trading on Monday

Posted on August 6, 2011. Filed under: Economy, Exchanges, Financial Crisis, Fixed Income, Securities | Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |

For Edgar Perez, Author, The Speed Traders, S&P Debt Downgrade Wake-Up Call to Get Serious about U.S. EconomyMr. 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), wrote on Modern Finance Report (http://www.modernfinancereport.com) that a short-term stock plunge (increase of volume) and a spike in volatility on Monday are reasonably expected given S&P’s downgrade of the U.S. debt rating; the U.S. stock market was coming off its worst week since the financial crisis. “So we have here two of the main requirements for high-frequency trading, volume and volatility. Therefore, it will be reasonable to expect Monday to be a busy day for speed traders, as they provide the liquidity long-term investors will need to survive the day.”
Mr. Perez indicated that he would not be inclined to kill the messenger and instead see S&P’s decision in a positive light as it should serve as an effective wake-up call to get Washington’s warring players to the negotiating table again. He gave the example of S&P’s past decision to put the UK’s AAA-rating on negative outlook in May 2009, which fueled a debate on the need for significant fiscal tightening, and tough decisions taken by the new coalition government, which were eventually rewarded by S&P with the UK’s outlook being revised back up to stable in October last year.

Mr. Perez wrote: “We cannot deny the significant psychological impact of S&P’s decision on the markets and the view of foreign governments and investors of the U.S. economy. However, I expect Monday’ stock plunge to be a short-term event that will lose steam quickly. In fact, investors can be tempted to use it as reason to snatch value plays, as there would have not been a fundamental change from where we were last Friday. At the end of the day, S&P’s main theme, that U.S. finances are in bad shape, is not news to investors and traders; for instance, Pimco, the world’s largest bond fund, had stepped away from US government debt back in March; in addition, savvy money managers had already positioned themselves for a potential rating downgrade.”

For Edgar Perez, Author, The Speed Traders, S&P Debt Downgrade Wake-Up Call to Get Serious about U.S. EconomyFinally, he summarized: “I agree with experts who sustain that the downgrade will not lead to sharp rises of lending rates to the corporate sector or households in the U.S., as Fitch and Moody’s still maintain their top rating for U.S. debt. Also, a sudden sell off of U.S. Treasury instruments looks unlikely, as there are still not many safe assets to replace them. Once the dust settles, attention will turn back to the economic fundamentals. Disregarding the S&P downgrade comes with high risk for the U.S. economy, particularly if Washington prioritizes electoral concerns over the long-term health of this great nation, the United States of America.”

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