Have the Russians already pulled their money out of Cyprus?

My article last night about the Cyprus ‘bailout’ turns out to have been a little premature – because all the Russian cash (up to or possibly even exceeding twenty billion Euros, according to some estimates) in Cypriot banks may not be there any more!  Reuters reports:

No one knows exactly how much money has left Cyprus’ banks, or where it has gone. The two banks at the centre of the crisis – Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus – have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia’s Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks’ largest depositors.

. . .

By Sunday, one participant in the negotiations said, there was almost no capital left in Laiki, a bank whose market value peaked at 8.1 billion euros in November 2007. Laiki’s former vice chairman Pavlou disagreed, estimating there had been 2.5 billion euros in foreign deposits alone.

. . .

ECB officials contacted Latvia, another EU country that has received large Russian deposits, to warn authorities against taking in Russian money fleeing Cyprus, two sources familiar with the contacts said.

“It was made clear to our Latvian friends that if they want to join the euro, they should not provide a haven for Russian money exiting Cyprus,” a euro zone central banker said.

There’s more at the link.

So all that lovely Russian ‘mobster money’ that Cyprus was hoping to steal confiscate use to reduce its financial sector’s debt burden, may well be gone already.  So much for that option!  I note that Laiki’s former chairman was careful to say that there ‘had been’ up to 2.5 billion Euros in foreign deposits.  He didn’t say they were still there!

This, of course, calls into question whether Cyprus’ plans to rescue its banking sector can still work.  If those Russian deposits have vanished into thin air, it may have to levy far more than planned on other large depositors – perhaps appropriating the majority of their funds.  That’s going to cause another backlash, one that may cause far more harm to the island nation than its politicians can presently foresee.  Alternatively, if there’s not enough ‘foreign money’ left to bail out the banks, where will Cyprus get it?  The ECB’s already made it clear that unless Cyprus comes up with its own contribution to the rescue deal, it won’t make other funds available;  so Cyprus has to find it from somewhere.  If it can’t, it faces national bankruptcy.  What does it mean for the rest of the Eurozone if one of its member nations goes under?  That’s unclear right now, but it was never addressed when the Euro was established, because it was thought to be impossible.  What if it’s not impossible?  Will Cyprus be the straw that breaks the camel’s Euro’s back?

That possibility is by no means out of the question, particularly given comments made yesterday by Dutch Finance Minister Jeroen Dijsselbloem.  He went so far as to publicly admit that something similar to Cyprus could happen elsewhere in the Eurozone.

“If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?’. If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders,” he said.

. . .

The [Cyprus] agreement is what is known as a “bail-in“, with shareholders and bondholders in banks forced to bear the costs of the restructuring first, followed by uninsured depositors. Under EU rules, deposits up to 100,000 euros are guaranteed.

The approach marks a radical departure for euro zone policy after three years of crisis in which taxpayers across the region have effectively been on the hook for resolving problem banks and indebted governments via multiple rescue programmes.

That process, with governments and taxpayers bearing the costs and providing the back stop, had to stop, Dijsselbloem said.

. . .

“If we want to have a healthy, sound financial sector, the only way is to say, ‘Look, there where you take on the risks, you must deal with them, and if you can’t deal with them, then you shouldn’t have taken them on,'” he said.

“The consequences may be that it’s the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take.”

. . .

“If we have even more instruments in terms of bail-in and how far we can go on bail-in, the need for direct recap will become smaller and smaller.

. . .

“Now we’re going down the bail-in track and I’m pretty confident that the markets will see this as a sensible, very concentrated and direct approach instead of a more general approach,” he said.

“It will force all financial institutions, as well as investors, to think about the risks they are taking on because they will now have to realise that it may also hurt them. The risks might come towards them.”

Again, more at the link.  Bold underlined text is my emphasis.

Now that’s going to make Europeans with large bank accounts feel happy . . . to hear the Finance Minister of Holland tell them that their money might also be confiscated, without so much as a ‘by-your-leave’, to bail out a failing bank or banking system.  Under the circumstances, would you leave your money in the bank, facing that risk?  I wouldn’t!  I suspect Mr. Dijsselbloem has just made bank runs in the less stable Eurozone economies that much more likely.

Keep an eye on this one, folks.  The fat lady’s nowhere near singing yet.

Peter