Skip to comments.Cyprus "Radical Rescue" Proposal Proves Greece Not Unique
Posted on 02/12/2013 3:18:51 PM PST by Kaslin
Cyprus is about to prove what anyone with common sense already knew, that Greece will not be the only country requiring haircuts on sovereign bonds.
Today the Financial Times posted news of a Radical rescue proposal for Cyprus
A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the countrys sovereign bonds, according to a confidential memorandum prepared ahead of Mondays meeting of eurozone finance ministers.
The proposal for a bail-in of investors and depositors, and drastic shrinking of the Cypriot banking sector, is one of three options put forward as alternatives to a full-scale bailout. The ministers are trying to agree a rescue plan by March, to follow the presidential elections in Cyprus later this month.
The new plan has not been endorsed by its authors in the European Commission or by individual eurozone members. The memo warns that the risks associated with this option are significant, including a renewed danger of contagion in eurozone financial markets, and premature collapse in the Cypriot banking sector.
It would reduce Cypruss outstanding debt to just 77 per cent of economic output, compared with 140 per cent in the current full bailout plan.
Labelled strictly confidential and distributed to eurozone officials last week, the memo says the radical version of the plan including a haircut of 50 per cent on sovereign bonds would shrink the Cypriot financial sector, now nearly eight times larger than the islands economy, by about one-third by 2015.
But the authors warn such drastic action could restart contagion in eurozone financial markets, and put forward two more cautious alternatives.Curious Thing About That "Full Bailout"
Notice how the existing "Full Bailout" still leaves Cyprus with a debt-to-GDP ratio of 140%. To get to an also unsustainable ratio of 77% requires a radical new plan.
Of course when that fails as well, there will be still more radical plans.
Steen Jakobsen, chief economist for Saxo Bank in Denmark ads some additional thoughts via email, as follows:
This morning hot topic has been a Financial Times article: Radical rescue proposed for Cyprus which indicates that depositors as well as investors in the country sovereign bonds stand to lose up to 2/3.
Cyprus is in need of approximately 17 bln. EUR - and how to reduce the overall burden which will reach 140 percent by 2015 without a hair-cut.- EU Finance minister meets tonight and need to secure deal before March 1st, 2013.
These are the leaked three options on the table:
This is interesting in light of present events.
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