Dijsselbloem's Deal with Anastasiades

A deal is reported to have been struck between the Eurogroup, led by Jeroen Dijsselbloem of the Netherlands, and Cyprus President Nicos Anastasiades. Here's how it breaks down, according to a cross post by Cyprus.com this morning on naked capitalism:

1. Laiki is resolved via good bank / bad bank, with uninsured depositors (4.2B) most likely losing everything (along with shareholders and bond holders). 
2. Bank of Cyprus will have a bail-in of uninsured depositors, with them losing between 30-40% most likely. Shareholders and bond holders will be wiped out. 
3. Troika will lend 10B to the Cyprus government, solely for fiscal purposes and based on a memorandum to be determined. None of the troika funds will be used for the bank bailout.
4. Insured depositors will be protected (sub 100K euros). 
5. The 9B of ELA [Emergency Liquidity Assistance] at Laiki will be transferred to Bank of Cyprus. This is the single most bizarre and unfair part of the agreement. It has not been discussed why the Bank of Cyprus creditors should be paying for the ELA of Laiki and no reporter pressed with a follow-up question. 
6. Note that for the most part the bailout is NOT hitting the Russian depositors that hard but will hit local Cyprus depositors hard. Russian depositors were not largely at Bank of Cyprus.

Gone is the specific demand that Cyprus raise 5.8 billion euros since none of the 10 billion euros the Troika is lending is going to a bank bailout. There is some question whether the deal needs to be approved by Cyprus' Parliament. Dijsselbloem is quoted in today's New York Times saying that it can implemented immediately. But naked capitalism raises the possibility that this is not the case:

I have been operating on the assumption ... that the deal negotiated in the early AM in Brussels was set because it relied on the bailout provisions already passed by the Cypriot parliament and did not require additional approvals. And of course, one of the biggest tricks in deal land is to act like something is done even if the remaining “technical” details aren’t technical but are actually substantive and could be used to stymie consummation of the transaction. 

However, Richard Smith has found a tweet that suggests otherwise:

If this source is right, it’s still possible for the Parliament to reject the deal. Consistent with that being possible, I noticed how the recent rounds of messaging about the pact considerably downplayed how bad the hits to Cypriot borrower would be (as in it seemed to be more in sales mode than I would have expected). The early estimates (not official, just based on a look at the balance sheet and knowledge of what was on it) was that the Laiki depositors >€100,000 would be very lucky to get anything back, and the Bank of Cyprus losses for the over €100,000 depositors had been 22% to 25%, and that may not include the ELA transfer, which would presumably increase the losses considerably. 

Admittedly, at this point, the inertial course would be to approve the agreement. However, the influential Archbishop of Cyprus advocated leaving the Eurozone over the weekend. That plus a show of outrage from the population could undo what seems to be a settled deal. And that would have more immediate, unexpected ramifications.

Krugman in his column this morning welcomes the imposition of capital controls in Cyprus and provides a little historical perspective:

I am, of course, not the first person to notice the correlation between the freeing up of global capital and the proliferation of financial crises; Harvard’s Dani Rodrik began banging this drum back in the 1990s. Until recently, however, it was possible to argue that the crisis problem was restricted to poorer nations, that wealthy economies were somehow immune to being whipsawed by love-’em-and-leave-’em global investors. That was a comforting thought — but Europe’s travails demonstrate that it was wishful thinking. 

And it’s not just Europe. In the last decade America, too, experienced a huge housing bubble fed by foreign money, followed by a nasty hangover after the bubble burst. The damage was mitigated by the fact that we borrowed in our own currency, but it’s still our worst crisis since the 1930s. 

Now what? I don’t expect to see a wholesale, sudden rejection of the idea that money should be free to go wherever it wants, whenever it wants. There may well, however, be a process of erosion, as governments intervene to limit both the pace at which money comes in and the rate at which it goes out. Global capitalism is, arguably, on track to become substantially less global. 

And that’s O.K. Right now, the bad old days when it wasn’t that easy to move lots of money across borders are looking pretty good.

Predictions are that Cyprus' economy, 45% of which is in financial services, will shrink 20% to 30% in the next two years.