By Euronomist on March 20, 2013

A Plan to Save Cyprus

After considering the current situation in Cyprus we have can up with the following plan. It was written by Euronomist, but Apostolides comments are seen  in brackets:

Instead of haircutting the depositors, use their funds as loans, i.e. hold them for 3-5 years until the economy starts growing again (if the natural gas investment starts earlier then we are looking at 2-3 years tops). During that time the deposits will receive interest (lower than the given market rate) which depositors will be able to use freely. Our understanding is that most of the domestic money is in the form of term deposits; having the amount sitting at the bank or utilized by the government will make no difference to ordinary citizens. In this way, those who have taken out loans on existing deposits will not be gravely affected and in addition this would allow citizens to proceed with their everyday occupations.(Apostolides: people must know that if we leave the Euro this is what will happen, and at much worse rates and conditions that what is described here. In Argentina the Corralon forced deposits into peso denominated bonds.  )

Next, depositors will receive bank shares at the rate of 1.5 share per 1 euro held by the government. (Apostolides: the real sticking point is IMF, but you have the ECB as an ally who want to put this to bed quickly) Banks should be recapitalized by the state, although the shares should be made out in the names of the depositors whose deposits have been used (ordinary shares rather than preferred since preferred is debt which does not assist too much in capital adequacy ratios). Through this, the banks' equity will be increased, meaning that the capital adequacy ratios targets will be fulfilled. The ECB will have no reason to shut the ELA, especially since the amount needed to recapitalise the banks will be much less after such a deal. As banks' share capital represents only the face value of the shares, the money given to the banks may be used two-fold:

1. Bring liquidity to the market thus boosting the economy
2. Rolling-over government debt, which will be decreased given that the deficit is expected to be less than 3% this year. (Apostolides: The deficit will now balloon to over 5%, but the difference in financing can be made up by restructuring all government debt). If the interest rate on the government debt is reduced to 1-2% (or less) and a long maturity is used, although the burden will be increased the interest payments will be significantly lower. Let us not forget that the current Russian loan has been issued with a 4,5% interest rate and it is highly unlikely that any new agreement will mean a lower rate. Lowering the interest rate by half will mean an additional reduction to the government budget.

If the government wishes, it can also give the depositors the rights to long-term bonds, with their rates dependent on the natural gas revenues.

Imposting capital constraints on transfers to foreign banks and withdrawals will be suitable as a mechanism to avoid bank runs from foreign investors. No solution can occur without imposing severe capital control regulations. In case anyone has not heard, these regulations are in fact legal in the European Union. We cannot emphasize it more: with no capital controls there is no solution for the island.

What we would propose is no cash withdrawals larger than 3,000-4,000 euros and not being able to transfer more than 5% (or 5,000 whichever is larger) of an account balance outside Cyprus unless it is payment of invoice (although the invoices should be carefully studied). Transfers between domestic banks and check issuance for deposit may take be issued for any account.

In addition, there should be a restructuring of bank loans, increasing their duration while simultaneously decreasing both the lending as well as the deposits interest rate. This will allow for lower installments over a longer time-frame which will mean that NPL's will be reduced significantly, both increasing bank profits and the capital adequacy ratios.

Although there have been some talks about leaving the euro, we are largely unsure of the consequences of a Eurozone exit (which will not be a controlled one). However, we commit to study the subject with more detail and come back with an answer.

P.S. Gas-linked bonds may be used as sweeteners only. Otherwise it would be mere speculation.

-Alexander Apostolides


  1. Interesting, however I see two issues on the above proposal. First of all, a large population depends on savings in Cyprus to withdraw money abroad (i.e. students studying abroad). This can be solved if we do not impose capital controls for accounts smaller of a maximum amount (even though I admit that this might be tricky). Most importantly, I have the feeling that capital controls should be illegal (not sure though, a lawyer should be more appropriate to comment this). I believe that with our entry to the eurozone we have adopted European legislation (which is beyond any country legislation) that ensures the freedom of capital transfers within EU (since this already happens).

    1. There is a link to the EU website where the legality of capital controls is presented. Here it is again: