Νέες φωτιές ανάβει απόρρητο έγγραφο της ΕΕ για το κούρεμα-ΤΟ ΗΞΕΡΑΝ ΠΡΙΝ ΤΙΣ ΕΚΛΟΓΕΣ

Τρία σενάρια-επιλογές για την εξυγίανση της κυπριακής οικονομίας, εμπεριέχονται σε απόρρητο έγγραφο που απέστειλε η Ευρωπαϊκή Επιτροπή προς το Προεδρικό, τον Φεβρουάριο, λίγο πριν τις Προεδρικές Εκλογές. Σημειώνεται ότι και στις τρεις επιλογές περιέχεται το κούρεμα καταθέσεων.

Το Sigmalive εξασφάλισε το έγγραφο, το οποίο δημοσιεύει σήμερα και η εφημερίδα Πολίτης με την αποκάλυψη ότι βρισκόταν στο Προεδρικό από τον Φεβρουάριο, πριν τις Εκλογές.

Το περιεχόμενο του εν λόγω εγγράφου είχε αποκαλυφθεί από τους Financial Times ήδη από τις 10 Φεβρουαρίου του 2013. Οι τρεις επιλογές που δίδει η ΕΕ, σύμφωνα με το έγγραφο:
Απορρίφθηκε: Πλήρες κούρεμα καταθέσεων και διασφάλιση του ποσοστού των 16,7 δις, όσες και οι ανάγκες της Κύπρου.
Απορρίφθηκε: Μερικό κούρεμα καταθέσεων και μερικό κούρεμα του κρατικού χρέους. Διαπιστώθηκε ότι το μεγαλύτερο μέρος του κρατικού χρέους το κατείχαν οι τράπεζες και τα ΣΠΙ και ως εκ τούτου, εγκαταλείφθηκε ως ιδέα διότι, αν εφαρμοζόταν θα δημιουργούνταν περισσότερες ανάγκες ανακεφαλαιοποίησης και θα τίθετο ζήτημα νέου κουρέματος.
Εφαρμόστηκε: Μερικό κούρεμα καταθέσεων και πακέτο φορολογικών μέτρων, η πλειοψηφία των οποίων είχε κλειδώσει με το μνημόνιο του Νοεμβρίου.

Aυτούσιο το έγγραφο

Strictly confidential Commission Paper on Cyprus
Parameters for a programme for Cyprus

I. Introduction

The financial and economic situation in Cyprus is fragile. Ideally an agreement on financial assistance should be reached shortly after the Presidential elections in Cyprus. To ensure an expedient process after the election it is important that international lenders reach an agreement on the key parameters for a future Programme as soon as possible.  This note outlines the key policy choices.

II. Problem description

The due diligence exercise carried out by Pimco has confirmed that the Cypriote banks have large capital needs (around 10 billion, or 60 per cent of GDP). If the costs for recapitalization are fully born by the State debt will rise to around 145 in 2014, raising concerns about debt sustainability.

In relative terms the official financing envelope would be very large (around 17 billion, close to 100% of GDP).  In some member states political support for a Programme is low because of allegations over money laundry and (unfair) tax competition. In the medium to long run, the Cypriot economy may benefit from recent gas finds. At present the benefit of this cannot be quantified, but represents upside to debt sustainability.

The draft MOU envisages fiscal consolidation measures of 7% of GDP in the period up to 2016 and a nearly full bail in of holders of junior debt bank debt (1,4 billion, 8% of gdp). Even though implementation of the MOU is believed to restore debt sustainability in the long run, doubts have been expressed about the ability of Cyprus to access market finance towards the end of the programme [it is important to make it explicit when CY has to re-enter the market and this is not at the end of the programme].

III. Key policy choices

Without any further measures the debt to GDP at the end of the programme (2015) will be around 140%, to decline further to 125% of GDP in 2020.  The December Euro group has indicated that the debt to GDP ratio needs to be significantly improved to ensure debt sustainability.

A first policy question is what should be the appropriate debt to GDP level.  It has been suggested by some that the target level for debt to GDP should be no more than 100% of GDP by the end of the programme period (2015). Others have argued that a debt level of 100% in 2020 should be sufficient.

A second policy question relates to the desired speed of the downsizing of the banking sector. Should the full adjustment take place within in the Programme period or would a longer period of deleveraging be acceptable?

A third policy question relates to the level of risk tolerance. The different approaches to resolution come with different risks for Cyprus and the broader Euro area.

Two broad options have been explored. The key difference between the two options is the speed of the deleveraging and the initial allocation of losses. IV. Options

A. Full bail in: fast deleveraging

In the full bail in scenario junior debt holders and uninsured depositors of the two biggest banks are fully bailed in. As a result of this the public support for banks can be reduced to 1,5 billion. Output losses however will be considerably higher than under the MOU scenario […% of additional output drop].  As a result the net improvement of the debt will be less. Debt to GDP at the end of the Programme (2015) is estimated at 108 per cent, and 100% in 2020. The financial sector will shrink very fast, significantly reducing the contingent liabilities of the state. Combining this option with a restructuring of the sovereign debt, would reduce the debt ratio to 77% in 2015.

In this scenario the burden is shared between the Cypriote taxpayers, depositors and holders of sovereign debt. To the extent that depositors and creditors are foreigners the costs are partially externalized. This effect is most pronounced in the bail in plus psi variant and much less important in the simple bail in variant. In the latter case the initial benefits of the burden sharing are to a large extend eroded by additional output and wealth losses.

The risks associated with this option are significant. The bail in option is complex and requires a high degree of coordination between many players domestically and cross-border, with very different interests. Risks of leaks are significant, which could trigger a premature collapse. Uninsured depositors will incur steep losses, in particular if combined with restructuring of sovereign debt. The short-term impact on output can be expected to be significant, implying a deeper recession during the Programme period. The longer-term impact on growth will depend on the speed with which financial and economic stability can be re-established and how quickly Cyprus would overcome the rapid downsizing to its financial services industry and related business services and regain sustainability growth.

The two banks have systemically important operations in Greece. To avoid spill overs Greece should be ring fenced. This would require subsidiarization of the branches of the Cypriote banks. This is complex and comes at a cost of minimum additional cost of 1 billionAS and it would require a transfer of ELA. It may not be possible to reach agreement on who will bear these costs (Greece or Cyprus). Based on recent market commentary Ccontagion beyond Greece cannot be excluded is likely despite limited exposure on Cyprus and would work via doubts about the safety of senior debt or deposits, if investors realise that these instruments are candidates for bail-in.  Especially in the periphery of the euro area, the recently gained confidence, as reflected in a decline in interest rates, may would evaporate.

A sine qua non for the implementation of the bail in option is a very clear commitment from the ECB that it stands ready to provide the necessary unlimited liquidity to Cypriote banks once they reopen. There is a significant risk that the bail in option will result in the imposition of deposit withdrawl restrictions and capital controls by Cyprus. This could have a very negative impact on the financing conditions for other peripheral countries. B. Partial bail in: moderate deleveraging

In the partial bail in scenario junior debt holders will be fully bailed in. Depositors will not be bailed in, but will pay additional taxes.  The following measures are added to the draft to reduce the debt faster compared to the baseline:

1. Privatisation programme [list of major assets would be useful here]:  1,2 billion including signing fees in 2015 and 1,5 billion cumulative in 2020 (8%  of GDP in 2020);

2. Increase statutory rate of corporate income tax to 12,5%: 135 million pa (6% in 2020)

3. Increase withholding tax on capital income to 28%: up to 160 mn pa (7% in 2020)

4. Extend maturities on the Russian loan (repayment in 5 instalments from 2021 to avoid a hump resulting from the amortisation of Cypriot bonds in 2020) and lower interest to 2% from 4.5%: started: 62,5 million pa (4% in 2020, tbc)

In this scenario the debt to GDP ratio would be reduced to around 130% in 2015 and 100% in 2020. There would be significant deleveraging of the banking sector, but at a slower pace than in the bail in scenario. Over a period of 10 years the banking sector would be gradually downsized from about 750% of GDP in 2012 to around half that level which is the euro area average. Subsidiarization of the branches in Greece would also in this scenario be sought to reduce the tail risks from Greece (sell-off of Greek operations would reduce banking sector assets by around [100%] of Cypriot GDP).

In this scenario there is some burden sharing with creditors (bailing in of junior debt) and externalisation of costs, notably via the reduction on the interest on the Russian loan and the increase in the corporate income tax. Compared to the bail in option the initial allocation of the burden is more biased towards the Cypriote tax payer.  The loss of income and financial wealth however is significantly less in this scenario than in the bail in scenario, which would limit the adverse impact on growth during the Programme period and beyond.

The contagion and implementation risks associated with the tax measures are low (both CIT and withholding tax already exists), even if a steep increase in the withholding tax may have some impact on savings and thereby slightly erode the tax base.  The extension of the maturity and the reduction of interest rates on the Russian loan require high level negotiations. Considering the alternatives – and the signal that Russia is willing to help – this should be achievable. V. A third way?AS
All options presented have important drawbacks. The full bail in options come with very significant operational and financial risks, while the partial bail in option puts a significant additional – fiscal burden on the Cypriote economy.

A financially and economically sounder option would be to allow Cyprus to sell the shares it will acquire in the banks to the ESM, when the direct recap instrument becomes available. The transaction price would be set so as to ensure that the incurred, expected and at least part of the unexpected losses would be allocated to the junior bondholders first and to Cyprus second (note: this would mean that the ESM would pay roughly 3,5 billion for the 10 billion stake of the government in the Cypriote banks)

To this effect one could add the following sentence to the MOU:  Once direct recapitalisation by the ESM becomes available Cyprus may apply for direct capital support from the ESM. This would allow the Troika to assume that before the end of the programme (2015), the debt of Cyprus would be reduced by 3,5 billion (- 20% of GDP).

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