CYPRUS SURPRISE
(Era.Murukan, May 2013)
We know you checked your mail-box on all ‘biryani special’ luncheon days, after tea. This column was not there. A swarm of emails landed at the editorial desk adorned with grumpies reminding us of the deadlines. We had to answer a spate of anxious calls –‘are you folks kicking, even if not alive’? Someone buttonholed me in the elevator and warned of dire consequences like buying a meal at the office canteen if this column does not reappear. I told him to time-box it and escaped. Tech-jargons save lives!
So, here we are with all customary apologies while remaining radiant with a glow of warmth from all the best wishes the readers’ circle for this simple column showered. Thanks folks! As the God of clichés dictated, ‘It is business as usual again; the show must go on – conditions apply’.
And April 2013 was incredible in more than one respect – the inflation showed a down trend; petrol prices dipped by Rs.2 per liter, Power Star got his foot-hold in Kollywood and ah, yes, the gold prices crashed. The jewelers at Usman Road, T.Nagar, Chennai functioned 24*7 to whet the appetite of Hallmark buyers of the yellow metal who thronged the thoroughfare with yellow cloth bags issued as compliments by sub urban provision shops. Chennai FM stations broadcast throughout the day advertisements in hush-hush tones (for what?) to visit this jeweler or his neighbor to buy gold at special prices and receive gold coins for free. In the land of freebies, everyone was whispering to everyone else, ‘Cyprus’.
So, Cyprus is behind everything – no, Power Star ascended on his own! We are talking about reserves and trade balances of a country called Cyprus. That should clear the air, right?
Cyprus, which had the theologist scholar Archbishop Makarios III ruling the country for three decades from the 50s to the 70s, fell on bad times towards the turn of this century. Cypriotes, we learn, wish April 2013 simply vanished from their calendar. It still brings bitter memories of a massive economic failure and a huge collapse of the banking system that immobilized a country known for its wealthy foreigner-friendly tax regulations, in the whole of Mediterranean.
The story unfolded this way –
Cyprus was buried neck deep in a gargantuan economic crisis, much of its own making.
What went wrong?
Well, the big Cypriot banks made a really bad investment. They lent money to Greece. When the Greek economy took a nose dive, the Cypriot banks took a bigger gamble, buying up Greek government bonds in the hopes of a bailout. Now they’re broke. The banks owe more money than they have. In fact they owe more money than the country’s Gross Domestic Product, which is their total assets, in a way.
The European Union stepped in to bail out the country but the offer was not without strings attached. The Euro financial majors lead by Germany remained determined that the island deflate a bloated financial sector that exceeds the size of the Cypriot economy by a factor of seven. The saviors reached an agreement with Cyprus early last month that went for the jugular of major banks, mainly with an emphatic request to close down the island’s second-biggest bank. If it could not be done, Cyprus would have been forced out of the single currency Euro Union, earning the dubious distinction of the first nation to be waved the red card and shown out of the Euro Financial Cup soccer arena.
According to the deal with Cyprus, savers with deposits of less than €100,000 (£85,000) would be spared but there would be heavy losses inflicted on the deposits of the wealthy.
There were signs of panic in Cyprus. Markets shuddered at the top, reacted badly and tumbled after the head of the group of Eurozone finance ministers indicated that Cyprus rescue could be a template for similar situations in other European countries, with less luck and liquidity. Cyprus is the first of five bailouts in the Eurozone till now where depositors have been hit. The lucky other four include Greece, Ireland, Portugal and Spain.
A €100 limit was imposed on ATM withdrawals in Cyprus. Savers with less than €100,000 were to be spared, with the burden falling much more heavily on the wealthy. They are to shell out a stiff levy, of their holdings. Most of them were Russian oligarchs, sipping stiff martinis and sun bathing in Miami.
Most banks, including Bank of Cyprus and Laiki, the two largest domestic banks, remained shut for 12 days while Laiki is split into ‘a good and bad bank’ based on asset base. The good that banks do lives after everything but the bad is oft interred and amalgamated with other banks (with due apologies to Shakespeare, Julius Caesar – dead – and Mark Antony).
And the levy on those wealthy oligarchs from Russia? Chill on. It is just 40% of savings over €100,000. It is called by a sophisticated banking term – ‘depositor hair cut’. In simple terms, a depositor of 100,000 euros will get back 60,000 Euros only. With the Russians being estimated to hold more than €20bn of the €68bn in Cypriot banks, most of them have undergone a clean tonsure with their losses amounting to several billions now. And to cap it, capital controls were introduced to prevent flight of money out of the country. How do you say, ‘that was a close shave’ in Russian?
Cyprus president Nicos Anastasiades in a televised address to the nation declared, “I want to assure you that this will be a very temporary measure that will gradually be relaxed”. And like all televised reality shows, it was taken with a large dose of Lay’s potato chips, a pinch of salt and mugs of lager beer.
The market grape wine is that Slovenia is probably the next country most likely to be forced into a bailout programme, but Malta and Luxembourg are also vulnerable given the size of their banking sectors relative to their economies. To think of Luxembourg, the high temple of finance as a salvation army beneficiary…. times are hard, mate, really.
And now, where does Cypurs gold come into this vaudeville?
Elementary my dear Watson. Cypriot President Nicos Anastasiades is trying to unlock 10 billion euros ($13.2 billion) of loans from the euro area and the International Monetary Fund. To do so, he must come up with a further 11 billion euros through measures including a tax on bank deposits of more than 100,000 euros at the country’s two biggest banks, the sale of assets and gold and other tax measures.
The Cypriot government plans to sell part of its gold reserves within the next months to increase liquidity and pay off expensive credit. As this came from the horse’s mouth (not a Trojan horse but a political race horse), the ground realities point to Cyprus off-loading a helluva lot of gold in the next few months.
And with the expectation of about 10 tons of Cypriot gold hitting the roof, the precious metals market went berserk. The price of gold fell to its lowest level in more than 18 months a Friday night in April amid fears that sales of the precious metal forced on Cyprus by its desperate financial plight would lead to wholesale dumping by other hard-pressed countries in the coming months.
At the end of a week dominated by the plight of the troubled Mediterranean island, gold slid below $1500 an ounce for the first time since July 2011 in anticipation that Cyprus would seek to raise €400m (£340m) by offloading a chunk of its reserves.
The price of the yellow metal fell sharp the next week onwards.
And that would have explained the huge crowd with yellow complimentary cloth bags barging into all jewelers. Those who had missed the gold rush need not pull a long face. While Cyprus’s gold sale in itself is small, heavily indebted Eurozone nations such as Italy and Portugal could also find themselves under increasing pressure to sell off their gold. Jewelers in Usman Road are having plans to offer Italian gold with a plate of hot steaming pasta or Portugese gold with spicy piri-piri chicken, it is reliably learnt.
And who is the major purchaser of gold off-loaded by these nations in distress? Who else except the Central Banks of other nations, like.. like whom? Russia – who is the world’s 7th largest gold bullion buyer and with a determination to concentrate in foreign currency reserves and gold.
From the losing Russian oligarchs emerging after a spiky ‘depositor hair cut’ in Cyprus to the winning Russian Central Bank, with a bang and bags of pure gold .. the wheel has turned a full circle.
Time box it and now tell us.. how much gold did you buy last month?
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Bharath Bank Batch
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(ok, it is ‘Watch’ .. rhymes better this way!)
What is the similarity between a stone sculpture and CRR (Cash Reserve Ratio) set by RBI?
The more you chisel out the form, the more intricate and charming will be both. As Bank Peek is not a newsletter published by Archeological Survey of India, we confine our discussions to CRR and the like.
Though the banks are requesting RBI to further chisel out CRR which currently stands at 4%, an all-time low in the past few years, the chief sculptor Mr.Subbarao (RBI Governor) has declined to do so. As banks like Oliver Twist plead, ‘I want some more liquidity’, RBI categorically says that Rs 5 trillion unutilized money is in the system that lender banks can very well access. Low hanging fruits are not sour, right?
If that be the case of CRR, what about RBI interest rate? That’s quite another Alison Lapper modern sculpture in Trafalgar Square, London.
Reserve Bank cut interest rate by 0.25% for the third time since January as part of the annual credit policy. And so, short-term lending (repo) rate is now 7.25%, lowest since May 2011. It did evoke a response, albeit cautious, from the Finance Ministry -“let us accept what has been done today”.
However, the car loan and housing loan borrowers with variable interest rate loans responded during quick newspaper surveys, shaking their heads in melancholy as if participating in their mother-in-law’s birthday bash – ‘does our acceptance matter’? True, we do want to save on interest for our loans so that we can spend more on our weekend outings.
And the market too did not respond positive to the rate cut and no-change CRR. The BSE Sensex dropped by half a per cent immediately after the announcement.
But RBI is undaunted and is determined to deploy “all instruments at command” to bring inflation down to 5% by March 2014. The RBI Governor while unveiling the annual monetary policy pegged the growth rate for the current fiscal at a conservative level of 5.7%. The Governor did sound confident when he observed, “economic activity will pick-up likely in the second half of the year.” ‘Come September’ has become the favorite theme of all bankers here. (Do you remember ‘Come September’, the 1961 flick starring Rock Hudson and Gina Lollobrigida? How old are you?)
Bankers of before, at and after Gina Lollobrigida era however somewhat reluctantly accept RBI’s view, “monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping public investment”.
Improving governance is something certainly they can look into. And stepping public investment? No risk at all, low hanging fruits these are. True the returns too are low and not that sweet, but they certainly are not the central bank’s grapes of wrath.
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FSA is dead – long live PRA
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A week before Lady Thatcher, the former Tory Prime Minister of the United Kingdom left for her heavenly abode, FSA passed away, though not un-honoured and un-sung.
The UK’s mighty banking regulator since the turn of the century, the Financial Services Authority (FSA), has been abolished and replaced with two successor organisations. The changes mark the end of the system set up by the previous Labour government headed by Tony Blair mostly. James Cameron’s Tory Government currently in power assures that FSA did not fade into oblivion since it was a Labour invention, though.
The FSA was set up 1997 as part of the so-called tripartite structure whereby banks, insurers, building societies and other such firms were regulated by the FSA, the Treasury and the Bank of England. Gordon Brown, the then-chancellor, created the FSA following criticism that the Bank of England had failed to sufficiently regulate the UK’s financial system.
From 1 April, the Prudential Regulation Authority (PRA) ensures the stability of financial services firms and be part of the Bank of England. The Financial Conduct Authority (FCA) is now the City’s behavioural watchdog. And, as we are well aware, a watchdog is not supposed to listen to ‘ his master’s voice’.
The Bank of England has also gained direct supervision for the whole of the banking system through its powerful Financial Policy Committee (FPC), which can instruct the two new regulators. With two you can tango and can as well have a third one to call the tune.
Chancellor George Osborne announced the changes back in 2010, aiming to make it clear who is in charge over supervising the financial services sector and avoid a recurrence of failing banks and enormous state-backed bailouts. And the change would not have come at a more apt moment, as some doomsday pundits have predicted through ‘The Telegraph’s screaming headlines that there will shortly be a deluge of failure of around 1.3 million ‘interest only mortgage’ housing loans in UK. But Bank of England keeps its cool as always. If you are waiting for a formal announcement of ‘Business as usual’ or ‘let us cross the bridge when we ..’, you are in for a disappointment.
Why BoE? Because, the regulatory changes empower Bank of England which incidentally gains a new governor, Mark Carney, in July to gain much more control over the functioning of the financial system. And these are the biggest changes to the central bank since it was given its independence in 1997.
The PRA is headed by the central bank’s deputy governor Andrew Bailey, and will regulate around 1,700 financial firms. The FCA is headed by Martin Wheatley, who worked at the FSA and was responsible for the review into the Libor rate-rigging scandal at banks. True they already have their hands full but a few more issues can still be tucked into.