Unlike the original proposal, uninsured depositors will likely lose around 40% (not 10%) at Cyprus' two largest banks.
The new (and seemingly final) Cyprus bailout agreed to Sunday night by senior Cyprus government officials, the EU and the IMF will see the complete wind-down of Laiki bank, the second largest bank in the country. The insured deposits of Laiki bank (deposits under €100,000) will remain intact and will be transferred to Cyprus' largest bank, the Bank of Cyprus.
That's all nice, but how did Cyprus come up with the €5.8 billion or so it needed to show the EU, in order to secure a €10 billion EU rescue package? That's coming (mainly) from the uninsured depositors at both Laiki and the Bank of Cyprus. While the percentages are still unclear, back-of-the-envelope calculations lead to the confiscation of roughly 40% of uninsured deposits at Laiki, and about 30% at Bank of Cyprus, to come up with the necessary amount.
This outcome -- as opposed to last week's 10% proposed levy on uninsured deposits, plus 6.75% of insured deposits -- will hit certain Cyprus-based FX brokers much harder then the original proposal. Let us explain.
As we wrote last week, those Cyprus FX brokers such as FxPro which apparently kept all client money (and much of their own) outside the country should not be affected. However those smaller FX brokers which kept both client money and much of their own money with Laiki or Bank of Cyprus -- and there are many -- will suffer, and possibly go under. Those brokers will simply wake up this morning (or whenever the banks in Cyprus actually re-open, which is still unclear as of this writing) and find that about 40% of their funds are gone.
Some Cyprus FX brokers are making statements that they will make their clients whole for any confiscations. But these statements seem worthless to us -- if a good chunk of their own money, in addition to client money, is gone, then where with this make-whole money come from? Are the shareholders of these smaller FX (and Binary) brokers going to pour fresh capital into their companies??? (We doubt it).
While most individual trading clients at Cyprus FX brokers kept less than €100,000 in their individual FX accounts, their monies were held by the FX brokers in combined segregated client accounts. These client accounts were almost always above €100,000 in size, and -- if held at Laiki or Bank of Cyprus -- will be among those to be seeing 40%+ of their money disappear.
One has to feel sorry for the Cyprus FX brokers, their clients caught in this, as well as the regular Cypriot citizen. Unlike the financial crises we've seen recently in other countries (e.g. U.S. 2008, Greece and Spain last year...) this Cyprus crisis had nothing to do with the behavior of the average Cypriot. In the U.S. the general citizenry was involved way too much in buying and mortgaging overpriced real estate. In Greece and Spain the general citizenry was happy to rely on government jobs and handouts, and to have their government borrow heavily to support an unsustainable national lifestyle. But in Cyprus, the domestic economy has been growing and has been managed fairly well -- the problem lay in a very narrow corridor of Cyprus banks which made what turned out to be very silly loans abroad.
Stay tuned to LeapRate as we follow the fallout of the Cyprus crisis and EU bailout in its effects on the FX sector. This story is far from being over....