Cyprus Looks to Reject Deal

The latest out of Cyprus is that the parliament seems certain to reject the bailout deal. There’s now talk of a Plan B which would have the same deposit tax but exempt folks with less than $20,000 in the bank. The problem with that is that would cause Cyprus to come up short on the amount of cash they need. Banks are still closed on the island and I’m afraid to see what will happen on Thursday morning when banks eventually reopen.

There is an interesting solution to this mess. Last night, Felix Salmon highlighted a remarkably simple three-step plan by Lee Bucheit and C. Mitu Gulati:

1. All insured depositors to be protected. Indeed, the public announcement of the bailout package would liberally sprinkle adjectives such as “sacred” and “inviolable” in front of the words “insured deposits” wherever they appear.

2. Holders of deposits in excess of the insured €100,000 minimum would receive, at par, interest-bearing bank certificates of deposit for those excess amounts. Depositors would be given the option of taking CDs of, say, five or ten years’ duration, with differing interest rates designed to encourage a longer stretch out. Also, to encourage a takeup of the longer dated CDs, the Government could offer a limited recourse guarantee on the ten-year CDs benefiting from a pledge of a portion of the Cypriot gas revenues that should come on line when those CDs mature. The CDs would be freely tradable and liquid in the hands of the holders.

3. The maturity dates of all sovereign bonds would be extended by a fixed number of years, let’s say five years. By our reckoning, this would reduce the total amount of the required official sector bailout funding during a three-year program period by about €6.6 billion.

This seems much easier. I don’t think the authorities understood the backlash of taxing bank accounts. That’s something that seems so opposed to the rule of law. In the West, we don’t just seize assets because we want to.

With the plan above, nobody has their wealth confiscated. There’s still pain to be had but folks who are in for the long haul won’t feel it as much. The CDs can trade but they’ll be going for a deep discount, so some savers would be punished.

Posted by on March 19th, 2013 at 10:52 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.