http://globaleconomicanalysis.blogspot.com/2013/02/cyprus-radical-rescue-proposal-proves.html

Monday, February 11, 2013 12:48 PM

Cyprus "Radical Rescue" Proposal Proves Greece Not Unique; Sovereign Haircuts Detailed in "Secret" EU Plans; Russian Connection

Cyprus is about to prove what anyone with common sense already knew, that Greece will not be the only country requiring haircuts on sovereign bonds.

Today the Financial Times posted news of a Radical rescue proposal for Cyprus

A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the country’s sovereign bonds, according to a confidential memorandum prepared ahead of Monday’s meeting of eurozone finance ministers.

The proposal for a “bail-in” of investors and depositors, and drastic shrinking of the Cypriot banking sector, is one of three options put forward as alternatives to a full-scale bailout. The ministers are trying to agree a rescue plan by March, to follow the presidential elections in Cyprus later this month.

The new plan has not been endorsed by its authors in the European Commission or by individual eurozone members. The memo warns that “the risks associated with this option are significant”, including a renewed danger of contagion in eurozone financial markets, and premature collapse in the Cypriot banking sector.

It would reduce Cyprus’s outstanding debt to just 77 per cent of economic output, compared with 140 per cent in the current full bailout plan.

Labelled “strictly confidential” and distributed to eurozone officials last week, the memo says the radical version of the plan – including a “haircut” of 50 per cent on sovereign bonds – would shrink the Cypriot financial sector, now nearly eight times larger than the island’s economy, by about one-third by 2015.

But the authors warn such drastic action could restart contagion in eurozone financial markets, and put forward two more cautious alternatives.

Curious Thing About That "Full Bailout"

Notice how the existing "Full Bailout" still leaves Cyprus with a debt-to-GDP ratio of 140%. To get to an also unsustainable ratio of 77% requires a radical new plan.

Of course when that fails as well, there will be still more radical plans.

Russian Connection

Steen Jakobsen, chief economist for Saxo Bank in Denmark ads some additional thoughts via email, as follows:

This morning hot topic has been a Financial Times article: Radical rescue proposed for Cyprus which indicates that depositors as well as investors in the country sovereign bonds stand to lose up to 2/3.
Cyprus is in need of approximately 17 bln. EUR - and how to reduce the overall burden which will reach 140 percent by 2015 without a hair-cut.- EU Finance minister meets tonight and need to secure deal before March 1st, 2013.

These are the leaked three options on the table:

Bail-in (the radical version) - Reducing outstanding debt to 75-ish percent via hair-cut which will hit foreign depositors and bond holders. This will hard on the big investor Russia.
Bail-in (Light version) - Only junior debt holders will be hurt, not bank depositors - this would however prolong the reduction of the banking sector by ten years - the suggestion will include increase corporate tax from 10.0% to 12.5% and withholding tax on capital income to 28%
A classic ESM structure - selling the 'nationalized' Cypriot banks to the ESM and secure funding. Problem being ESM is not allowed, yet, to do direct funding of banks.

The political decision is really down to how big a reduction Cyprus need. Some people argues for 100 percent by end of 2015, others say it should be by 2020.

The deep irony of course being, that when we had the hair-cut on Greece, we were told Greece was a one-off and it will never be repeated - Well, Dr. Watson, It's elementary: Other people money is always easy to spend.

Making things complicated is two issues: Cyprus goes to the polls on February 17 and 24th - As we have seen across Europe it looks like a change guard: Cyprus opposition leads extends lead week before vote.

Cyprus is seen by many countries as tax heaven for Russian money, so bailing out Cyprus equates to "helping Russia investors" - We have no view on the issue but note how Asmussen, ECB Board member, is taking the high road in German press: ECB's Asmussen sees Cyprus bailout by end-March.

Conclusion

It's clearly a concern for market that Greece was not, after all, a one-off. The radical version could reignite fundamentals issue in Europe and as we have written in our Stress Indicators recently: Risk off looks more and more likely.

We suggest securing profit and to reduce overall risk- mainly in EUR, JPY and major European indices. The deal will probably only be done at last minute, but it leaves us "hanging" for another two-three weeks, and one thing the market does not like is increased political tail-risk.

Safe travels,
Steen

Cyprus Debt

Curiously, "Government bonds from Cyprus seems unaware of any potential hair-cut" notes Jakobsen.

Thus for now, it appears the intent is to bail out Russia at the expense of Cyprus businesses and taxpayers on the misguided notion that will prevent "contagion".

Mike "Mish" Shedlock

and Rajoy explanations not cutting it so far.....

http://www.zerohedge.com/news/2013-02-11/spain-kickback-scandal-threatens-rajoy-79-find-corruption-explanations-weak

Spain Kickback Scandal Threatens Rajoy As 79% Find Corruption "Explanations" Weak

Submitted by Tyler Durden on 02/11/2013 11:54 -0500

Just like for Alice, Spain's farcical kickback and bribery scandal's rabbit hole just keeps getting deeper. This morning El Pais reports that the alleged providers of payments to the government (via the kickback fraud) - known as 'Gurtel' - received an unprecedented EUR115mm in government contracts. Withmore than 70 people facing chargesranging from money laundering to bribing a public official, Rajoy's efforts at coming clean have fallen on deaf ears as 79% of Spaniards are dissatisfied with the explanations. This follows a weekend of disclosures including the fact that Rajoy gave himself a 32% pay rise up to 2011 as he push austerity down the throats of his people. As El Pais notes, "...The only thing that is clear is that most of the recipients of payments on the former treasurer’s list have admitted that they accepted money in cash...." The sad political truth is, as Deutsche notes, the likeliest course of action at this stage, in our view, is that on the basis of the internal investigation, Rajoy may go as far as letting go some members of his cabinet, but we think that he will protect the “hard nucleus” of his administration and will not resign. It appears, as they note, that the Spanish government's room for maneuver (over further austerity) is significantly diminished.

Via El Pais (weekend),

Between 2006 and 2011, Rajoy’s salary from the Popular Party (PP) rose from an annual gross 146,000 euros to 200,000 euros,

...

On Saturday, Rajoy did not mention Bárcenas’ papers. He merely said he never took black money, yet did not deny that payments were made. But Bárcenas’ ledgers show that secret payments to party leaders ended in 2008, precisely when Rajoy began declaring significantly more income from the PP.

...

About 79% of polled are dissatisfied with Rajoy’s explanations in reaction to government corruption allegations, according to a Metroscopia poll for El Pais newspaper

96% say corruption allegations should be considered and studied seriously

72% say politicians involved in allegations should resign

...

"...The only thing that is clear is that most of the recipients of payments on the former treasurer’s list have admitted that they accepted money in cash...."

Via El Pais (today),

The benefit of a few was to the detriment of the many. The corrupt business ring known as Gürtel obtained over 115 million euros in contracts from public agencies as well as local and regional governments under Popular Party (PP) rule, according to an ongoing investigation.

That is without counting all the private contracts that the PP awarded the business conglomerate headed by Francisco Correa ("correa" translates as "belt" in English and "Gürtel" in German). Theransacking of taxpayers' money could be even greater, though, as the investigation has not concluded yet, four years after Correa's arrest.

More than 70 people face charges ranging from money laundering to bribing of public officials in a major case of political corruption involving the PP.

The investigation shows that the hefty profits were shared out among members of the ring and some of the politicians who helped them secure the contracts.

Millions of euros were also concealed from the tax authorities. Correa has declared himself without income for the last 12 years, and is thought to have cheated the state out of an estimated 18 million euros in income tax alone between 2002 and 2007.

The regions of Madrid and Valencia were the ring's main theater of operations. The towns of Majadahonda, Boadilla, Arganda and Pozuelo de Alarcón, outside the capital, were havens of corruption for years, according to the report. In Majadahonda alone, Gürtel businesses were awarded nearly 3.5 million euros' worth of public contracts between 2001 and 2005.

The Gürtel network first came to light in 2009, when EL PAÍS obtained information on a judicial investigation being led by the since-suspended Judge Baltasar Garzón. The highest-profile trial related to the probe was that of former Valencia premier Francisco Camps, who was acquitted of taking bribes by a jury.

Deutsche Bank's thoughts on the process and outcome:

Rajoy is fighting the allegations- denying the accusation and threatening judicial action against those making those allegations and making public his own financial records. The whole matter is now no longer a merely journalistic event, but has moved to a judicial investigation - the original documents published by El Pais have been transmitted to the Madrid tribunal. The proceedings could take several months, maybe more. ABC newspaper on 8 February reported the following statement by Spain’s attorney general, Eduardo Torres-Dulce: “Justice needs to go fast, but not impossibly fast”. In the meantime, PP is conducting an internal investigation.

The likeliest course of action at this stage, in our view, is that on the basis of the internal investigation, Rajoy may go as far as letting go some members of his cabinet, but we think that he will protect the “hard nucleus” of his administration and will not resign.

Still, in any case, we think that the room for maneuver of the Spanish government has significantly diminished. In particular, the capacity for Rajoy to “sell” additional austerity measures or transitorily painful structural reforms is now lower.

And Greece biding its time but will be exploding again shortly....

http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_11/02/2013_482761

Government focus turns to state staff, unions

With pressure mounting from international creditors for a series of so-called prior actions to be implemented, Prime Minister Antonis Samaras is expected to focus on streamlining the bloated civil service sector as well as containing strike action on various fronts.

According to sources, the troika is keen for the government to press ahead with a plan to put 25,000 civil servants into a so-called mobility scheme which would see most of them dismissed and a minority being transferred to understaffed sections of the public service. Sources at the Maximos Mansion said Monday that a recent wave of early retirements would likely satisfy creditors’ demands for cutbacks in the state sector. The troika has pushed for layoffs however.

It is expected that authorities will focus on the dismissal of employees found to have seriously breached the code of conduct.

Another thorn in Samaras’s side is the labor unions. Labor Ministry sources on Monday refuted reports that the government is considering making changes to labor regulations that would make it more difficult for unions to call strikes. Two of the three coalition partners, PASOK and Democratic Left, voiced objections following a report in Sunday’s To Vima newspaper that suggested Labor Minister Yiannis Vroutsis of New Democracy wants to make changes that would require strikes to need the support of the majority of union members, while giving management the right to enforce a lockout if employees do not return to work.

The government has been heavy-handed against strikers, issuing civil mobilization orders against Athens metro workers and seamen, but it has taken a softer stance against farmers who are seeking concessions.

In a bid to force the government’s hand, farmers, who have gathered at road junctions across Greece, said on Monday that they would hold one-hour protest marches every day.

and.......

http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_11/02/2013_482696

Coalition split over plans to change law governing strikes

A report that the government is considering making changes to labor regulations that would make it more difficult for unions to call strikes has threatened unity in the coalition government.

Two of the three coalition partners, PASOK and Democratic Left, voiced objections following a report in Sunday’s To Vima newspaper that suggested Labor Minister Yiannis Vroutsis of New Democracy wants to make changes that would require strikes to need the support of the majority of union members, while giving management the right to enforce a lockout if employees do not return to work.

“Mr Vroutsis and other ministers who are New Democracy members need to understand that they are not promoting their party’s policies but the program of a coalition government,” said PASOK spokesperson Fofi Gennimata.

“There has been no understanding regarding changes to the law and we are against any such discussion.”

Democratic Left's Dimitris Chatzisokratis also stressed that his party had not consented to any change in the law regarding industrial action.

SYRIZA condemned the government for considering changes that it labelled as being against workers’ interests.

and.....

http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_11/02/2013_482699

Collective contracts for 600,000 Greek workers expire this week

Collective contracts for 42 professions expire this week, as employees face the prospect of substantial wage cuts.

Some 600,000 workers will be affected by the centrally-bargained contracts running out on Thursday.

The terms of the contracts will apply for another three months before employers will be free to negotiate individual deals with their employees or to negotiate a new agreement with unions.

It is estimated that some 1.2 million employees have signed individual contracts over the last year.

and.....

http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_11/02/2013_482756

Payment notices go out to 2.5 million taxpayers

By the end of next month the Finance Ministry will have sent payment notices to some 2.5 million people with debts to the tax authorities, serving as a first warning, as the ministry has decided to proceed to confiscations for debts to the state.
The ministry has examined a proposal for the reduction of the level of minimum debt for confiscations from 1,000 euros, where it currently stands, to 600 euros.
The general secretary for revenues, Haris Theoharis, on Monday ordered the tax authority heads to proceed to extensive checks on all taxpayers owing money to the state and start sending notices asking debtors to pay their dues within 20 days.
The first notices will go out to those whose debts date to 2012.
Theoharis also told tax officers that their performance in tax and debt collection will be monitored on a quarterly basis.