{"id":1226,"date":"2013-03-29T09:00:00","date_gmt":"2013-03-29T09:00:00","guid":{"rendered":"http:\/\/starthostunlimiteddmffassi-ss.stackstaging.com\/bondworld.ch\/home\/sites\/20b\/7\/760c69a11c\/public_html\/investmentworld.ch\/index.php\/2013\/03\/29\/viewpoint-the-eurogroup-approved-the-economic-adjustment-plan-for-cyprus\/"},"modified":"2013-03-29T09:00:00","modified_gmt":"2013-03-29T09:00:00","slug":"viewpoint-the-eurogroup-approved-the-economic-adjustment-plan-for-cyprus","status":"publish","type":"post","link":"https:\/\/www.investmentworld.eu\/ch\/viewpoint-the-eurogroup-approved-the-economic-adjustment-plan-for-cyprus\/","title":{"rendered":"Viewpoint: the Eurogroup approved the economic adjustment plan for Cyprus"},"content":{"rendered":"

<\/span><\/span>The agreement reached on Cyprus this week confirms the European authorities\u2019 determination to avoid extreme solutions in addressing the financial emergency of a member state. The agreement is safeguards insured deposits of up to 100 thousand euros, but for the first time draws on uninsured deposits to raise financial resources. \u2026.<\/p>\n

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For professional investors and advisers only<\/strong><\/p>\n

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Capital controls, if maintained in the long-run, may breach the articles of the European Treaty on free capital movements within the Union and could thus raise legal challenges.<\/p>\n

In the night between Sunday 24 and Monday 25 March, the Eurogroup approved the economic adjustment plan for Cyprus. Moreover, to avoid a deposit flight, banks stayed closed until Wednesday, 27 march. The key points of the agreement are:<\/p>\n

1. Restructuring of the banking system. Laiki (Cyprus\u2019s second-largest bank) will be liquidated.<\/strong>
The bank will be split into two: a \u201cbad\u201d bank, which will be conferred bad loans, bond issues, and uninsured deposits (4.2 billion euros); and a \u201cgood\u201d bank, that will include insured deposits (16 billion euros) and ELA (9 billion), and be merged by incorporation into the Bank of Cyprus. Uninsured deposits with the Bank of Cyprus (10 billion euros) will be frozen and subsequently involved in the recapitalisation of the bank, which must achieve a core Tier 1 ratio of 9% by 31 December 2013. Bondholders and shareholders will also be called to take part in the operation, by means of a debt\/equity swap, while it is explicitly stated that ESM-IMF loans cannot be used to this end. For the banking system as a whole, accelerated deleveraging is provided for, to reduce bank assets to a weight on GDP (from 8% to 3.5% of GDP) in line with the EU average. Of the 5.6 billion euro total contribution requested of Cyprus, 4.2 will be drawn from uninsured deposits Laiki.<\/p>\n

2. ESM\/IMF contribution confirmed at 10 billion euros.<\/strong> The IMF\u2019s share still hasn\u2019t been announced, but will be smaller than has been the case with previous assistance programs.
The letter of intent will be finalised at the beginning of April. Approval by the ESM Board is expected by the third week of April.<\/p>\n

3. Introduction of administrative restrictions on capital movements and cash withdrawals<\/strong>. The measures approved allow the authorities to impose limitations on bank operations and cash withdrawals, and to introduce a compulsory notice on withdrawals from sight deposits. The Minister of Finance has announced that, upon the reopening of the banks, capital control measures will be imposed for seven days, and subsequently adapted to the situation, with the aim of keeping controls at a minimum in order not to further damage the economy.<\/p>\n

4. Tax hike on capital income and corporate income.<\/strong><\/p>\n

5. Initiation of an independent assessment of the anti-money laundering regime.<\/strong><\/p>\n

The agreement reached seems to have eliminated the risk of Cyprus being forced to abandon the Monetary Union. However, there are still significant uncertainties and risks, tied to three points in particular: a) the effectiveness of capital control measures in a country belonging to a monetary union; b) the restructuring of the banking system (in particular, uncertainty lingers over the nine billion euros issued to Laiki by the ECB in the form of ELA, which risk being charged to the Bank of Cyprus); c) the size of the levy on deposits larger than 100 thousand euros, which based on the statements made by the central bank governor and by the minister of finance could be as high as 40% on deposits with the Bank of Cyprus, and potentially amount to 100% of deposits (uninsured) with Laiki. The management of the Cypriot crisis signals on the one hand the authorities\u2019 determination to prevent the exit of a member state from the euro area, while retaining, on the other, major criticalities tied to the involvement, for the first time, of depositors (albeit uninsured). Capitals\u2019 controls are an awkward element in a Monetary Union as they discriminate amongst banks resident in the different countries member of the same union. Capital controls, if maintained in the long-run, may breach the articles of the European Treaty on free capital movements within the Union and could thus raise legal challenges.<\/p>\n<\/p><\/div>\n

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Appendix
<\/strong><\/p>\n

Analyst Certification<\/strong>
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.<\/p>\n

Important Disclosures<\/strong>
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient\u2019s own judgement.
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Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (\u201cResearch Policy\u201d). The Research Policy is clearly explained in the relevant section of Banca IMI\u2019s web site (www.bancaimi.com).
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Valuation Methodology<\/strong>
Trading Ideas are based on the market\u2019s expectations, investors\u2019 positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and\/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and\/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

Coverage Policy And Frequency Of Research Reports<\/strong>
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer\u2019s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A\u2019s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI\u2019s web site (www.bancaimi.com) or by contacting your sales representative.<\/p>\n

Source: BONDWorld – Intesa Sanpaolo \u2013 Research Department<\/p>\n","protected":false},"excerpt":{"rendered":"

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