The Boris Badinov Bank

The contours of the latest deal between the EU and Cyprus are becoming clear.  No “levy” on deposits.  Deposits under 100ks will not be touched.

In place of the levy, Cyprus will move to a good bank-bad bank structure.  All deposits less than 100k will go to the good bank.  All deposits over 100k will go to the bad bank.  Since the bad bank’s assets will be, well, really bad, its depositors will get cents on the euro.  Estimates are that the bad bank depositors will suffer losses of between 30 and 90 percent.

A large fraction (most?) of the bad bank deposits will be Russian.  Meaning that Russians will take a big hit.

This is pretty much what the IMF and the Germans wanted initially, but backed off from in the face of intense opposition from Cyprus-which didn’t want to shaft the Russians, in the hope of perpetuating its status as an offshore haven.

Imposing big losses on depositors, insured or not, makes runs in Spain and Italy more likely in the event that it appears that they will have to throw themselves on the tender mercies of the Europeans (read Germans).

The Russians will no doubt be furious, setting up potential confrontations going forward.  The Cyprus drama seems to be a proxy war between Russia and Germany, which is hard to explain given Germany’s previously benign approach to Russia: for instance, Germany scuppered US attempts to advance the progress of Georgia and Ukraine towards Nato membership.  So why is Germany so insistent on doing something that inflicts large losses on Russia-and elite Russians?  Can the impending German election explain it?  Or does Germany think that the fate of the Euro is on the line, and if saving the Euro p*sses off the Russians, so be it.  Or is it something else?  I wonder.

Regardless of the exact reason, Russians are now effectively the not so proud owners of a bad bank.  Bank Badinov, as it were:

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About Craig Pirrong 238 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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