Cyprus, from haven to contagion | FT Alphaville

Cyprus, from haven to contagion

Cyprus is one of the weirder cases of this disease Europe has called ‘Greek exposure’. Tiny sovereign debt, big bank gearing to Greece. All wrapped up in a web of offshore deposits.

Fitch cut the sovereign rating of Cyprus to A- from AA- on Tuesday (in line with S&P and Moody’s, but a large downgrade: two notches) based on Greece exposure.

As Fitch said:

Roughly one third of the banking system’s assets are booked as Greek exposure, including that of Greek subsidiaries based in Cyprus. This exposure includes almost EUR14bn of Greek sovereign bonds and an estimated EUR5bn of Greek bank bonds. In addition, Cypriot-owned banks have lent through their substantial networks in Greece significant amounts to Greek companies and households.

Most Greek-related exposure is held by three major Cypriot banks: Bank of Cyprus, Marfin Popular Bank and Hellenic Bank. Fitch believes that these banks are relatively well placed to absorb the impact of a sovereign debt crisis in Greece that entailed an assumed 50% haircut to face value of Greek government bonds. The agency estimates that in this scenario the cost of recapitalising the banks to a tier one capital ratio of 10% would be of the order of EUR2bn (11% of GDP), only part of which might have to be met by the state. However, in a more severe stress test, where a Greek sovereign default was associated with significant deterioration in asset quality such that non-performing loans rose to 25%, Fitch estimates that the cost of recapitalising the banks could rise to 25% of GDP, necessitating more extensive sovereign support.

Interesting, that €14bn Greek bond total. S&P said in April that Cypriot banks hold €5.8bn in Greek government paper, which suggests that the remaining €8.2bn lies in Greek banks’ Cyprus subsidiaries, for which (presumably) Athens is on the hook.

But, about those subsidiaries…

As Bloomberg reports, Greek depositors have been walking out of these subsidiaries at a fast rate over 2011 (deposits in the Cypriot unit of National Bank of Greece fell 10 per cent, for example). It’s curious because this cash had originally been spirited out of parent banks in Greece itself in 2010, as the country’s debt crisis ate its financial system.

Now, we can be pretty sure that the deposits haven’t gone back to Greece, at least not in strength. Lenders there also haemorrhaged deposits at similar rates in the first months of 2011.

So where has it gone?

Related link:
Greek bank risk — another New Europe tour – FT Alphaville