by snaidu » Fri Mar 22, 2013 7:14 pm
I am so sorry to hear of your troubles. It appears that everywhere you turn, you are being arm-twisted into agreeing on something very painful in order to get out of your predicament. I was shocked to learn of the Plan A which proposed that you discard the guarantee on your bank deposits and suffer losses. The fact that this would destroy depositor confidence in the whole EU banking system seem to have escaped the brilliant minds of IMF and EU Finance Ministers. By now, no doubt you have made your feelings known. That’s why a Plan B is being hatched. However, this Plan B might involve selling your sovereignty to a foreign country in return for paltry sum of cash. I don’t think you want that to happen.
Cypriots, it is reported that you need USD22 billion to save your banks & economy. I am now proposing that you develop and deliver a Plan C, which will ensure your sovereignty, dignity, and independence remain intact. You will in time find out that this Plan C will produce faster economic turnaround, lower employment loss, lower wages loss and a rapid stock market turnaround compared to IMF/EU plans.
You have two problems:
1. Your banks have toxic assets (mostly foreign) and will fail if not protected.
2. You country has debt repayment issues and could default.
The Plan C, which will help you manage both issues is as follows:
1. The first set of actions outlined below is to help Cyprus manage the banking crisis:
a. Impose capital control until foreseeable future. This capital control is to prevent physical cash and electronic money from bank savings and portfolio investment from flooding out of the country. That will prevent cash shortage, banks collapse and share market collapse (so no hot money flowing out and crippling your economy). The capital control can be eased after the whole crisis settles down.
b. Set up a National Sovereign Wealth Fund (SWF) and assign the oil and gas reserve to this fund. This SWF will be the sole owner of all energy resource mining rights in Cyprus. Apply a reasonable value to this resource. Forbes claims that this could be as much as $400 billion over the extraction period so to be on the safe side, let’s say that the value of the energy resource is $50 billion in present value. Put that on its Balance Sheet as asset.
c. Set up a National Asset Management Corporation (NAMC) – this organization will take over all non performing loans found in your banks which is causing the potential bank failure. There are two types of non-performing loans that are hurting your banks. The first is loans given to foreign entities/individuals (e.g. Greece, call it NPL1)) and the second, which is not really a NPL but could become one if the country’s finance collapse, that is the Cyprus government bonds bought buy the banks (call it NPL2). Now, NPL2 only really becomes NPL if NPL1 is not managed. So let’s manage NPL1.
i. NAMC will buy over the NPL1 from your banks, thus cleaning your banks from toxic assets.
ii. NAMC will pay for this at par value issuing Zero Coupon Bonds to the value of $12.5 billion, which is the amount that is reported to be required to cleanse your banks from the NPL1. The payment will be in form of the reintroduced Cyprus Pound. (see section 2 below).
iii. NAMC Zero Coupon Bonds will be bought by the SWF, which has $50 billion in assets from the untapped energy resources. SWF will raise this money by collateralizing 12.5% of its Oil & Gas assets, mortgaging it to Cyprus Central bank, which will issue the money to the SWF in electronic form.
iv. The NPL1 owned by NAMC is a perpetual claim on foreign entities and individuals, which the Cyprus government need not write off. It can be used for future financial and trade negotiations. As with any asset management company, NAMC must work hard to recover the most value out of the NPL1 that it owns.
d. Set up National Capital Corporation, recapitalize the banks and transfer the ownership of these banks to the NCC. Money for recapitalization will come from Zero Coupon Bonds issued to the SWF. If I am right, the amount required for this is US$10 billion (equal to the Emergency Liquidity provided by the ECB). This recapitalization must be in the form of reintroduced Cyprus Pound (see Section 2 below).
e. By carrying out actions mentioned above, you banks will be 100% owned by the Cyprus government, these banks will have zero external non performing loans (i.e. loans given to or bonds bought from Greece government, Greek entities and Greek people). These banks now can operate without the fear of failure. However, since depositor confidence has been shattered by the deposit tax proposal, money withdrawals MUST be controlled until everyone calms down. No money withdrawal must be allowed for non residents and for residents, money withdrawal must be limited to daily limits and for resident companies, money withdrawal cannot exceed their business needs. There will be some management required for this but not as painful as having the total collapse of the banking system. Also, money exceeding a certain limit (say $10,000) cannot be transferred out of the country by anyone in physical cash or electronic form. This is an emergency measure until confidence returns.
f. To do the above you would need emergency Parliament Acts to be passed for the formation and operations of SWF, NAMC and NCC.
2. Now the second set of actions in Plan C is meant to manage sovereign default risk and the overall economy:
a. Whatever you do, make sure that the Cyprus social environment remains positive and a ‘happy zone”. The main reason for this is to ensure that you keep up and perhaps increase foreign exchange income from tourism, shipping etc (i.e. keep up and improve your export of services, which requires Cyrus social environment to remain conducive).
b. To achieve the above you can’t have people rioting or begging in the streets, get it? The moment that happens, your export of service will collapse (less people visiting Cyprus etc).
c. Right, now to the more mundane stuff.
d. Exit the EURO, try keeping EU membership.
e. Reintroduce own money, your Cypriot Pound, pegged at CYP1 = Euro 0.6 (i.e. the rate it was when changeover to Euro took place).
f. Print only CYP50 as the largest denomination paper currency, this to minimize smuggling of funds in large cash amounts.
g. Make CYP not a legal tender anywhere outside Cyprus – to prevent short selling & speculation of CYP by currency traders. This is a temporary measure and works!
h. It is reported that there is about Euro 70 billion deposit in Cyprus banks. Get the Central Bank to buy out all Euro deposits in Cyprus banks using the CYP at the said exchange rate. That means, Cyprus Central Bank will create CYP120 billion in electronic money, transfer these into the individual accounts in the banks and transfer Euro70 billion into its own account. Which means, the Central Bank now has Euro70 billion foreign exchange reserve. Now, this foreign exchange reserve is the asset backing the reintroduced CYP. The Euros to be transferred must include cash in bank vaults (money type “MB”)
i. Make only CYP legal tender in Cyprus. There will be some outstanding Euro notes in the hands of consumers (i.e. the “M0”– currency in circulation) but these could be insignificant compared to the overall Euro money supply in the country.
j. There will be black market for Euro and the official exchange rate may not hold but remember, by having Euro70 billion in foreign exchange reserve, Cyprus can easily meet foreign debt repayment obligation by drawing down on this money, avoid sovereign default and maintain one of the highest Central Bank reserve in the world vis a vis your GDP. That amount of money can cover 12 years of import of goods (which is a crazy amount of money to have as reserves – so it will serve the purpose of backing the new CYP very well). So good chance your exchange rate can be defended.
3. Now having done the above, focus on your economy:
a. Set up a National Oil & Gas Company (NOC, don’t you already have one? I can’t seem to trace it), tasked to manage and operationalise the energy resource. Issue Request for Proposals from energy companies for the development of your energy resources on the basis of a strict production sharing contract that holds the balls of these energy companies (and not the other way around!). That will set the motion for monetizing the energy resource and provide credibility to the collateralized asset owned by the said SWF. The NOC is the operator on behalf of SWF.
b. You are spending 6% of GDP on energy import. By replacing it with own gas, and selling some gas to outsiders, you can eliminate your current account balance deficit and bring back you economy to a healthy situation.
c. Cyprus imports more goods than exports. So trading partners will be ready to deal with Cyprus and be kind to it (i.e. you guys are not beggars and will not be going around begging, esp. if you have the money to pay for it).
d. Once you get your trade balance into the positive, you should have no worries on the exchange rate of CYP and can free up the capital controls but maintain the exchange rate at appropriate levels at that time.
e. Control your interest rate. Ensure that your people who have mortgages and business will not be affected.
f. You might have some inflation problem as foreign goods could become more expensive as the CYP exchange rate plummets due to money oversupply or poor investor confidence but you are already taking care of this through many capital control mechanism.
g. Don’t worry about lack of FDI due to capital control. Oil companies do business in really terrible countries so they can manage their risks in your country and bring in the required FDI for the O&G sector development.
h. Don’t just sell gas, turn it to fertilizer and other downstream product by building petrochemical plants on your soil. That way you will get positive trade in goods as well.
4. The amount of employment created by these actions and jobs saved from avoiding bank collapse and sovereign default can easily make Cyprus an economic haven in Mediterranean. Perhaps the foreigners know this, that’s why they are robbing you clean!
I think that is a long enough list and a better list of action to save your nation that what you have been given by the powers that be…
