By Andrei Skvarsky.
Lombard Odier, a Swiss asset management firm, praises the European Union/International Monetary Fund bailout scheme for Cyprus for making bank bondholders “share the pain” of the crisis but warns it will deprive Cypriot banks of a major source of funding and discourage Russians from investing in the country.
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“Unprecedented and welcome is the fact that bank bondholders (even senior) are, at last, being forced to share the pain. This restores some fairness in the loss attribution process that had been lacking since the start of the crisis,” Lombard Odier says in a research piece.
At the same time, the Geneva-based bank attacks the bailout plan’s “last minute” and allegedly politicised aspects.
“We regret that the reasons for imposing a haircut on bank debtors have more to do with a sense of urgency and political considerations (German elections, predominance of Russian investors) than the result of a consistent framework set up by EU/IMF leaders to address solvency issues in a proper and fair way,” the firm says.
“Policymakers seem to have once again taken a last minute case by case approach to the crisis. As such we doubt that, in the event of another major European economy, like Spain, requesting a bailout, bondholders would be hit alike.”
While it generally approves of Cyprus’s decision to tax depositors, Lombard Odier says that thereby the country has “broken a major taboo”, which will shake domestic trust in the Cypriot banking system and cause Russian direct investment to “evaporate”.
A 20bn-euro share of the Cyprus banking sector’s total deposits of 70bn euros comes from non-euro area nationals, largely Russians, the Swiss firm points out.
“Even with this bailout, the future of the country thus looks bleak: recession seems inevitable and the economy will remain broken for years, until it finds another sustainable driver of growth,” Lombard Odier sums up, wondering whether the Cyprus bailout scheme will be used as a “template” for other Eurozone countries.
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