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PIMCO’s worst case assumes 65% property devaluation

In its worst-case scenario, where the Cyprus banking system would require €10.1 billion for its recapitalisation, PIMCO assumes a devaluation of properties by up to 65 per cent according to informed sources.

INFORMED sources quoted by the Cyprus Broadcasting Service say that PIMCO is insisting on its worst-case scenario, which assumes a devaluation of properties by up to 65 per cent.

Under this assumption the banking system will need a total of €10.1 billion to raise its basic capital to the level required by the European Banking Authority. That amount would push the island’s total sovereign debt to an unmanageable level making a bailout deal even more difficult.

In a meeting with officials from the Cyprus Central Bank last night, PIMCO said that it does not consider that its baseline recapitalisation amount of €6.9 billion would be considered adequate by prospective lenders.

In other news it appears that the Cypriot government has been severely reprimanded by the troika for not implementing what has been agreed in the memorandum and its every move is now being closely monitored.

According to a report in Stockwatch, confidential documents from the Finance Ministry list detailed descriptions of deviations from the memorandum and negative comments by the troika on many of the points on which delays are apparent.

The documents show that the government has, so far, complied with only a minority of the agreed measures, and that even in these, there are serious gaps.

For example, the documents reveal large gaps in information that creditors have been given on important issues such as property tax. They believe that Cyprus has adopted the new tax, while the Ministry admits in the documents that the relevant legislation has not yet been approved, and has been postponed after the elections.

Readers' comments

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  • John Rose says:

    MarkD. The bank repo last march. First time I found out was last week when the pool cleaner for the complex told me. Developer has been given the property by the bank to do ‘something’ with.

    I have no assets here or in UK

  • MarkD says:

    @John Rose
    Have the bank just let you walk away or are they going to attempt to make up any shortfall by pursuing you? If there letting you off then I would imagine there’s a big sigh of relief from others in a similar position to you at the moment!

    If I understand this are we saying that if you have more than €100,000 deposited in a savings account, that the remainder will disappear into the black hole of debt?… Surely no one in there right mind would have any deposits in ROC right now would they?

  • John Rose says:

    2006 Purchase price €277k
    Up for sale since purchased
    Stopped paying mortgage 2010
    Outstanding loan plus interest €330k
    2012 offered €160k, bank declined
    2012 repossessed
    Now back with the developer who was guarantor
    Devaluation 57%+
    So 65% not unbelievable

  • Andrew says:

    Shocked that troika and any one living or knowing Cyprus for more than 2 days would expect the Cyprus Government or its people to be honest. Please.

    It is NOT going to happen. Do not expect it, wait for it, beg for it, prey for it. Just simply deal with it and act accordingly otherwise, go buy a ton or two or ten of tissues.

  • Eddie Smyth says:

    This is going to get very messy and painful,,,, probably impossible to rectify,,,, under the current ECB/EU austerity only crisis exit strategy and with German fed elections coming up in 7/8 months we can expect no sympathy or assistance unless we can show ourselves to be another shiny star pupil, even then the country and the people will be crucified by a deal loaded in favour of Europe,,,,the only game changer could be further deterioration in Europe and the triggering of the EFSM when funding to French and Italian banks directly could change things. A deal prior to firing up the EFSM will strangle the country. As we seen with Ireland the ECB/EU will not retrofit a done deal, Ireland’s €65 bln bank recap has been squarely loaded as Irish sovereign debt. The frustrating part of all this is the fact that the three main beneficiaries of the boom and objectors to crisis debt sharing; Finland, Holland and Germany have guaranteed access to EFSM if required.

    Peak to trough property price shift is like how long is an elasticated piece of string in the absence of an economic stimulus plan from Europe anyone can speculate the future outcome with some credibility.

    Did we join the EU for the wrong reasons?, were we ever suited culturally, socially or economically for the move?. I must have felt like being on vacation surrounded by bodyguards for the Government over the last five years which well and truly drove the spike through the heart of the goddess.

  • andyp says:

    “Now that we realise that Cyprus has to find perhaps EUR 4 bln or more to get to the magic 120% of GDP (which let’s face it is still a long way from comfortable), we might find the bond haircut idea coming back to haunt us, or worse still, the nutty idea of grabbing the deposits of anyone over the insured threshold of EUR 100,000”

    Not that I keep much money here any more it is rather worrying that someone has even considered this as a possibility, which I suppose in reality it is.

    Anyone know if this potentially applies to both chequeing and deposit accounts?

  • Costas Apacket says:

    Now then, what could possibly cause a 65% drop in property prices in Cyprus?

    Could it be possibly caused by mass repossessions of properties by the Banks followed by a glut of these properties appearing on the secondary property market only to be resold to bargain hunting Oriental and Russian and other buyers through a plethora of newly formed Property Buying and Selling agencies set up by Uncle Stavros and Cousin Panicos?

    All without Title Deeds of course.

    And so the cycle starts all over again! Sweet!

  • @Denton Mackrel – here’s Fiona’s article, original at: Real Pimco worst case scenario is actually EUR 11.3 bln! where people may wish to comment:

    Digging into the figures reported by Monday’s Phileleftheros (full story in hard copy only) reveals that there is a sleight of hand in the figure being reported on Pimco’s worst case scenario.

    Phileleftheros reported, no doubt in good faith, that Pimco’s worst case scenario is EUR 10.1 bln.

    But this figure includes a deduction of EUR 1.2 bln for cocos—those deposits which many depositors turned into high-yielding convertible bonds but which will soon be turned into very low-value shares.

    If we add the EUR 1.2 bln back in then the worst case scenario from Pimco is in fact EUR 11.3 bln and not the EUR 10.1 bln reported. It also implies that the baseline is EUR 8.2 bln, not the EUR 7 bln reported.

    Meanwhile other reports have said that the baseline figure is EUR 6 to 9 bln.

    Why is the coco deduction important? Because those of us who have been calculating how much Cyprus will need to find to bring its debt/GDP ratio down to the magic 120% that might just make it sustainable have been assuming that the EUR 10 bln reported a few weeks ago does not include deductions.

    And we have been relying on cocos to meet some of the gap.

    So if the cocos are already included in the EUR 10 bln or so that has been the main reference for our assumptions, then Cyprus must find even more to bring its debt level down to a more sustainable level.

    The various options for debt sustainability were the subject of a seminar last Wednesday hosted by the European University of Cyprus and organised by Alexander Apostolides, Lecturer in Economic History.

    In my own presentation, I had estimated that Cyprus would need to find only EUR 3 bln to bring its debt/GDP ratio down from an estimated 136% of GDP by 2016 to 120%.

    I said the government could find EUR 1.2 bln from cocos and perhaps EUR 2 bln from privatisation.

    I now have to revise that and say it has to find an additional EUR 1.2 bln from somewhere else.

    One other option that has been hotly debated is a Greek-style haircut on bondholders. Outstanding European Medium Term Notes (EMTNs) are EUR 3.8 bln, of which I am reliably informed around EUR 2.5 bln are held by non-Cypriot institutions.

    (The rest of the debt is either domestic debt held by the banks that need recapitalising, debt held by Russia or debt held by senior creditors like the European Investment Bank, so not really cuttable).

    Until the European University of Cyprus seminar last week, most people thought that a haircut on EMTNs was not possible because of the English-law contracts under which the bonds were issued.

    But Mitu Gulati, an expert lawyer on sovereign debt restructuring from Duke University, argued that there were enough gaps in the Cypriot contracts that the government might be able to implement a haircut if it wanted or needed to.

    It would be an “ugly solution”, he said, not as “elegant” as the one proposed by his co-speaker, Lee Buchheit, partner at Cleary, Gottlieb, Steen & Hamilton LLP.

    Buchheit argued that extension of maturities and an amendment to the European Support Mechanism (ESM) treaty might deal with the problem of sustainability and bondholder “holdouts”.

    These are bondholders who refuse to take a haircut, then sue for the full amount. It has stymied a final resolution of the Argentina default for years.

    Now that we realise that Cyprus has to find perhaps EUR 4 bln or more to get to the magic 120% of GDP (which let’s face it is still a long way from comfortable), we might find the bond haircut idea coming back to haunt us, or worse still, the nutty idea of grabbing the deposits of anyone over the insured threshold of EUR 100,000.

    This raises the question of whether the authorities’ focus on a single uncomfortable figure and attempts to massage it will end up having caused the country more harm than good.

    Surely it is far better to have an honest assessment of the requirements and an honest debate about how to deal with it, rather than ending up with a reputation for not being quite honest about the problem.

    This will only test the patience of already tetchy European taxpayers even more.

    Can we at least hope that this debate might take place after the election?

  • Denton Mackrell says:

    Eur 10.1bn? According to Fiona Mullen a leading finance sector analyst (as reported in Financial Mirror this week), that does not take account of a ‘missing’ €1.2bn bank debt that eventually will have to be reckoned with. Nigel, I’ve mislaid her article – perhaps you could confirm and comment?

  • Martyn says:

    It is nothing short of Scandalous that the fag-end Cyprus government has been ‘ducking and diving’ on acceptance and implementation of many Troika requirements linked to the requested Bail-out. Nor does it come as any surprise at all that PIMCO’s assessment of massive and ‘realistic’ provisions against Cyprus banking failures are in excess of €10bn. Several of us ‘lay commentators’ have been predicting this kind of figure, reflecting the remarkable laxity of lending and legal practices and overall banking regulation over months gone-by. What now?

    New government faced immediately with enormous, – many would say insurmountable – financial challenges, much tighter austerity requirements than we have seen so far, potential social unrest? All the product of ludicrous Denial of any problems or needs to change over the last 5 years or so. What a Mess!

  • Ron Aptroot says:

    Seeing the current house prices on the island, compared to let say the same kind of properties in the south of Spain, then a reduction of 2/3 (about 65 %) seems more than reasonable.

    The properties are more than overpriced.

    Cyprus is the last of the European countries to start a restructure. Too late and too soft, leaving the island in a desperate state.

  • Costas Apacket says:

    So when ‘Don’t Call Me Shiarly’ says Cyprus has complied with everything the Troika has asked for, what does he actually mean?

    When he says Cyprus has nothing to hide and that it is not a laundromat, what does he actually mean?

  • andyp says:

    The Cyprus government has been telling porkies to the troika.

    Well knock me down with a feather.

    You have got to wonder where the developers and lawyers, not all but far too many, take their lead from.

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