Cyprus is currently scheduled to vote on its bailout/bank haircut plan, and right now it’s not clear if anything can pass that would allow the country to recapitalize its banks and prevent a financial collapse.
Via Felix Salmon, sovereign restructuring experts Lee Bucheit (lawyer at Cleary) and C. Mitu Gulati (a professor at Duke) have produced a short 3-page paper titled Walking Back Cyprus, which proposes a more elegant solution in 3 steps, which are:
1. All insured depositors to be protected. Indeed, the public announcement of the bailout package would liberally sprinkle adjectives such as “sacred” and “inviolable” in front of the words “insured deposits” wherever they appear.
2. Holders of deposits in excess of the insured €100,000 minimum would receive, at par, interest-bearing bank certificates of deposit for those excess amounts. Depositors would be given the option of taking CDs of, say, five or 10 years’ duration, with differing interest rates designed to encourage a longer stretch out. Also, to encourage a takeup of the longer dated CDs, the Government could offer a limited recourse guarantee on the 10-year CDs benefiting from a pledge of a portion of the Cypriot gas revenues that should come on line when those CDs mature. The CDs would be freely tradable and liquid in the hands of the holders.
3. The maturity dates of all sovereign bonds would be extended by a fixed number of years, let’s say five years. By our reckoning, this would reduce the total amount of the required official sector bailout funding during a three-year program period by about €6.6 billion.
So there’s no confiscation. But money would be converted to CDs, which would have a net-present value that’s less than the current amount. That would still be painful, but it wouldn’t feel like such a violation. And it would raise plenty of money.
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