Leaked IMF Report on Outrageous Cyprus Bail-In

May 28, 2013 • 10:35AM

A report of the International Monetary Fund board meeting at which the Cyprus bailout was discussed was leaked to Stockwatch, and is available in full on their website, and also reported in the Greek daily Kathimerini. It reveals some details that have not been made public. Among the directors who where not from European countries, there was a great deal of pessimism on whether the bailout program will actually work.

The document details a report to the board by director Menno Snel and senior adviser Ektoras Kanaris, that noted that a big Cyprus crisis should have been well-known for at least the last two years. Among other things they write, "Arguably, the most important and extraordinary element of the program was that the recapitalization of banks would be almost exclusively generated from the banks' retail deposits," adding that the "bail-in" of depositors was an "unconventional financing method" yet a necessary alternative. It should be noted that they say the bail-in was "almost exclusively generated" by the depositors and that the bail-in wiped 70% of the entire domestic deposit market. They admitted this "will have severe implications" for any hope of economic recovery. They also admitted that the charges of money laundering against Cyprus "were highly exaggerated."

Their report drew severe criticism from another director Nogureira Batista, who represents Brazil and 10 other South American countries on the board. He complained that the board was being compelled to approve a program in which they had "little ownership" and which has "even less chances of success, or it runs the risk of exacerbating the crisis in Cyprus which could engulf such bystanders as Slovenia or Malta and aggravate the problems in Greece." He also asked a question on what were the real financial needs of Cyprus. He pointed out that at first it was said to be EU17 billion, then EU23 billion and then he refers to EU85 billion as being required between 2013 and 2016 according to a "Table 5," which is not otherwise listed in this report. Batista wonders where this huge amount of funding, which is close to four times Cyprus' Gross Domestic Product, is supposed to come from. He also slammed the proposed bail-in of "insured and uninsured depositors in both solvent and insolvent banks." "It should never have been endorsed by the [IMF] Management, especially before consulting with the Board," he said. Others said that the move "deprived Cypriot businesses of their working capital and medium-income households of their life savings." As for the IMF forecasts regarding the ostensible success of the program, he said that would require a "suspension of disbelief."

Russian board representative Alexei Mozhin questioned why Cyprus' business model was deemed "unsustainable and doomed to fail," since other countries in the Eurozone and the EU have the same model.