Wednesday, March 20, 2013

Plan B (or C, or D, or...)

Mitu Gulati and Lee C. Buchheit offer an alternative (but still bad) scheme for Cyprus;
  • 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.
  • Holders of deposits in excess of the insured €100,000 minimum would receive, at par, interest-bearing bank certificates of deposit (CDs) for those excess amounts.
Depositors would be given the option of taking CDs of, say, five or ten years’ duration, with differing interest rates designed to encourage a longer stretch out. Also, to encourage a take-up of the longer-dated CDs, the government could offer a limited recourse guarantee on the ten-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 tradeable and liquid in the hands of the holders.
  • 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.
The benefits? Terming out excess deposits will effectively lock in that funding to the banks for many years. The alternative (debiting 9.9% now and watching the balance of 90.1% get out of Dodge when the banks reopen) may easily require the bailout package to be reworked in a month’s time. 
Rescheduling the maturity dates of outstanding sovereign bonds – with no haircut to principal or interest rate – would avoid the need to have those maturities repaid out of official sector bailout funds. A principal extension of this kind is the most clement of the three instruments in a sovereign debt restructurer’s tool box, the other two are surgeon’s saws labelled, respectively, 'principal' and 'interest'.

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