Content provided by Matt Santini, CLS Portfolio Manager

As I write this, the island of Cyprus has just agreed to keep banks closed through Thursday. If you were looking to drawdown on your offshore cash before the NCAA tourney, you are out of luck. And ultimately, unless they own gold or have mattress reserves, Cypriot’s (and as news unfolds non-domestics too!) liquidity is non-existent. And so here we are again: another Eurozone country that can’t meet their obligations. Cyprus is tiny in comparison to say Ireland, but the ratio of deposits to GDP is high. So in other words, retail banking is big business here. Detailed paperwork shows that the majority of non-domestic deposits originate via offshore accounts from Russia. Why? It is assumed that low taxes and the ease of “layering” makes Cyprus attractive for an easy ruble to euro conversion. Layering is opening up many small accounts under different entities to mask large flows from a single offshore entity, a preferred money laundering method.

This is why Cyprus wants a bail in, not a bail out (much to the chagrin of domestic depositors, and periphery countries). There aren’t enough domestic tax dollars to cover the debts, but there is a lot of offshore money utilizing the infrastructure. A bail in would be an immediate tax on accounts, not account holders. This would be a levy on anyone holding deposits within Cyprus, regardless of home country. Makes sense on “paper.” Rather than a tax payer funded bailout, in essence this is partially a tax evader funded bailout.

0667-CLS-3/19/2013