Krugman's Arithmetic on Cyprus is a bit FUBAR

I generally love Krugman, but his math this morning on Cyprus is not correct.  Note:  I am not in the habit of correcting the arithmetic of Nobel prize winning economists -- I think he is just working off misinformation I think. This morning, Krugman analyzed Cyprus and came to the following conclusions:   Domestic Deposits are 500% of GDP and local real estate was a big part of the problem.

I’ve done some asking around, and cleared up something that was puzzling me. Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. So we should think of Cypriot deposits as mainly coming from non-Cypriots, attracted by that business model..

Instead of 'asking around', here are the actual figures directly from the Central Bank of Cyprus as of end of January 2013

(1) Deposits:

Total Deposits:  68,420M

Domestic Residents: 42,789M (62.5%)

Non-Domestic EU Residents: 4,748M (6.9%)

Non-Domestic Non-EU Residents: 20,882M (30.5%)

So this would that domestic resident deposits are 225% of GDP , not 500% (Cyprus GDP is a shade under 20B euros in nominal terms, though presumably falling hourly at this stage).

Sure, some of the deposits are actually foreign depositors in the guise of domestic corps, but note that of all domestic depositors, 26,290M is domestic households so 16,056M makes up all domestic financial and non-financial corporations in Cyprus and given that Cyprus does have a real economy, a good chunk of that is true domestic corporations.  The balance is govermental deposits, fwiw.

Also, keep in mind that there are 60,000 British retirees in Cyprus and 40,000 Russians living in Cyprus (the latter, generally wealthy, as it has become a preferred location for rich businessmen to safely raise their families) and their savings will not necessarily correlate with GDP.

(2) Domestic housing loans are 12,601M or about 60% of GDP.  I don't have any comps offhand, but that does not seem unreasonable.

The true issue driving the crisis from the Cyprus perspective are:

(a) yes, a banking sector large for its size but not out of line of similar locations --  Malta, Switzerland, Singapore -- each, like Cyprus, with their jurisdictional advantages and disadvantages -- and a fraction of Luxembourg's (25x assets/gdp).

(b) massive uncompensated losses in the GGB restructuring (25% of GDP overnight) and general commercial weakness in the Greek and Cyprus loan portfolios of the two major banks.   Of course, as Greece and, now, Cyprus are forced into destructive deflation, yes, eventually the commercial portfolio will become a huge problem too.

As before our perspective remains that:

The initial bailout plan was misguided:

Cyprus has a series of unappealing options ahead of it now:

Posted on March 21, 2013 and filed under Cyprus.