Malta: Another Weak Link In The European Chain Of Tax Havens?

Includes: EU, FXE, VGK
by: The Motley Monetarist

The story goes that the Grand Master of the Religious order of Jerusalem had to pay a tribute to Charles V of one falcon in the year 1530 in exchange for the granting of Tripoli, Malta and Gozo. This story then was the basis of the famous detective story by Dashiell Hammett involving the figurine of a bird, immortalized in a famous movie, starring Humphrey Bogart.

The island state of Malta, with a GDP of approximately 15.5 billion euros ($19.7 billion), is one of the tax havens dotting Europe, including Gibraltar, Cyprus, Luxembourg and Lichtenstein. Malta is not entirely tax free, with a flat rate tax of 15% on Maltese income, but worldwide income of Maltese residents is entirely tax free. However, its banking history is troubled; it has already undergone a significant bank run in 1973.

Malta the next Cyprus? The question is whether Malta is the next weak link in the chain after Cyprus. It is plagued by a growing external debt and persistent current account deficits.


In addition, its gross government debt has been skyrocketing in recent years.


Another telling sign is the dominance of deposits from non-residents, primarily from non-euro residents.


The shaky origin of the Bank of Valletta in the 1973 bank run.

The Bank of Valletta is one of Malta's three largest banks, (along with HSBC and Comm Bank).

Unfortunately, its birth in 1973 was under less than auspicious circumstances. The National Bank of Malta (NBM), the predecessor to the Bank of Valletta, was a prime lender in real estate and tourism. It overextended itself, in the context of an international slowdown and the oil crisis, not unlike today's circumstances. Prior to the 1973 run, the NBM had reduced its deposits with the Central Bank of Malta from $32.4 million in 1968 to $1.6 million in 1972, in order to make greater lending available in the property sector. Simultaneously, it increased the client deposit base to $102 million by the end of 1972 (1972 dollars), and held approximately $34.3 million in liquid and semi-liquid assets, consistent with a 25% liquidity ratio of paid-up capital. Thus, it commanded a substantial liquidity base.

On December 6, 1973, a bank run developed when the NBM opened for business, culminating in withdrawals of $2.7 million on December 10. The bank was subsequently nationalized by Dominic Mintoff, then Labor party leader and governor of Malta. The shares were to be transferred to the government without shareholder compensation. Barclays Bank in Malta also witnessed a liquidity run at the same time.

The debate on the expropriation of the NBM shareholders was heated. Nevertheless, Mintoff made the takeover a precondition to injecting liquidity.

The courts denied relief to the NBM shareholders and found for the government; the Bank of Valletta opened for business on March 24, 1974 based on the forced expropriation of the shareholders of the NBM.

Are we going to witness a rerun of 1973? Flash forward 40 years. Consider the position today of the Bank of Valletta, with total assets surpassing 7.05 billion euros ($8.95 billion), a BBB rating, only 296 million euros ($375.92 million) in deposits at the central bank, and one has another Cyprus in the making.

Here are some salient statistics from the bank's 2012 annual report and highlights how weak the bank's balance sheet is. The EBA (European Banking Authority) guidelines on the Tier 1 ratio have increased to 9%. (Tier 1 capital is defined as base capital divided by risk-weighted assets). Currently the Bank of Valletta is just barely skimming this minimum. It should be recalled that the Bank of Cyprus, before the collapse held 209 million euros ($265.4 million) in derivative securities.

Earnings per share

Net impairment losses

Total position in derivatives

Tier 1 ratio

Total capital secured by real estate

2012 figures

27 eurocents (34.3 cents)

22.8 million euros ($28.95 million)

844.2 million euros ($1.07 billion)


1.2 billion euros ($1.52 billion)


The data on real estate secured capital speaks volumes, and is eerily reminiscent of the position of the National Bank of Malta in 1973, prior to the bank run. According to the 2005 census, there are 53,000 vacant dwellings in Malta. The stock of vacant property is worth approximately 7 billion euros. Malta's housing boom peaked between 2002 and 2005, fueled by the growth of the British and Irish expatriate community (like in Cyprus). Then the 2009 contraction led to a drop in housing prices, which declined by 9.9% in Q1 2009, the declines abating slightly to a 7.8% drop between the 3rd quarter of 2012 and 2011.

Thus we see one significant bank, over-leveraged in real estate, loaned out at 3.7 billion euros to its customers (mostly real estate loans), the country itself with a growing external debt problem and lop-sided in the banking deposit base attributable to overseas residents.

Malta has all the potential to be the next crisis du jour for the euro zone.

The next few months should see considerable volatility in the euro as the weak links in the euro chain (including now Malta) start to show signs of coming undone, and as the loose coalition that came together to "solve" Cyprus' problems becomes more and more fragile. It was clear, for instance, that Mme. Merkel, faced with re-election and considerable discontent in Germany, will be less and less willing to compromise if Malta's banking sector shows signs of buckling based on its past history and inherent fragility.

In the words of the immortal Dashiel Hammett, "When you put two and two together, sometimes you get four and sometimes you get twenty-two."

[Editor's note: Read a rebuttal to this article from the Bank of Valletta here.]

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.