Europe's paymaster - that would be Germany for those who have not paid attention to events over the past four years - is not used to being snubbed. It certainly is not used to being snubbed by what every empty chatterbox and their kitchen sink will tell you is a "small and irrelevant" country (all the more so in the aftermath of last summer's embarrassing defeat in its head on confrontation with the ECB, in which the Bundesbank showed that sometimes the best offense is a gracious retreat). It most certainly is not used to not being invited to discussions involving the future of its precious mercantilist European union, especially when said union may no longer exist as we know it in 48 short hours. And Germany is angry.
Sometimes a picture paints a thousand words and with markets treading water ahead of any news out of Cyprus, Russia, or Brussels, we thought some brief levity (if not irony) was in order. Here are a number of excellent cartoons on the Cyprus situation from how we got here to where we are going...
One of the most interesting issues of what has happened in Cyprus is where was the problem three weeks ago? There was not a mention, not a hint of anything that was wrong. All of the banks in Cyprus had passed each and every European bank stress test. The numbers reported out by the ECB and the Bank for International Settlements indicated nothing and everything reported by any official organization in the European Union pointed to a stable and sound fiscal and monetary policy and conditions. The IMF, who monitors these things as well, did not have Cyprus or her banks on any kind of watch list. In just two weeks' time we have gone from not a mention of Cyprus to a crisis in Cyprus because none of the official numbers were accurate. Without doubt, without question, if this can happen in Cyprus then it could happen in any other country in the Eurozone because the uncounted liabilities are systemic to the whole of Europe.
It was May in 2010 that Greece suffered its first bailout by its Eurozone peers. At that moment it effectively went bankrupt, however it took nearly three years for reality to set in. Yet it wasn't until months later that Greece's smaller (as we are constantly reminded) neighbor was first downgraded from its legacy "pristine" status, by the jokes that are the "Big 3" credit rating agencies. That downgrade unleashed an "waterfall of reality", shown exquisitely on the chart below culminating with yesterday's S&P cut of the island nation to CCC from CCC+, which is only comparable to the boom to bust ratings of CDS issued in early 2007 only to see full loss a few months later. How long until one or more agencies push the country to the dreaded "D" line?
- Cyprus targets big depositors in bank plan (FT)
- Merkel Vents Anger at Cyprus Over Bailout Plan as Deadline Looms (BBG)
- Russia rebuffs Cyprus, EU awaits bailout "Plan B" (Reuters)
- Russia Rejects Cyprus Bid for Financial Rescue as Deadline Looms (BBG)
- Cyprus unveils shake-up as the clock ticks (FT)
- Remember Italy? Italy’s stalemate unnerves investors (FT)
- Credit Suisse CEO pay jump to fuel banker bonus debate (Reuters)
- Kuroda Rebuts Reflation Naysayers as BOJ Action Looms (BBG)
- Fund Manager Says 'Whale' Trade Was a Bet (WSJ)
- House averts government shutdown, backs Ryan budget (Reuters)
- Hong Kong Homes Face 20% Price Drop as Banks Raise Rates (BBG)
Yesterday, when we described the latest Cyprus bailout proposal being (belatedly) debated by the Cyprus parliament and soon to be voted, we wondered how long before the Troika rejects it outright. After all the "Solidarity Bailout" Plan C (or whatever it is) did not do what Germany more than anything wanted to accomplish - punish Russian depositors as this entire farce has been nothing but a political gambit dictated by Germany from the onset. And so while GETCO's entire army of algos awaits the flashing red headline with a touch of optimism to unleash robotic buying of ES and EURUSD, we fast forward to the inevitable denouement, which is, not surprisingly, bad news for Cyprus, because as the FT reports, confirming our initial skepticism, "European officials rejected Cyprus’ plans for an alternative package to save its banking sector and remain in the euro, starting a fresh round of talks with the island nation’s government on Friday."
As Europe wakes up to what could be a tumultuous day, Handelsblatt reports that the ECB has decided that, due to the "great danger" of a bank run once they reopen next week, it will enforce capital controls independently of Cypriot (elected) officials. With perhaps a nod towards negotiating some ELA funding for Cypriot banks next week (if the government accepts this ECB-enforced 'program'), the rather stunning restrictions on people's private property include:
- Freezing Savings - no time-frame (it's not your money anymore)
- Make bank transfers dependent on Central Bank approval (a money tzar?)
- Lower ATM withdrawal limits (spend it how we say?)
The capital controls will be designed "so that citizens have access to sufficient cash to go about their lives." So, there it is, a European Union imposed decision on just how much money each Cypriot can spend per day. Wasn't it just last week, we were told Europe is fixed?
The wave of social unrest that rumbled across Europe between 2008 and 2011 has become less intense. This has come as a cause for relief in financial markets, as it has helped to underpin the marginalization of ‘tail risk’ already addressed by the ECB and the Greek debt restructuring. And yet the latest crisis over the Cyprus bail-out/bail-in not only shoots an arrow into the heart of the principles of an acceptable banking union arrangement, if it could ever be agreed, but also signifies the deep malaise in the complex and fragile trust relationships between European citizens and their governments and institutions. Some people argue that protest, nationalist and separatist movements are just ‘noise’, that the business of ‘fixing Europe’ is proceeding regardless, and that citizens are resigned to the pain of keeping the Euro system together. UBS' George Magnus is not convinced, even if public anger is less acute now than in the past, it is far from dormant, and its expression is mostly unpredictable. So is the current lull in social unrest a signal that the social fabric of Europe is more robust than we thought, or (as we suggested 14 months ago) is the calm deceptive?
Last November, in an act of sheer monetary desperation, the ECB issued an exhaustive, and quite ridiculous, pamphlet titled "Virtual Currency Schemes" in which it mocked and warned about the "ponziness" of such electronic currencies as BitCoin. Why a central bank would stoop so "low" to even acknowledge what no "self-respecting" (sic) PhD-clad economist would even discuss, drunk and slurring, at cocktail parties, remains a mystery to this day. However, that it did so over fears the official artificial currency of the insolvent continent, the EUR, may be becoming even more "ponzi" than the BitCoins the ECB was warning about, was clear to everyone involved who saw right through the cheap propaganda attempt. Feel free to ask any Cypriot if they would now rather have their money in locked up Euros, or in "ponzi" yet freely transferable, unregulated BitCoins. And while precious metals have been subject to price manipulation by the legacy establishment, even if ultimately the actual physical currency equivalent asset, its "value" naively expressed in some paper currency, may be in the possession of the beholder, to date no price suppression or regulation schemes of virtual currencies existed. At least until now: it appears that the ever-benevolent, and always knowing what is "in your best interest" Big Brother has decided to finally take a long, hard look at what is going on in the world of BitCoin... and promptly crush it.
With some predicting China will import 79% of its oil by 2030, could domestic shale gas extraction help China meet its energy needs? As shale gas fever sweeps through Beijing, analysts are looking at the costs and benefits of extracting what is increasingly a controversial source of energy. But for China, with its growing middle class, the immediate and long-term demand for energy has the potential to spark a revolution in shale gas before sufficient and safe technological know-how and regulations are developed.
Goldman's 'Swirlogram' places the global industrial cycle squarely in the 'Slowdown' phase as growth momentum fades rapidly. Driven by plunges in aggregate confidence levels and New Orders (less inventories) - as well as CAD and AUD data - this reinforces last month's preliminary view of a slowdown beginning. Goldman notes we could potentially see weaker global activity over the coming months. Is it any wonder we are seeing bellweather names missing in a big (un-unique) way.
So far, Cyprus has not been able to pass a direct tax against depositors and has gone to Russia for a helping hand (and failed). However, the question of whether such an event could happen in the U.S. is a much more interesting point of discussion. While to most onlookers the idea of a direct deposit tax instituted by domestic US banks remains far off - the issue of the Fed's monetary policies, particularly since the last recession, has had a significant impact on "savers." While the individuals in Cyprus have been faced with an outright extraction of capital from their accounts - U.S. savers have had their savings negatively impacted much more surreptitiously. The continued drive by the Fed's monetary policies to artificially suppress interest rates to create a negative interest rate environment for savers is a defacto "tax" on savings. The destruction of principal since the turn of the century, which is far more disastrous than it appears when adjusted for inflation, has ended the dream of retirement for many individuals. So, can the U.S. potentially have a direct tax on savings? It's already happened.
While it will be no surprise to any ZeroHedge reader, academic research from ETH Zurich shows that not only are "commodity markets becoming very financialized and computerized... and more susceptible to minor shocks," but "at least 60-70% of price changes are now due to self-generated activities rather than novel information." In other words, only about a third of commodity price moves are caused by real fundamental news now (as opposed to 75% pre-HFT).
While Cyprus grabs the headlines, there are stirrings in Spain, New Zealand, and the UK with regard to how depositor funds (and their apparent insurance) is considered in the new normal banking system. As John Aziz notes, essentially, if there is to be any confidence in the banking system, the possibility of depleting liquidity insurance funds to bail out banks needs to be taken off the table completely. The possibility of insured depositor haircuts needs to be taken off the table completely. If banks need bailing out, the money must not come from insured depositors, or funds designed to compensate insured depositors. If banks fail, the losers should be the uninsured creditors.