Archive - Mar 21, 2013

Surprise! No decision came out of the Eurogroup conference call (and none is expected this evening) as:

• *EUROGROUP EXPECTS CYPRUS TO SUBMIT NEW RESCUE PROPOSAL QUICKLY and
• *EUROGROUP SAYS IMPORTANT TO GUARANTEE DEPOSITS UNDER EU100,000
• *EUROGROUP SAYS TROIKA ANALYSIS NEEDED ON NEW CYPRIOT PROPOSAL

However, Cyprus has decided that it will only undertake small deposit levy (if at all) and prepares to present a new proposal. And just to rub some salt in the wound:

• *CYPRUS CUT TO CCC FROM CCC+ BY S&P; OUTLOOK NEGATIVE

So, Laiki has only hours of liquidity; the government hasn't voted on a proposal yet; Eurogroup won't act until Troika analyzes the proposal; and Cypriot Central banker wants major capital controls.

The Swiss National Bank (SNB), which supposedly guarantees price stability in Switzerland, currently holds about 1,040 tons of gold reserves after gradually selling off at least 1,550 tons and now members of the Swiss People's Party, the far-right Swiss Democrats and the Lega dei Ticinesi movement, is confident a nationwide vote will be called (after they gathered 106,000 signatures) on stopping the sale of gold reserves held by the SNB. It also wants gold bars stored in the US to be returned. As Swiss Info reports, the People's Party leader Luzi Stamm comments, "Gold reserves guarantee the stability of the Swiss franc. They ensure that that private savings, salaries, pension keep their value," warning that gold must not be the object of speculation for the SNB or for politicians and demanding the SNB keep a minimum of 20 per cent of its assets in gold, twice the current level. In addition, they want to force the government to disclose where the gold reserves are stored, since "it is only in safe hands if it is kept in Switzerland."

There are two articles of faith in the central-bank religion: 1) We can keep interest rates near-zero for as long as we deem necessary, and 2) We can suppress inflation at will, too. The question is: can they do both at the same time for as long as they wish? If either interest rates or inflation (and they are correlated) start rising, the central banks' claims of control evaporate. There is an interesting paradox at work here: Since there is an unlimited buyer for low-yield bonds (the central banks), there is no market pressure for higher rates. Why raise yields when you can sell trillions of dollars of low-yield bonds to the Federal Reserve, Bank of Japan, etc.? By buying the new debt with newly created money, the central banks have marginalized the market's ability to transparently price risk and credit: the bond market has in effect been captured by the central banks, who can counter any reduction in demand with newly created money. But the central banks don't control where all this newly issued money goes. If it goes into the real economy, it triggers inflation; if it goes into assets, it inflates asset bubbles. Inflation and bubbles have consequences.

Fukushima Still Pumping Out Massive Amounts of Radiation

More details are appearing on the latest and greatest plan in the shambles to solve Cyprus' (and Europe's unsolvable) problem. It appears the European Group is implicitly declaring economic war on the 'wealthy' depositors (we noted here non-domestic depositors dominated recent inflows) as these headlines hit:

*EURO AREA SAID TO WEIGH CLOSING CYPRUS POPULAR, BANK OF CYPRUS
*EURO AREA SAID TO WEIGH GOOD BANK, BAD BANK FOR CYPRUS BANKS
*UNINSURED DEPOSITS COULD GO TO CYPRUS BAD BANK, FACE 40% LOSS

We assume followed rapidly by some eurozone law-breaking capital controls to stop the remaining 60% flooding out instantaneously...

Oh the irony:

18/01/2008, Trichet: "For a small, open economy like Cyprus, Euro adoption provides protection from international financial turmoil."

Expected to last 60-90 minutes - if Monday's call is any guide - it seems the European Group's teleconference to discuss Cyprus has pressured stocks and WTI (seemingly the new anchor risk asset) to the lows of the session and VIX to highs...

Just as we predicted, it seems Cyprus is rapidly escalating down the path we feared. The latest step:

Cyprus Popular Bank announces restrictions on ATM withdrawal to EUR 260 per customer per day

Bt on the bright side, for the next few hours, they still have liquidity... We just hope the steps we outlined get stalled before this really escalates.

Farcebook does not have a credible advertising model & any Facebook analyst/pundit who valued FB without trying the platform isn't worth the postage to mail his bonus check...

It appears, based on government officials, that things are going a little critical in Cyprus. Following rumors of the closure (restructuring) of good/bad bank assets for Cyprus Popular Bank, we get this news:

*CYPRUS HASN'T HAD ANY FURTHER NEWS FROM RUSSIA: OFFICIAL
*CYPRUS POPULAR BANK HAS "FEW HOURS OF LIQUIDITY LEFT": OFFICIAL

For a while there, one might have been forgiven for believing that all was going to be well; that the recovery was V-shaped and the new-normal was nothing but the old-normal and Goldilocks would reappear. It appears, however, that the central bank lipstick slapped on the deflationary pig of the over-levered global economy is starting to wear off. As the following 4 charts show, things are not as 'recovering' as many hoped (and still hope).

Following the dismal PMIs this morning, most EU equity indices were declining. From around the open of US equity markets, EURUSD began to levitate as the 'bad' news hit Cyprus Popular Bank being 'restructured', no deal with Russia, and ATM lines mounting. Of course, the machines interpreted EURUSD's rise as a positive and European equities (and US equities) got a lift into the EU close. We suspect, in reality, this EUR strength is very different and given the surge in demand for Swiss 2Y rates (now at 2 month lows), EUR-USD basis swaps, and European sovereign bond markets in the last hour, it would appear this is very much repatriation flows and not 'we love the Euro' flows. European stocks did end the day lower though - catching down to credit's earlier week weakness.

The mooted savings levy in Cyprus is a form of wealth confiscation on behalf of the EU which is making depositors throughout the Union nervous. There has been no dramatic increase in the demand for gold in recent days. However, this could be a ‘tipping point’ moment when savers realise that they are unsecured creditors of banks and their savings are not sacrosanct.

Local TV station CYBC reports that police in the Cyprus' capital are scuffling with protesters (including employees of Cyprus Popular Bank) outside the nation's parliament:

*CYPRUS POLICE CLASH WITH BANK EMPLOYEES OUTSIDE PARLIAMENT

CYBC says more protesters gathering at Parliament House

Refuting earlier comments from the regulator that Cyprus Popular Bank would not be shuttered, CYBC is reporting (following the failure to sell it to the Russians) that the bank is to be shut down, split into good-bank-bad-bank, and that deposits under EUR100,000 will be protected.

• *CYPRUS POPULAR BANK TO BE SHUT DOWN, STATE-RUN CYBC SAYS
• *CYPRUS POPULAR BANK TO BE SPLIT IN GOOD, BAD BANKS: CYBC
• *CYPRUS POPULAR BANK ASSET PROCEEDS TO BE RETURNED TO DEPOSITORS
• *CYPRUS POPULAR BANK DEPOSITS OF LESS THAN EU100,000 GUARANTEED

Of course, we await the re-refutation but for now it seems the latest news trumps the regulators 'lies' earlier.