Archive - Mar 22, 2013

What if the businesses were fully aware that interest rates were being manipulated? What if they knew exactly how and why this was happening? Would they still misallocate their investments?

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."