Archive - Mar 25, 2013

Perhaps it was their comment last week that "with the brains in Brussels... the Euro can't last," but the Orthodox Church of Cyprus has lost over EUR100 million reacted to its holdings in Bank of Cyprus. Church leader Archbishop Chrysostomos II, in comments on TV, noted that "Cyprus asked for 'crumbs' compared to large size of Europe’s budget," and that those responsible in Cyprus should be punished (he blames the outgoing government, Ministers of Finance, the Central Bank, and the Executive Directors of Banks) - "those that brought the place into this mess, should sit on the stool." He noted that people will lose jobs and the state will be poorer but that the Church is prepared to help; and his first step - to send invitations to the heads of various Russian companies on the island.

The IMF offered Cyprus a bailout with no specific amount or even range and no time period while in the process gutting confidence in the banking system by robbing depositors and imposing losses on bondholders. A Damn good plan if I ever heard one!!

Perhaps the best example of a "word out of place" comes from the new Eurogroup head, Dijsselbloem, also phonetically known as Diesel-BOOM, who just may have ushered in the next, next wave of the Eurozone crisis:

• "Cyprus a Template For EU"

Er... wasn't it a special case, inside a unique case, wrapped in a one-time case? We will ignore the rather hilarious Freudian slip, and focus on what he was explicitly talking about with Reuters, in what Cyprus allowed was the effective usurpation of democracy - the only reason the Cypriot bailout "passed" (at least so far) is because it was structured as a bank restructuring, a financial system "resolution", not a tax, and thus not in need of a parliamentary, democratic vote. Because as Cyprus also showed, votes to deprive depositors of cash, whether insured or uninsured, simply won't fly. Hence the shift.

FX, bond, and stock markets in Europe are not happy. As the EURRUB sees it biggest drop this year (Ruble buying), it appears whatever confidence-inspiring Dijsselblom believed in last night has faded rapidly as Italian and Spanish stocks plunge to the lows of last week (after opening gap higher). Italian and Spanish bank stocks are on-and-off halted. EURUSD is getting hammered. Italian and Spanish bond spreads are blowing wider from gap tighter openings. This is not good... The reason appears to be: Cyprus a Template For EU, Reuters Says, Cites Dijsselblom

Wondering why the Euro is losing steam so quickly this morning after the Eurogroup 'saved' Cyprus? Perhaps this FX cross is the reason...

Contrary to rumors that a background "Russian reckoning" may be taking place, in the aftermath of this weekend's Berezovski suicide which was followed this morning by a rumor that his arch nemesis Putin-backed Roman Abramovich, it appears that for now any 'hopes' of a wholesale retribution against the Russian oligarchs are just that for now:

*ABRAMOVICH NOT DETAINED IN U.S., SPOKESMAN MANN SAYS

The most positive aspect of last night’s deal was that a deal was reached at all, and that some steps have been taken to counter moral hazard. However, overall, this is a bad deal for Cyprus and the Cypriot population. Cypriot GDP is likely to collapse in the wake of the deal with the possible capital controls hampering the functioning of the economy. The large loan from the eurozone will push debt up to unsustainable levels while the austerity accompanying it (along with the bank restructuring plan) will increase unemployment and cause social tension. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and central bank funding, with little hope of economic growth. Meanwhile, the country will remain at the edge of the single currency as tensions increase between members with Germany, the ECB and the IMF now looking intent on a more radical approach to the crisis. The eurozone took this one down to the wire. But late last night, after a week of intense back and forth negotiations, a deal was reached on the Cypriot bailout. Below we lay out the key points of the deal (the ones that are known, there are plenty of grey areas remaining) and our key reactions to the deal.

Before last Saturday, few even knew where Cyprus was located. Then, courtesy of the most epically bungled up "bail-out in" attempt in the history of the Troika, Cyprus became the only thing everyone talked about: the definition of a black swan. How did this transformation from an ugly island duckling to a glorious black swan look like from the perspective of the media? The following chart courtesy of Bloomberg's Michael McDonough, which shows the instances of mentions of the words "Apple", "Germany" and "Cyprus" across newswires, shows the answer which not surprisingly even looks like a swan.

The silver market is increasingly becoming an exercise in contradiction. On one hand, the silver spot price has disappointed thus far in 2013, falling from the low-thirties in early January down to its current level around US$29.00/oz. Given that price direction, one would be forgiven for assuming that the silver ETF's had experienced outflows over that time - but they have not.

As the financial media breathes a sigh of relief and asset-gatherers can go back to their business of commission-taking, proven right once again that at first blush (because US equities are higher) Cyprus has been saved and the world is safe once again to extend risk wherever you wish; it appears something less than exuberance is occurring elsewhere. Spanish stocks (and Italian and Spanish bonds) are losing ground fast this morning; the USD is notably bid with EURUSD now below Friday's close; Gold and Silver are tumbling; Swiss 2Y rates remain at zero; and S&P 500 futures are at exactly the same place they were when the 'deal' was announced last night.

Depression for Cyprus: Our Cypriot GDP forecast entails a drop of just over 20% in real GDP by 2017. This forecast had already factored in much what was agreed, but did not account for the additional uncertainty shock generated by the past week’s appalling political mess. Risks are clearly on the downside and Cyprus will in all likelihood require additional financial assistance further down the road. Accounting for less than 0.3% of euro area GDP, any downward revision to Cyprus will be barely visible on the euro area aggregate.

While the news flow is dominated by Cyprus, it will be important to not lose sight of the developments in Italy, where we will watch the steps taken towards forming a government.  The key release this week is likely to be US consumer confidence. Keep a watchful eye on the health of the consumer in the US after the tax rises in January. So far, household optimism and demand has held up better than expected. The IP data from Taiwan, Singapore, Korea, Thailand, Japan will provide a useful gauge on activity in the region and what it reflects about global activity, however Chinese New Year effects will need to be accounted for in the process.

First, it is Merkel's turn, which last week was furious at Cyprus for daring to reject the first flawed Eurogroup plan impairing insured depositors, only to praise it for now... rejecting said plan. To wit: Chancellor Angela Merkel, "as well as the government, is very happy that the troika, the euro group and Cyprus were able to reach an agreement," German government spokesman Steffen Seibert says in Berlin. He added that difficulties will arise in the short term because of measures aimed to scale back Cyprus’s banking sector, "but in the long run it will lead to a healthier” industry. That remains to be seen, especially when factoring in the Russian response. Which wont be pleasant.

• Cyprus Salvaged After EU Deal Shuts Bank to Get $13B (BBG)
• Last-minute Cyprus deal to close bank, force losses (Reuters)
• Anxious, angry Cypriots face uncertain future (Reuters)
• Spain Brings the Pain to Bank Investors (WSJ)
• First Switzerland now... U.S. Seeks Answers in Liechtenstein on Tax Cheats (BBG)
• Rebel Free Syrian Army founder loses leg in Syria blast (Reuters)
• European Stocks Rise on Cyprus Deal as Italian Bonds, Crude Gain (BBG)
• Michael Dell Likely to Sweeten Buyout Bid to Save Legacy (BBG)
• Bankers’ pay premium is narrowing (FT)
• Surgery Restoring Penis After Prostate Cancer Increasing (BBG)
• Silent or supportive, conservatives give gay marriage momentum (Reuters)

As before, the Eurogroup will contribute, via the ESM, up to EUR 10bn (roughly 60% of Cyprus’ GDP), the bulk of which is to be used to cover debt roll-overs and the primary deficit now that the country has all but lost market access. The restructuring of the two banks will be conducted under the new and extensive bank resolution authority conferred to the Central Bank of Cyprus last week, and will not require parliamentary approval. The operation will involve losses being inflicted on the (few) junior and senior bank bondholders of the two institutions and, more crucially, on deposits above the EUR 100K threshold (a communiqué by the Eurogroup talks about a deposit-to-equity conversion, but no details are provided)....  Reaching a deal has raised awareness that inter-country fiscal transfers in the Euro area remain a messy business, leaving public opinion damaged. Until more clarity emerges on how Cyprus will settle after the banks re-open, however, and with an attempt under way to form a new government and find a new President, we prefer to stay on the sidelines until the dust settles.