Archive - Mar 27, 2013

The big news out of Europe is whether or not Cyprus will be a template for future bailouts. Having seen that issues like personal property, rule of law, and democracy got thrown out of the window in Cyprus as soon as things got hairy, investors and depositors throughout Europe are panicked as to whether they will be targeted next when the next European Domino starts to fall.

As of now, the banks are still expected to open tomorrow; some of the details of the capital controls to be put in place have been leaked (via Phileleftheros):

• *CYPRUS CONTROLS APPLY TO ALL ACCOUNTS, CURRENCIES
• *CYPRUS BANK CONTROLS INCLUDE CURBS ON CASHING CHECKS
• *CYPRUS BANK CONTROLS TO BE IN FORCE FOR 7 DAYS
• *CYPRUS CURBS INCLUDE BAN ON ENDING TIME DEPOSITS
• *CYPRUS CURBS TO INCLUDE PAYMENTS ABROAD

So no outflows allowed to a foreign country (cough Russia cough) and for only 7 days (Pluto Standard Time?); furthermore, talk is that carrying cash of over EUR3,000 across the border wil be banned.

"We were alone... It’s clear that Germany wants to impose its views on the peoples of southern Europe, which need her at the moment. The toughest decision was that for Cyprus: it was a ruthless decision to wreck the country’s economic system, which will have huge and unpleasant consequences.”

In the seven days since Slovenia's new government has been in power, their 10Y bond has seen its yield explode over 120bps as the investing world searches for the next 'Cyprus'-like land-mine. Of course, the Slovenian leaders are proudly denying it all, "Slovenia won't need aid, we can do this on our own," but with the nation needing EUR3 billion in bailout funding and the previous government proposing a 'bad-bank' style breakup, one can only imagine the capital outflows that are viciously circling this nation's financial system (given the relative size of their large 'uninsured' depositor base as shown here - SI). How will they solve the problem? By tapping international bond markets of course, "depending on market sentiment."

A brief note on what to look for in the capital controls Cyprus will soon announce. The purpose is not to pass judgment on the merits of capital controls, but to discuss the implication.

Greece has re-entered a bear market. Its stock market, after seven months of exuberance has dropped 20% in the last month. Greek government bonds are also in trouble as the no-brainer trade is now at three-month lows (with its price also down 20% from just a week ago). It would seem that 60% youth unemploymet may actually mean something once again...

The Dutch Finance Minister chaired the meeting on Cyprus. He was the one that directed the entire affair on Cyprus and the template that he revealed was first denied then admitted, then denied by the ECB and confusion reigned supreme. Now here comes the first pig; the representatives of the Eurozone finance ministries released a document this morning stating that Cyprus was not the template for future bail-outs. I suppose it was initially written in German and translated into English however they must have forgotten to translate it into Dutch. This is because when the Dutch Finance Minister was asked about this document, and he is the Chairman of the Finance Minister group remember; he said he knew nothing about the document. I am not making this up. My imagination is good but not this good. The good news this morning is that we already know which country is going down next. That country is Luxembourg.

It seems the realization that i) Cyprus mattered, ii) If Europe slumps then US will be infected (no matter how clean the asset-gatherers believe the shirt to be) is impacting markets globally once again. A slew of horrible data overnight following yesterday's US data disappointments (following US earnings bellwether misses) is finally (now at quarter-end) having some impact on the euphoria. European stock markets are dropping rapidly with Spain and Italy down 5 to 6 % this week now. Spanish, Italian, and Portuguese bond spreads have blown back wider (Spain yield back over 5%) by 30 to 40bps this week alone and EURUSD is getting monkey-hammered breaking back below 1.2800 - its lowest in over 4 months. European (and US) banks are also in trouble with the former now negative year-to-date. US Treasuries are well bid on this safe-haven flow (down 6 to 7bps on the week) and Swiss and German 2Y bond yields are negative once again (with the latter more negative as the 'safety' of offshore financial centers seemed less than the core of Europe).

Russia and South Africa, which together control about 80% of the world’s reserves of platinum group metals, plan to create a trading bloc similar to OPEC to control the flow of exports according to Bloomberg. “Our goal is to coordinate our actions accordingly to expand the markets for realization of these metals,” Russian Natural Resources Minister Sergey Donskoy said yesterday in an interview at a summit of leaders from Brazil, Russia, India and South Africa in Durban. “The price depends on the structure of the market, and we will form the structure of the market.” South Africa mines about 70 percent of the world’s platinum, while Russia leads in palladium, a platinum group metal used in autocatalysts, with about 40% of output, according to a 2012 report by Johnson Matthey Plc. Palladium rose 0.8% yesterday to $763.50 after Donskoy’s comments, reversing declines to reach the highest level since March 18. Platinum, used to make jewelry and autocatalysts, has risen 2.3% this year because of increased demand from the auto industry and after supply disruptions at mines. The price jumped yesterday in the hour after Donskoy’s comments, narrowing yesterday’s decline. South African Mines Minister Susan Shabangu confirmed that the two countries aimed to counter oversupply of platinum, and said possible measures could include taxes and incentives. “We’re not really controlling the market,” she said in an interview in Durban. “We want to contribute without creating a cartel, but we want to influence the markets.”

On Monday we reported the very disturbing news that despite the ongoing liquidity blockade, capital controls and (somewhat) closed Cyprus banks, one particular group of people - the very same group targeted to prompt this whole ludicrous collapse of the island nation - Russian Oligrachs had found ways to bypass the ringfence and pull their money out quickly and quietly. We said that, if confirmed, "If we were Cypriots at this point we would be angry. Very, very angry." Turns out the Cypriots did become angry, and the questions are finally starting. As Spiegel reports, the Cypriot Parliament, which may or may not last too long once the banks reopen tomorrow and the people realize that in a fractional reserve banking system, those deposits you thought were there... they are gone, poof, has begun investigating the capital flight that may means the destruction of Cyprus has been for nothing. Sadly, it is now too little, too late.

Recall the fate of the East German MZ motorcycle company (see picture below). Prior to the 1990 reunification of Germany these motorcycles were an extremely common sight (eyesore?) on the streets of London. But in what many saw as a cynical vote catching measure, Chancellor Kohl allowed the East German savings in Ostmark deposits to be converted into the Deutschmark at a one-for-one exchange rate (the black market rate was nearer to 10-1). The immediate euphoria of East Germans being able to spend their savings at a favourable exchange rate was replaced by gloom as East German industry was bankrupted at this wholly incorrect exchange rate.

• What bread... What circuses... JPMorgan Chase Faces Full-Court Press of Federal Investigations (NYT)
• European Regulators to Charge Banks Over Derivatives (WSJ) ... but forgive us if we don't hold our breath
• Cyprus readies capital controls to avert bank run (Reuters)
• Damage ripples through Cypriot economy (FT)
• G4S readies guards as Cypriot banks prepare to open (Reuters)
• Global pool of triple A status shrinks 60% (FT)
• Customers Flee Wal-Mart Empty Shelves for Target, Costco (BBG)
• BOE Says U.K. Banks Have Capital Shortfall of $38 Billion (BBG)
• U.K. Banks Facing Capital Shortfall (WSJ)
• Cyprus Details Bank Revamp (WSJ)
• Kazumasa Iwata Joins Kuroda Naysayers as BOJ to Meet (BBG)
• BRICS Nations Need More Time for New Bank, Russia Says (BBG)

While everyone likes to hate on Cyprus, it is Italy that is the focal point of today's European "omnishambles" that has seen the EURUSD tumble to a five month low as of this writing. First it was economic data that scared investors, with Industrial Sales and Orders tumbling far below expected, posting numbers of -1.3% and -1.4%, respectively, on expectations of an increase. Retail sales were just as ugly, declining by -0.5% in January, on expectations of an unchanged print, with the December 0.2% number revised also into negative territory. Then Bersani, who has been tasked to form a government until tomorrow, said that the possibility of a broad coalition government does not exist, adding that no lasting government is possible without him as a premier, and requesting that Grillo's Five Star party not block his path to government, for which we wish him the best of luck as moments later Five Star ruled out all external support for a broad government and would vote no confidence for Bersani. Then we got news that the Italian financial police has searched the Nomura in Milan in connection with the Monte Paschi case, which means even more skeletons in the closet are about to be uncovered. Finally, Italy just held a 3.5% 5 and 4.5% 10 year bond auction in which the country raised less than the maximum targeted €7 billion, and in which the Bid to Cover on the 5 Year dumping to the lowest since 2002, with bidding quite soft and the yield rising to 3.65% versus 3.59% previously. This has resulted in a blow out in Italian yields by 16 bps to 4.73% compared to 4.705% earlier. End result, as noted yesterday, has been an acceleration in the rush out of the EUR, with the EURUSD sliding to under 1.28 for the first time since November 21, a blow out in Greek bonds with yields pushing up 55 bps to 12.68% and a push for real safety (sorry, not the DJIA) in the form of German 2 Year bonds, which have dipped to -0.018%, the lowest since December, on rising fears that despite endless lies out of its bureaucrats, Europe may not be fixed after all.

Do you think that depositors in Cyprus are being taxed? That their money is being taken from them to go to the government in Cyprus or to Europe? Most analysis of the Cyprus bailout is wrong...