Archive - Mar 2013

It appears the Cypriots (or more clearly the European leaders) do not appreciate the extent to which Russia has propped up the local economy. “When the Russians leave who is going to stay at the Four Seasons for $500 a night? Angela Merkel?” one wealthy Russian asks rhetorically, as The FT reports, they are receiving a deluge of overseas phone calls from helpful Swiss bankers looking to swoop up the deposit transfers. "The locals should understand: as soon as the money leaves, the people who go to restaurants, buy cars and buy property leave too. The Cypriots’ means of living will disappear," and there are signs that the locals are getting how drastic this situation is, as a large billboard has sprung up at Larnaca Airport with a Russian flag and the words "Brat’ya ne predaite nas!" - "Brothers, don’t betray us!" Many Russian businessmen appear to have one foot out of the door already and are considering whih jurisdiction to move to as they await to see if Medvedev follows through on his threat to dismantle the double tax treaty with Cyprus.

While Friday's 'hope' triggered some selling pressure in Bitcoin (in EUR), it appears the dismal reality of Europe's new normal has spurred a 'great rotation' as BTC just hit EUR60 for the first time ever...(from EUR36 before the initial Cyprus news last week).

Who said the circus left town?

This is what the world's "smartest" economist is calling for.

Unfortunately, when we posted this chart showing European bank loan-to-deposit ratios we were about 10 months ahead of the "deposit impairment to grow into non-bad loan assets" curve. Now that Cyprus over the past week, and DieselBOOM in the past hour, has reminded everyone just how critical it is to not be a soon to be impaired uninsured depositor in any European bank encumbered with a massive loan burden, where one "resolution" may (and will) be depositor impairment, it is time to bring this back up front and quite personal. Because when the next insolvent European bank is revealed to be, gasp, insolvent, it just may have saved your money in retrospect.

It was all going so well. TV pundits could proclaim their omnipotence - knowing full well that Cyprus was a storm in a teacup - and then D-Bom hit the wires with some harsh reality speak. European banks plummeted - most of Italy's banking system ended limit down, European bank credit spreads blew to their widest in 4 months and bank stocks are playing catch down - as we pointed out recently  (with their biggest 6-day plunge in 8 months) and almost negative YTD. Equity indices across the continent saw their biggest drops in a month (since the Italian elections) but it was Spain and Italy that bore the brunt - rightfully so as fulcrum securities. Bond spreads snapped wider (from opening notably tighter) as rumors of an Italy downgrade and Fitch reconsidering the sovereign/banking link didn't help. Swiss 2Y rates held at 0% and while it dropped notably on the day, Switzerland's SMI was the best performing stock market on the day, as the Russian Ruble saw its best day against the EUR in 6 weeks. "Europe is fixed," indeed.

It is perhaps oddly fitting that Andri Antoniades "an experienced and versatile Senior Executive Banker with a proven track record of success (who lists "travelling [sic], cooking and community work" as his interests") i.e., the "special administrator" just announced by the Cyprus Central Bank to implement last night's announced wind-down of the second largest Cyprus bank, Laiki (which supposedly was the primary money laundering conduit for wealthy Russians and other oligarchs) worked for 25 years in that other titan of alleged global money laundering: HSBC (which has neither admitted nor denied such allegations formally). Because who better to unwind a money laundering operation than one who has (allegedly) two and a half decades of experience winding one.

The by-now infamous Dutch FinMin Jeroen Dijsselblom - and head of the Eurogroup of finance chiefs - made some fascinating comments this morning with Reuters and the FT that are changing the shape of European markets rapidly. From banks need to save themselves to forcing "all financial institutions, as well as investors, to think about the risks they are taking on because they will now have to realize that it may also hurt them," he is making a lot of sense - though we suspect Mr. Draghi will not be amused as his 'promise' looks like being tested. Simply put, Dijsselblom is saying that a balance sheet can be 'normalized' not only by boosting assets (courtesy of the ECB) but by collapsing liabilities (or remarking bad loans to market) - something that no one in power has admitted to date. While this is upsetting to markets - so used to the visible hand of central planning saving themfrom themselves - this is very positive step for 'real people' as taxpayers appear to be 'off the hook' and the responsible parties beginning to be punished.

^{Importantly, Cypriots and other Eurozone citizens who own gold saw the value of their holdings rise 2% in euro terms.}

The demise of gold and the "death of the gold bull market" is "greatly exaggerated" says Mr. O’Byrne.

^{He said that while the risk from Cyprus has abated, in the light of capital controls in EU country and the treatment of Cyprus, there are now huge question marks over the future of the European Union itself.}

This is precisely what I feared would happen: that any basic rules or laws would be tossed out the window during times of extreme crisis. This has unfortunately proven to be the case.

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...