Archive - Mar 2013 - Story

While this kind of 'wealth tax' has been predicted, as we noted yesterday, this stunning move in Cyprus is likely only the beginning of this process (which seems only stoppable by social unrest now). To get a sense of both what just happened and what its implications are, RBS has put together an excellent summary of everything you need to know about what the Europeans did, why they did it, what the short- and medium-term market reaction is likely to be, and the big picture of this "toxic policy error." As RBS summarizes, "the deal to effectively haircut Cypriot deposits is an unprecedented move in the Euro crisis and highlights the limits of solidarity and the raw economics that somebody has to pay. It is also the most dangerous gambit that EMU leaders have made to date." And so we await Europe's open and what to expect as the rest of the PIIGSy Banks get plundered.

That Russia has previously threatened, and followed through with, sending ships to the Mediterranean is nothing new. In the past, every such episode was related to the protection of what Putin considered vital geopolitical interests in the region: whether defending the Syrian port of Tartus, various crude and natural gas pipelines in the region threatened by NATO expansion in Turkey, or offsetting heightened US presence around Gaza and Israel (and of course Iran). Which is why with the legacy conflicts in the region dormant, and the only news of any relevance being the European intervention in Cyprus against Russian oligarch interests, it is surprising we learn today that the Russian Navy will dispatch a permanent fleet of five or six combat ships to the Mediterranean Sea, with frigates and cruisers making up the core of the fleet... How soon until we read that Russia is willing to invest even more unguaranteed loans into the Cypriot financial system.... in exchange for one little tiny naval and/or military base?

Four months after we made our call to short the living daylights out of Cable following the announcement that Goldman's Mark Carney is coming and is getting ready to crucify the BOE's balance sheet, we were confused: +1400 pips in our favor, it appeared the profit bonanza could never end and yet we didn't want to get too greedy. And then came none other than the most invaluable analyst on Wall Street, Goldman's Tom Stolper, who made our decision easy. Last Monday, the man who bats between 0.000 and 0.050 boldly went where he had been so many times before, and said to go long EURGBP on "monetary policy and current account differentials" with a stop loss of 85.70. Naturally, we read between the lines. Sure enough, as of this posting, EURGBP is now 85.38, well below the designated stop loss, and over 200 pips in favor of those who, as usual, faded perhaps the worst FX "strategist" of all time. Which, incidentally, is why Stolper may well be the most valuable of his breed on Wall Street: rarely has there been man whose calls have made so much money for so many.

Given FX markets are double-dipping now, it is little surprise that S&P 500 futures open down 16 points from the 1553.5 close on Friday - a one-week low. This is the biggest close-to-open gap down since May 2012. Treasury Futures just opened implying a 1.94% 10Y (-5bps) and 3.16% 30Y (-5bps). And despite the USD strength, spot gold just opened also up from $1591.95 to $1607. The arb against JPY carry is holding stocks for now... only another 8 hours until Europe opens... Over 38,000 contracts have traded in S&P 500 futures in the first 5 minutes ($2.9bn notional) - 30 times the average for a Sunday night... The initial dump was caught by a VWAP reverter but that is fading now... Japan's NKY looks set to open down around 500 points or so given JPY's strength.

Following Angela Merkel's address to her people this evening, explaining, "anyone having their money in Cypriot banks must contribute in the Cypriot bailout. That way those responsible will contribute in it, not only the taxpayers of other countries, and that's what is right," we thought it ironic that the people of Greece envisioned her in a slightly different light today during a parade in Patras. 'Union'? No tension here at all...

If initially Europe came out as utterly deranged in its Cyprus deposit-confiscation scheme, at least it was consistent. Now, it appears that Europe is desperate to appear not only completely incompetent but also unable to even make a simple decision and stick with it, following news from both the WSJ and the FT that the original confiscation thresholds of 6.75% and 9.9% for deposits below and over €100,000 is about to be revised.

A lot of analysts have given the European situation a rest since last year. There were certainly some 'market' signs that the ECB and IMF had slowed (if not stopped) the deterioration by providing liquidity backstops to the addled banking system. But perhaps that was just the calm before the storm. In truth, things were still probably just as perilous as ever up until yesterday when the ECB and IMF decided to start a banking panic by enforcing a haircut of up to 10% on bank depositors. That was literally the stupidest thing that anyone has done since the Euro crisis began, and while it may not lead to utter disaster, there is a significant chance that it will. If bank runs materialise across Europe next week, the unemployment situation is most likely to worsen even further. If that happens, expect more and more unemployed, underemployed and angry Europeans to start voting for increasingly radical political parties. This is suicidal.

It seems the European Union (IMF et al.) have decided that the route to crisis stabilization, just as we outlined here over a year ago and updated here, is through a wealth tax. However, as Handelsblatt reports, the gross distortions of wealth distribution among both core and peripheral nations (evident in the chasm between 'mean' and 'median' net assets - or wealth) makes some nations more 'capable' of 'giving' and as Commerzbank's chief economist notes, median wealth in Italy is EUR164,000 (as opposed to Austria's median of around EUR76,000 and mean of around EUR265,000) meaning that, in theory, Italy has no debt crisis (with net assets at 173% of GDP - significantly more than the Germans at 124%), "so it would make sense, in Italy a one-time property tax levy," he suggested. "A tax rate of 15% on financial assets would probably be enough to push the Italian government debt to below the critical level of 100 percent of gross domestic product." So there you have it, the 'new deal' in Europe, as we warned, is wealth taxes and testing the "capacity of Cypriots" appears to be the strawman on what the public will take before social unrest becomes intolerable.

With President Anastasiades concluding his remarks, Cypriot public opinion, as it has changed over the first critical 24 hours after yesterday's Eurogroup decision, are recorded in a survey conducted by the Insight Market Research (IMR) agency at the University of Nicosia. The survey shows that the first reaction of Cypriots can be characterized as anything but positive with 71% believing the the House should reject the deposit haircut imposition and a full 73% believe that President Anastasiadis and the Cypriot delegation "failed to secure a good deal." 72% believe that depositors below EUR100,000 should not be affected at all but 62% believe Cyprus should stay in the Euro. Begging the question, when's the next Cypriot election?

As Citi's Steven Englander suggested earlier, the developments in Cyprus will lead to EUR selling and USD, CHF, GBP, NOK and SEK  buying (in that order). He adds, the issue is whether to believe that the Cyprus levy on depositors is one-off, but depositors and investors elsewhere could easily see this as another in a string of ‘one-offs’ and react badly. The risk-return to depositors in countries with weak banking systems may not favor taking the risk that Cypriot banking system was so unique that such a levy would never be considered elsewhere. The levy on deposits ostensibly covered by deposit insurance may also undermine confidence in weak banks. The question is whether this becomes a full-blown crisis or a mini-crisis. For now, as FX markets open, it appears EURJPY is getting hammered (from 124.47 close to 121.6) implying S&P futures will open down around 30 points. We are sure Abe is watching closely...

The incredible reality that so many Cypriots woke up to this weekend (after the late Friday NY time announcement of their deposits taking a haircut to save their precious banking system) has spurred the citizenry to take to Twitter to vent their anger and frustration. As we asked just as few days ago - has the European Spring begun, perhaps it is time for someone to launch social media guillotines as the 'elites' seem happy to say "let them eat Lokmades (Cyprus Cake)"...

It's all Greek to us, but with the FX market set to open in an hour, and with the recently-elected Cyprus president Nicos Anastasiades set to speak at 7 pm local, we are confident quite a few may be interested in what they see in a live webcast from what has become Ground Zero in the latest European risk-flaring episode (especially with at least one protest already scheduled outside of the Cypriot parliament at 3:30 pm tomorrow).

Politics aside, the bottom line is that the Rubicon has been crossed, and deposits have now been forcefully confiscated in what Europe promises to be a standalone case. What is certain, is that nobody will wait to find out how long it takes before Europe's class of increasingly more desperate and ill-meaning despots is found to be have lied once more (as it has about everything else since the start of the European crisis). And while the mainstream media will be focused primarily on Europe in the coming days, as BCG and we have warned, the topic of "wealth taxation" is now front and center, and it stars not only Europe, but the US as well.  The question then becomes: what does the funding structure of the US private depository institutions look like, and is there any possibility of Cyprus "wealth tax" recurring on the other side of the Atlantic. To answer this question, we present the summary layout of the consolidated US depository system, which according to the Fed's December 31, 2012 Flow of Funds report had a grand total of $15 trillion in assets, and a matched number of liabilities, of which 72%, or a total of $10.9 trillion was in the form of deposits. So, if the US was to go the Cyprus route, and begin impairing balance sheet liabilities to remark assets, there would be precious little space (with just $4.3 trillion in total other funding liabilities), before one would need to start eating into the deposit base, should Congress decide to implement a very "fair and just" financial asset tax in the US next.

A short trip across the sea from the debacle occurring in Cyprus and it appears the tension is rising up in Greece once again. It is well known that Golden Dawn 'nazi' party won a surprising and disconcerting number of parliamentary seats at the last election, and the massively unstable size of Greece's youth unemployment continues to spell trouble; but, now Greece's most popular sport - soccer (football) - is infected by the increasingly nationalist fervor. As Fox reports, national soccer player Giorgos Katidis has been banned for life from playing for Greece after giving a Nazi salute while celebrating a goal this weekend. Cited as "a deep insult to all victims of Nazi brutality," the striker took to twitter (@GiwrgosKatidis) to proclaim his innocence of the meaning of the gesture (you decide in the image and clip below) - right arm extended and hand straightened - adding that he detests fascism. The question now is - when does the Cyprus soccer team play next? as it seems the peripheral European nations are starting to wake up to the Union's reality and the haircut is the next catalyst.

"Has Europe bazookaed itself in the foot? Even if we avoid a negative outcome this week, events in Cyprus invite broader questions about the region’s commitment, repeated ad nauseum since June to ‘break the feedback loop between sovereigns and banks’. The IMF warned as recently as Friday that the Euro area lacked an effective deposit guarantee framework (before agreeing to a haircut that adroitly proves its point). The Cypriot package reinforces the fact that existing deposit guarantee schemes are only as strong as the sovereign which backs them; something which is unlikely to go unnoticed in the rest of the region (although we think specific contagion risks are limited near-term). Other EU member states will likely be affected, there are significant numbers of UK depositors in Cypriot banks, some of whom the UK has now promised to protect (with echoes of the Icesave situation), and some potential contagion channels may not be obvious. It is notable that German policy-makers have been insisting on Cyprus’ significant ‘systemic relevance’ over recent days while pushing a package that may test it."