Guest Post: The Real Story Of The Cyprus Debt Crisis (Part 1)

Why do the debt crisis in Cyprus and the subsequent "bail-in" confiscation of bank depositors' money matter? They matter for two reasons: 1. The banking/debt crisis in Cyprus shares many characteristics with other banking/debt crises. 2. The official Eurozone resolution of the crisis--the "bail-in" confiscation of 60% of bank depositors' cash in an involuntary exchange for shares in the bank (which are unlikely to have any future value)--may provide a template for future official resolutions of other banking/debt crises. In other words, since the banking/debt crisis in Cyprus is hardly unique, we can anticipate the resolution (confiscation of deposits) may be applied elsewhere.

Water Cannon And Tear Gas In Turkey: The Photo Exhibition

Two weeks after the break out of protests in Turkey, often times violent, the local discontent is nowhere closer to resolution. In fact, it is getting worse, and is on its way to converge with the "resolutions" adopted in its neighbor Greece following news that two Turkish union federations said on Sunday they would stage a one-day nationwide strike on Monday in protest at the forced eviction by riot police of hundreds of anti-government demonstrators from an Istanbul park. From Reuters: "The Confederation of Public Workers' Unions (KESK), which has some 240,000 members in 11 unions, and the Confederation of Revolutionary Trade Unions (DISK) announced the strike in a joint statement. Three other groups representing doctors, engineers and dentists will also join the action, it said."

Sea Of Red

In the brief but tempestuous fight between Abe and the "deflation monster", the latter is now victoriously romping through an irradiated Tokyo, if last night's epic (ongoing) collapse in the Nikkei is any indication: down 6.4%, crushing anyone who listened to Goldman's "buy Nikkei" recommendation which has now been stopped out at a major loss in three days, and now well in bear-market territory, it would appear that a neurotic Mrs. Watanabe is finally with done with daytrading the Pennikkeistock market, and demands Shirakawa's deflationary, triumphal return to finally clam the market. Only this time the Japan's selling tsunami is finally starting to spill, if not to the US just yet (it will) then certainly to Asia, where the Shanghai Composite which was down 2.7%, and is once again well down for the year, and virtually all other Asian stock markets. Except for Pakistan - the Karachi Stock Exchange is an island of stability in the Asian sea of red.

Samaras Says Won’t Backdown on Greek Broadcaster Closure As Coalition Splinters

While we usually think of a butterfly's wings flapping as the cause of chaotic tornadoes around the world, in the case of Greece, it appears Samaras' comments that he "won't tolerate the sacred cows of Statism," after his closure of the nation's TV broadcaster ERT, has sparked much more widespread angst than many could have known. Amid the coalition, the 'opposition' party Tsipras has called for a "no-confidence" vote. A fascinating development given that the Greeks quietly folded when they took away their pensions - but remove the TV and revolution is around the corner.


And the tension is rising since Samaras is adamant that "there is political will to change," and the ERT decision is a "symbol that wastage has ended." This is not going away.

Gold Surges

Nothing like the smell of a fresh Eurozone (thank you Greece!) crisis in the air, to remind everyone that in an insolvent world, where every counterparty is suddenly once again suspect (and collateral-free), there is only one asset class that has no counterparty risk (although the distinction between paper and physical gold is still a far too complicated lesson for most) - gold.

Things In Greece Are Once Again Going Bump In The Trading Day

We have been gently reminding readers for the last few weeks that Greek bonds and stocks have not been dancing to the same tune as the European Union's leaders' proclamations of victory but today it seems the fears are spilling over into other assets. With the closure of the nation's state-owned TV station ERT, it seems the coalition is rapidly coming unglued. The highest of high beta liquidity-fueled momentum dash-for-trash trades are discovering that large crowds and small doors don't mix as the marginal 'flow' is slowing (or feared to slow). Greek stocks are now notably underwater for the year (after being up almost 28%) and Greek bonds are down almost 17% from their highs just a few weeks ago...

Market Update: Easy Come, Immediately Go

It would appear the cleanest dirty shirt is losing its appeal as both bonds and stocks are being sold this morning and the JPY and EUR are rallying as the liquidity washes back home. The USD Index is back at its 10DMA again but it seems the building tension in Europe (Turkey and now the potential for a collapse in the Greek coalition over the ERT closure - which we warned about yesterday) and Abenomics hangover is leading to an unwind of these levered carry trades everywhere around the world.

Europe's EUR500 Billion Quasi-Quantitative Easing

Five Eurozone countries now have loans for half a trillion Euros. These members of the Euro currency union are receiving loans from the one of two bailout funds which are financed by the other 12 Eurozone members. Eurozone members receiving assistance from the two European rescue funds do not pay into it. That means the higher the assistance, the higher the obligations of the healthier countries. Germany already guarantees 27 percent of the loans, France 20 percent and Italy 18 percent. The rescue funds borrow capital, guaranteed by nations of the European Union, in the financial markets and then hand the money to the indebted countries. In doing this they engage in a kind of Quantitative Easing where money is printed based upon the various guarantees. None of these guarantees are counted against the liabilities of any country when the debt to GDP ratios are made public. There is a new scheme underway where bondholders would have to pay for the vast amount of any losses with the money of depositors also in question. There is no agreement yet on this plan. What can be said is that the playing field is being tilted with much more risk now placed in the hands of bond owners and depositors.

Crisis And Chaos Return To Greece Following National TV Shutdown

The biggest news out of Greece is that the events in the 24 hours have pushed the depressed country right back into crisis mode, with political bickering front and center (the opposition leader called the uncoordinated move "a coup" even as coalition partners blasted the broadcaster shutdown while Europe washed it hands), while the economic contraction is set to accelerate once more following what is certain to be another escalation in daily protests and riots. And who can blame them - with that last civilizational "premium" - free TV for all - gone, what else is there to do?

Frontrunning: June 12

  • Pimco Sees 60% Chance of Global Recession in Five Years (BBG)
  • Global Tumult Grips Markets (WSJ)
  • NSA Secrecy Prompts a Pushback (WSJ)
  • ANA Scraps 787 Dreamliner Flight as Engine Fails to Start (BBG) - one of these days, though, it shall fly
  • Kuroda’s April-Was-Enough Message Faces Markets Wanting More (BBG)
  • S&P warns top US banks are still ‘too big to fail’ (FT)
  • Democracy for $500 per plate (Reuters)
  • Iran, the United States and 'the cup of poison' (Reuters)
  • Japan grapples with lack of entrepreneurs (FT)
  • Greece First Developed Market Cut to Emerging at MSCI (BBG)
  • Asia's ticking time bonds; time to cut and run? (Reuters)
  • Sony Outduels Microsoft in First PS4-Xbox One Skirmish (BBG)

Is The Eurozone Crisis Set To Flare Up?

The lack of a centralized constitutional and monetary union has led to several years of inaction in the process of unification of the Euro-zone.  While it was a "grand experiement" to run the Euro-zone under a single currency the underlying structure to make it effective long term was never achieved. There are currently many promises that have been made to the financial system by the ECB.  The question is whether or not they can ultimately "cash the check." While we do not have certain answers as to the where, the who or the when - we are fairly confident that it will be sooner than many currently imagine. We do believe that the ECB will be able to skirt by the ratification of the ESM this coming week and get some limited funding into place, however, we still believe the bigger problem comes at the end of summer when the German voters begin to voice their concerns - after all it is their money that is being wasted.

Greek "Recovery" May No Longer Be Televized Following "Transitory" Shut Down Of National Broadcaster

The Greek recovery (whose GDP recently plunged to year 2000 levels) is progressing as expected, however following the latest news out of the Fourth world country that its national broadcaster ERT, with 2800 employees, will be shut down, it may no longer be televized. There is hope though: following its shutdown, it will be reopened... eventually...  following a substantial downsizing. It is not clear why ERT had to be shutdown just to fire a few hundred people, although union rules are likely implicated. It is also not clear how long until the process is completed. What is clear is that the local workers are unhappy and have already resorted to that favorite Greek pastime: protesting. But at least they have the Euro.