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Why Cyprus is Important

Marc To Market's picture





 

European officials have impressed upon investors that the tail risks of a EMU break up have receded markedly.  Some officials talk even that the crisis is over.  The premium Italy, and to a less extent, Spain, pay over Germany have narrowed to levels that had previously thought possible only if the ECB were to make good on its promise of unlimited (ex ante) purchases.  There have been some signs that foreign investors are participating in the primary and secondary sovereign European bond market.  Ireland is returning to the capital markets.

To be sure, challenges remain. Greece's will and ability to impose more austerity is questioned.  Spain has relied on cuts in public investment over the last several years while other spending has actually risen.  With high issuance this year than last, apparently without the help of another LTRO (with some borrowing, perhaps around 100 bln euros expected to be paid back early--beginning as soon as the end of Jan), Spain's funding challenges are likely to resurface.  Italy's elections next month could still result in a hung parliament, with Monti's centrist movement seemingly contributing to the fragmentation.

However, it is Cyprus that may be the most pressing issue.  Yes it is small and few international investors have any exposure.  However, its significance extends beyond its size.

There are four main issues.  First, the amount of assistance it needs is still not determined and won't be until later this month.  Nor, contrary to reports will the Europe be a in position at the finance ministers' meeting in early Feb to devise an aid package.  This will forces the Cyprus government to rely on "creative" fund raising, such as "borrowing" the money from state-owned institutions and pensions.   Aid now seems unlikely until March at the earliest.

Second, reports (in the German media) at the end of last year warned that Cyprus banks have been used to avoid taxes and launder (primarily Russian) money.  This has prompted concern from the German SPD and Greens.  German Chancellor Merkel has had to rely on support from these opposition parties for her European agenda.   Aid to Cyprus could be rejected by the German Bundestag, which would raise broader concerns.

German elections are likely in September and the SPD's Steinbrueck's campaign is not off to an auspicious start.  However, this issue, could become a wedge.  Moreover, Lower Saxony holds state elections in a couple of weeks and it could see Merkel's ally the FDP further implode and a shake up in the party's leadership. The CDU is polling near 40% and will likely need an ally to form the new government.                                                          

Third, while the Troika (EU, ECB, IMF) had looked like a solid front in the early stages of the European crisis, fissures appeared toward the end of 2012.  These fissures are evident in dealing with Cyprus.  The IMF wants the private sector participate in burden sharing (i.e., debt restructuring/haircut) before tax payers money is brought to bear.  Yet previously European officials have indicated that Greece was unique in requiring a debt restructuring.  Although at first European officials resisted the IMF's participation, now it seems that they are reluctant to proceed without it                                          

Fourth, the EU has been accused of playing political favorites.  For example, some reports suggest that EU officials were aware of at least some of the deception of the conservative Greek government before the 2009, but was reluctant to confront it for fear of bolstering the opposition Socialists.   Now it appears European officials want to distance themselves from Communist president of Cyprus, Christofias.  Merkel, for example, who will visit Cyprus later this week, is not expected to meet him.  Cyprus will hold presidential elections on Feb 17.  If no candidate receives 50% of the vote, which is the most likely scenario given the recent polls, a second round would be held on Feb 24.

While last year we argued against the widespread view of a Greek exit, we are not as sanguine about Cyprus.  Although one does not see it reflected in the survey or policy markets like intrade.com, we suspect the risks of a Cyprus exit are greater than currently appreciated.

 


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Wed, 01/09/2013 - 12:55 | Link to Comment Navymugsy
Navymugsy's picture

They just announced that the unemployment here in Cyprus is at 14%. That's up from 9.5% last November. We're on our way to #1 bitches!!!

 

http://famagusta-gazette.com/cyprus-among-countries-with-highest-unemplo...

Wed, 01/09/2013 - 13:57 | Link to Comment Stuck on Zero
Stuck on Zero's picture

No way buster.  The U.S. is #1 in that area and will always remain so.

 

Wed, 01/09/2013 - 12:29 | Link to Comment Jack Sheet
Jack Sheet's picture

"there have been some signs..."
"perhaps.."
"are likely to.."
"could still result in.."
"seemingly contributing to..."
" seems unlikely..."
"could be rejected.."
" elections are likely.."
"this issue could become.."
" now it seems they are reluctant.."
....
you have missed your vocation as a political spokesman

Wed, 01/09/2013 - 17:51 | Link to Comment Marc To Market
Marc To Market's picture

Jack, I try not to project a greater certainty than the evidence allows me.  I think of it as intellectual honesty and integrity.    There are some commentators who do not do as I attempt.  If you think that pretending or claiming greater knowledge is more helpful/useful, good luck.  Let me know how that goes.  We live, I think, in a probabalistic world.  Why pretend otherwise ?    And to be clear, you don't have a problem with analysis, that concludes that the risk of Cyprus leaving is greater than many seem to think, but your criticism is that my analysis is nuanced and respects and embraces conflicting evidence ?  Really ?  

Wed, 01/09/2013 - 11:59 | Link to Comment SmoothCoolSmoke
SmoothCoolSmoke's picture

Uh-huh.   So now Cyprus is going to bring down the Bankster Cartel.  When does Cyprus hold some kind of "vote" that ZH can get worked into a lather about? 

Wed, 01/09/2013 - 11:27 | Link to Comment geno-econ
geno-econ's picture

Meltdown gold content in those Orthodox priest crowns would solve problem as well as confiscating and selling Church owned land which really belongs to Cyprian people.  Same applies to Greece, including taxing wealthy tax evaders. Latter also applies to US tax loopholes concocted by Congress.  Alternatively, buy Cyprus Semiconductor

Wed, 01/09/2013 - 12:20 | Link to Comment OneTinSoldier66
OneTinSoldier66's picture

And once you've gotten your way and had Government eat the rich, then what? Am I next?

Wed, 01/09/2013 - 12:47 | Link to Comment geno-econ
geno-econ's picture

Depends on how you made your money.  If you made it the "old fashioned way" ---no problem.  Otherwise, consider a quick expatriation 

Wed, 01/09/2013 - 16:05 | Link to Comment OneTinSoldier66
OneTinSoldier66's picture

Understood. I just want the strictest regulation of all, the free market. Know where I can find one of those?

Wed, 01/09/2013 - 10:46 | Link to Comment disabledvet
disabledvet's picture

One of my favorite stocks. Cyprus Semiconductor (sp?) is a beaten down name with "solar connections" having spun off it's solar division years ago at the peak of the bubble. Thanks for the update...glad to see you agree.

Wed, 01/09/2013 - 10:45 | Link to Comment disabledvet
disabledvet's picture

One of my favorite stocks. Cyprus Semiconductor (sp?) is a beaten down name with "solar connections" having spun off it's solar division years ago at the peak of the bubble. Thanks for the update...glad to see you agree.

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