Contributing Editors' Blog Entries

Marc To Market's picture

Why Cyprus is Important

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. Its significance extends beyond its size.

Phoenix Capital Research's picture

In Europe the political leaders are now not only proclaiming that the “worst” is over but that in fact the crisis as a whole is over. To say this is political grandstanding would be understatement of the year so far: EU unemployment just hit a new record of 11.8%. Also, both Greece and Spain have issued reports revealing that their banks are massively undercapitalized and in fact have negative values.