News Russia May Reconsider Cyprus Bailout Role, Bailout Vote Delay Crushes Overnight Ramp Attempt
As expected, it is all about Cyprus this morning, and overnight, and just as naturally it wouldn't be a centrally-planned market without the generic BTFD overnight ramp attempt, which we got from the EURUSD, as the pair rose from sub 1.29 to 1.2973, which also pushed the US futures up to nearly fill half the overnight gap lower. Citi explained this, observing the "EUR/USD squeezed higher on reports Cyprus bailout terms may be eased, CitiFX Wire says", but it did add that "selling was likely to materialize; flow has 60% bias in favor of downside, Seeing heavy net selling, mainly from leveraged funds." Naturally, the market does what it does best - clutches at straws, although not even this centrally-planned market could ignore news that today's Cyprus parliament vote has been cancelled, that banks will likely remain closed tomorrow, and that a vote may not happen until Friday, which likely means the bank holiday is about to stretch to one week, and possibly much longer as Cyprus is terrified to open its banks to the fury of scrambling "bank-runners."
As for Cyprus, the absolute confusion deepens following comments from the ECB's Asmussen that the ECB did not insit on a Cyprus bank levy structure. This is confusing, and comes on the heels of last night's comments from German FinMin Schauble in which he blamed the ECB, Commission and Cypriot government for the wide bail in. So if the ECB, Germany, and the Cypriot government all did not want a deposit confiscation, who did? Russia?
And speaking of the Russian wildcard, things are starting to get interesting: first the country reported, via RIA, that it sees no impact on capital movement from Cyprus tax, which is interesting considering all bank transfers in and out of the island have been frozen.
But then things started to get interesting following another RIA report citing finance minister Siluanov, that Russia may reconsider its role in the Cyprus rescue following the bank tax. Siluanov added that bank tax breaks the plan for joint steps on Cyprus and that the decision was made without Russia (which is expected since Russia is not part of the Eurozone).
Russia concluded the overnight headlines after deputy economy minister Sergei Belyakov told reporters in Moscow that the Cyprus decision casts doubts on the EU banking system. Here is why all of Europe can kiss Russian oligarch savings goodbye: risks to safety of retail and corporate bank deposits “cast doubt on the principles of the banking system not just in Cyprus, but in the countries of the EU,” Belaykov says. Cyprus deposit losses won’t influence Russia’s attempts at "de-offshoreization" of economy, Belyakov added.
Forget trade and currency wars - is this the weekend we just launched the second part of the Cold war? Because if memory servers, the last time Russia and Germany were openly at each other's throats, things in Europe did not end too well...
Finally, for those who missed the news frenzy of the weekend, here is DB's Jim Reid summarizing it:
I had a strange dream that night that a European country had seized a portion of insured depositors money to fund a bail-out while senior bondholders of the banks and the Sovereign survived unscathed. I think it took until yesterday and the effects of the medicines to wear off to realise that this was what actually happened. Although EU leaders have made it clear that the shock resolution in Cyprus is a one-off it has surely changed the landscape in Europe and now provides a template that will be at least on the table, even as a bargaining chip only, in the years ahead.
The real damage here is going back on the Government's pledge to honour all deposits up to Euro 100k - one that now exists EU wide. It’s clear that the Cypriot Government was given the alternative of a chaotic default where arguably much more would have been lost for many. But could the authorities not have taxed the uninsured depositors more than the 9.9% and kept those with under 100k whole as opposed to a 6.75% levy? Overnight reports have suggested that this is one area that might be up for internal negotiations within Cyprus before the banks reopen tomorrow after today's holiday. Indeed, The FT is reporting that deposits over 100k could see an increased rate of 12.5% while smaller deposits would be levied at 3.5% in an effort by President Anastasiades to scrape together a parliamentary majority to approve the bailout. Martin Schulz, head of the European parliament, while agreeing that savers should bear some of the bailout costs, called for changes to exempt those with savings under €25,000 (The Guardian).
If the smaller depositors are hit at all, one can't help thinking that this move has crossed a sacred line and that any depositors in any bank domiciled in a country reliant on the largesse of the EU should in theory now think very carefully about alternative places to store money whatever the size of their holdings. For now one would suspect that markets are calm enough that the contagion will be limited but such a move could easily amplify any future crisis in Europe as the spectre of deposit losses will now be on the table whatever politicians say in advance or whatever insurance scheme is on the table. So this is perhaps more of a slow burning issue than the start of the immediate resumption of stress. It is however worrying that little consistency has been used relative to previous bail-outs and that smaller seemingly insured savers have been brought into the solution.
The reality though is this move is the latest (but by no means the last) manifestation of financial repression -albeit one which is a bit less subtle than say inflation or devaluation but one that has a similar impact. Indeed those of us with money in a UK bank account have seen the international value of these deposits fall notably in 2013 so far and a fair bit more since 2008. In international terms, as it stands, the smaller Cypriot deposits will have lost similar amounts to UK depositors in 2013 but clearly in a manner that will provoke much more anger. It perhaps shows how the options become more limited when you don't have your own currency to use as part of the solution.
For the record, further measures of the deal include a bail-in of junior bondholders and increases of taxes on capital income. Corporate tax rates will also be lifted to 12.5% from 10%.
According to the Eurogroup, these measures, combined with the deposit levies will reduce the size of the Cyprus bailout from around EUR 17bn to EUR 10bn and lead to an improvement in the Cypriot public debt trajectory with debt/GDP falling to 100% by 2020. So what's next? Cypriot finance minister Michalis Sarris has said that his government had already moved to ensure deposit holders could not make large withdrawals electronically before Tuesday’s open. ECB's Jörg Asmussen also said a portion of deposits equivalent to the levies would likely be frozen immediately. In terms of the legislative process, Cyprus' parliament will not be convened until 4pm Cypriot (2pm London) time today with a vote on the levy expected before tomorrow. The current ruling party's lack of majority may just complicate things here. Indeed the parliament is composed of 56 MPs and legislation requires a simple majority of 29 votes. DB’s George Saravelos noted that the opposition already stating that they will vote against so the ratification hinges on all of the ruling party's (DISI, 20 MPs) and the smaller coalition partner's DIKO (9 MPs) votes. That said, George’s baseline scenario is that the levy will pass, not least because there is now little alternative left but he also highlighted that the approval would be a close call and the risk is that decisions are delayed. A delay or failure to approve the bailout may put Cyprus banks' liquidity profile at risk. For instance, the UK Telegraph noted that Cyprus Popular Bank could have its emergency liquidity assistance funding removed by the ECB by 21 March. Interestingly, approval of the levy would also have consequences on the approximately EU2bn of British deposits held in Cyprus but George Osborne on Sunday said that British troops and Government staff's savings that are threatened by the bailout will be compensated with the details to be worked out over the next few days.
Taking a look at the market reaction thus far, the EUR took a dive against the Dollar overnight to 1.2885 (vs 1.3076 close on Friday) but is off the intra-session lows for now. Asian equities are lower across the board with losses seen on the Hang Seng (-2.1%) and ASX200 (-2.05%). Most other Asian indices are down between half to one percent but are off the early lows.
S&P 500 Futures are down -1.7% overnight. Credit spreads gapped wider with the Australia and Asia iTraxx indices 4-5bp wider as we type. European Financials Snr and Sub indices are 24bp and 36bp off their recent wides but we can perhaps expect a weak day ahead given the focus on Cyprus. Reflecting the greater demand for so-called safe haven assets, gold is up 0.3% and 10yr UST yields have rallied 9bp overnight.
Aside from the events in Cyprus, the other news of note over the weekend was the election of presidents (speakers) in the Italian parliament’s two houses. As DB’s Marco Stringa writes, both speakers are newcomers in the Italian parliament. In the senate, Pietro Grasso, an antimafia prosecutor, won in a run-off vote. Grasso obtained 13 votes more than the number of centre-left senators with the additional support more likely coming from a minority of the Five Star Movement senators than Monti’s centre. However, this should not be read as an opening of the 5SM to an alliance with the centre-left. The great majority of the 54 5SM Senators followed the party’s line even in the run-off. Indeed, Marco continues to sees little hope for cooperation among the parties to form a government.
Turning to the day ahead, the immediate focus will be on the parliamentary session in Cyprus beginning this afternoon. There is little data scheduled for today with the US NAHB housing index the main release of note.
Beyond today, the FOMC’s policy announcement and Bernanke's press conference on Thursday will take centre-stage. Our US economists do not expect any imminent changes in Fed policy. Thursday’s flash European PMIs will be the focus data-wise following the mixed readings last month. In China, the HSBC flash manufacturing PMI (also on Thursday) will be watched for any bounce back after February’s fall - which many blamed the timing of new year for. A busy week for the UK is scheduled with the government's 2013 budget (Wednesday) as well as jobless/inflation/retail/government borrowing reports and BoE minutes through the week. In the US we get the latest round of housing data with housing starts and building permits on Tuesday; and existing home sales/house prices on Thursday. Outside of housing, Thursday's Markit PMI and Philly Fed surveys are worth watching.