The Cyprus finance minister Michael Sarris may or may not have submitted his resignation after the president formally declined to accept it, but now that he is back on the saddle he is back to spreading hope, cheer and goodwill. Those wondering why both the EURUSD, and its derivative, US stock futures have surged overnight and retraced all of yesterday's losses and then some, it is not due to any anachronistic events such as "good economic news" (especially since the Spanish PM said Spain will have to cut its economic outlook once again, or rather, as usual), but due to the following phrase uttered by Sarris a few hours ago: "We are hoping for a good outcome, but we cannot really predict" regarding his views on talks with Russia. That's right - the entire overnight ramp is based on the hope of one man, who thinks Russia can be blackmailed through deposit haircuts, into bailing out the tiny island which has now said nein to Europe and bet the ranch on a well-meaning Vladimir Putin. What can possibly go wrong: according to the GETCO algos all alone in levitating stocks, absolutely nothing. What is clear is that Cyprus is fully intent on seeing Europe "blink" whether due to Russia's involvement or just because it thinks (correctly) it has all the leverage as the alternative is a breakdown of the Eurozone.
Needless to say, there was no actual good news out of Russia. From Reuters [25]:
Finance Minister Michael Sarris said he had reached no deal on financing with his Russian counterpart, Anton Siluanov, but talks were continuing.
Cypriot officials disclosed that the country's energy minister was also in Moscow, ostensibly for a tourism exhibition. Cyprus has found big gas reserves in its waters adjoining Israel but has yet to develop them.
"We had a very honest discussion, we've underscored how difficult the situation is," Sarris told reporters after talks with Siluanov. "We'll now continue our discussion to find the solution by which we hope we will be getting some support.
"There were no offers, nothing concrete," he said.
Elsewhere, Nicholas Papadopoulos, a member of Cyprus’s democratic party Diko discussed the parliament’s rejection of a levy on bank deposits with Bloomberg TV, saying Cyprus would propose a new package to the EU. That's great. The only problem is that the math is simple: either a massive haircut on Russians sparing everyone else, or nothing, and if the Russians get whacked, there will be no deal with Russia, while parliament has already made it clear any deposit haircut would not fly. So back to square one even as Frau Merkel reiterated the Shaeuble talking points [26], saying she regrets the decision by the Cypriot parliament.
However, reality is irrelevant - all that matters to the vacuum tubes is that there is some hope out of Europe, and with no POMO today, the algos are very hopeful that Bernanke will not hint at any more rate cuts today in today's 2 pm FOMC minutes, as he has in the past two times, as that would surely kill any no volume levitation party.
More overnight highlights from Bloomberg:
- Treasuries fall for first time in four days as yen resumes decline vs U.S. dollar. Fed meeting concludes today; rate decision and eco projections at 2pm in Washington, Bernanke press conference at 2:30pm.
- Troika officials are in Cyprus discussing further capital controls and the possible extension of a bank holiday through the end of the week, according to a European official who spoke on conditions on anonymity
- Germany and its euro-area allies maintained pressure on the island’s politicians today to raise a planned EU5.8b via a levy on deposits; Austria finance minister Fekter raised the threat of a ECB funding cutoff while Germany’s Schaeuble said the nation’s “business model is no longer tenable”
- Russia and Cyprus are continuing loan talks, with Cypriot finance minister Sarris pledging to continue discussions “as long as it takes”
- BoE’s King was defeated for a second month in a vote to expand stimulus as the majority of policy makers said more bond purchases may erode their credibility and push the pound lower, minutes of the MPC’s March meeting showed
- GBP/USD rises 0.3% to 1.5138; Chancellor of the Exchequer Osborne presents his 2013 budget at 1:30pm in London
- U.K. jobless claims fell less than forecast in February while a wider measure of unemployment rose for the first time in a year
- Japan closed for holiday. Shanghai Composite +2.7%. European equity markets, U.S. index futures higher. Peripheral yields fall, spreads to Germany narrow Energy, precious metals rise
The full overnight narrative from DB's Jim Reid:
Cyprus looks set to continue to dominate the headlines in the near term although we do have Bernanke on show later and also the UK budget. As I'm sure you all know by now, the Cypriot Parliament rejected a reworked levy on deposits last night. The revised levy, which included an exemption on deposits below EUR20k, was rejected by 36 votes with 19 abstentions including the President's centreright DISY party abstaining from the vote. So a pretty categoric rejection. The 'no' led to immediate focus on Cyprus’ banking sector as we approach the ECB’s Emergency Liquidity Assistance (ELA) expiry today although our economists believe in practice some leeway for a few days exists. The provision of ELA funding is normally conditional on the receiving banks remaining intrinsically solvent but our economists noted that this condition hardly holds with the prospect of a bank run starting immediately after the expiry of the bank holiday.
After the no vote, the ECB released a vague statement saying that it "reaffirms its commitment to provide liquidity as needed within the existing rules". This helped the S&P500 (-0.24%) and EURUSD (-0.58%) close off the day’s lows. Reports suggest that Cyprus' banks could remain closed until next Tuesday March 26th with capital controls and transaction limits in place when banks eventually open (WSJ, Telegraph). The FT noted that Cyprus’ finance minister arrived in Moscow last night in an 11th hour attempt to request assistance from the Kremlin.
In many ways we're back to square one as the fact that the revised version of the bank levy was rejected by the Cypriot parliament suggests that the "reprofiling" of the levy, which was open to negotiations with the troika, was not the main issue. More likely, it is the very principle of a bank levy - and the adverse consequences it would have on the country's standing as an off-shore centre - which is being overwhelmingly rejected by Cyprus' political circles. It is obviously a setback for the EU, but as our Economists note, reaching a deal on the adjustment program at the first attempt has always been tough since the beginning of the crisis. Rationally they think the Cypriot government and parliament will have to accept the deal, at least the principle of a deposit levy, even if some sweeteners may have to be found (e.g. on the austerity measures).
But with the deposit levy facing political opposition what are the other fund raising options potentially available to Cyprus? Overnight the ekathimerini reported that Cyprus will attempt to sell the troubled Popular Bank of Cyprus, known as Laiki, and possibly other local lenders. The same article noted that it is likely the Russians will seek some form of compensation for such an investment. A naval port in Cyprus for the Russian fleet and access to the country’s natural gas reserves are among the rewards Moscow might seek. The option of tapping the social security funds’ reserves (amounting to EU5bn) is said to also being considered. The other option being reported is to offer depositors with more than EUR100k a voluntary haircut in return for natural gas-indexed bonds. The NYT also reported that Gazprom may enter the fray with a private bailout plan. Rather than tax deposits, Cyprus could raise money to right its economy by selling Gazprom exploration rights to offshore gas deposits in the Mediterranean Sea. Given that Gazprom is 50.02% owned by the Russian government and with former PM Putin being the current company chairman – such a deal certainly adds geopolitical dimension to the current situation. If raising the EU5.8bn in funds via the deposit levy is the pre-requisite for the EU bailout for Cyprus, then Gazprom seems financially quite capable of mustering a deal of some sort given its current market capitalisation of about EU84bn and a cash balance of c.EUR12bn at the end of September 2012.
So the question is whether the EU will revise its terms, whether the Cypriots find a way of raising the money in an acceptable manner or whether Russia rides to the rescue. The market is still assuming the money will be found somehow and hasn't yet considered the 'nuclear' alternative. A fascinating few days still lie ahead.
While the immediate focus is on the developments in Cyprus, we also have the FOMC statement (6.00pm London time) followed half an hour later by Bernanke’s press conference. For the record, DB’s US economists do not anticipate any major policy changes at today’s meeting - Chairman Bernanke and Vice Chair Yellen have been clear in recent commentary that the improvement in the labour market to date falls far short of what they will need to see before reducing monetary policy accommodation. In particular, Bernanke would like to see further rebound in the employment-population ratio, which has moved only slightly higher (58.6%) from its post-recession low (58.2%). For this reason, they anticipate a continuation of QE through at least mid-year, despite the improving tone in the economic data. In terms of the Fed’s latest economic projections, our economists expect that central tendency projections for 2013 real GDP growth (currently 2.3% to 3.0%) may be modestly upgraded while the year-end unemployment rate range of 7.4% to 7.7% may drift slightly lower.
Across the Atlantic, Chancellor George Osborne will be presenting the UK government budget for the next fiscal year today. News reports have suggested that government ministers have been ordered by the Chancellor to come up with GBP2.5bn of extra spending cuts. The extra cuts, equivalent to about 1%, over the next two years will apply to all departments apart from health, schools and hospitals, although police, defence and local government will also be granted some leniency. The savings are expected to be used to fund housing and other capital projects including a number of growth-oriented infrastructure items.
In addition to laying out the budget, some are expecting the Chancellor to use the opportunity to signal a change in the BoE’s mandate that would allow the central bank to loosen its 2% inflation target.
Turning to Asia, markets have been relatively quiet newsflow wise with Japanese markets closed for the Vernal Equinox public holiday. Chinese equities have posted strong gains overnight led by the Shanghai Composite (+2.5%) and Hang Seng (+0.8%) which is pulling other regional equity markets off the overnight lows. It is a similar story for the S&P500 futures (-0.05%) which has recovered from the overnight lows. In the currency space, the Australian dollar is marginally firmer against the USD. The CDS index roll has been the main focus for the Asian markets overnight and will likely be the main theme for European and US markets ahead today.
Looking at the rest of the day ahead, we have the BoE minutes from its March meeting which will show how the nine members of the MPC voted with respect to further easing. The UK labour report is scheduled to be released at the same time. The above mentioned UK budget is expected at 12:30pm GMT today. In the Eurozone, Italian President Napolitano is expected to begin consultations with political leaders this morning London time in an effort to form a government. Datawise, the advance consumer confidence reading for March will be the main data point in the Eurozone. In the US the focus will be squarely on the FOMC and Chairman Bernanke’s press conference but expect markets to continue to gyrate around developments in Cyprus for now.