Impact Imminent?

 

Zero Hedge has the latest Cyprus update - There is no parliamentary support in Cyprus for any bail-in deal. Tyler Durden begs the question:

 

Neither we, nor anyone else, has any idea what comes now.

 

The folks at FTAlphaville have some thoughts on the state of play:

 

A bank run spreading to Spain looks a non-starter in the short term.

 

The risk of any wider bank run looks pretty small so far, with market reaction relatively benign.

 

I've been following the Press coverage of Cyprus, the talking heads are saying that Cyprus is a manageable issue. Nothing to worry about at all.

I'm going to disagree with FTA and the TV folks. The chances of a bank run have never been higher. Tyler's right. We're looking at a black hole.

 

The "Other" scenario for Cyprus is a shell shocker. Forget the shareholders or the senior bond guys - they will end up with Dick's hat band. Those Russians who were at risk of losing as much as 15% of their deposits - They get zip too. At best, they are getting an IOU. That IOU will have a value of 10 cents on the dollar.

Those small depositors that were going to get hit for an unfair loss of 6% now face a vacuum. Their bank statements may not reflect a loss of principal, but they won't be able to withdraw a dime from those accounts. The local banks will remain closed, when they do reopen those deposits will be converted to some new currency. It's possible that the new currency will be the Turkish Lira. You thought the poor folks in Cyprus were getting a bad deal on Monday? Wait till Friday before you pass judgement.

What happens if Cyprus does a "drop out" of the EU? That result immediately makes a lie of Mario Draghi's words that the Euro was Uber-Ales. This is precisely what Super Mario said "would never happen".

If Cyprus goes turtle and leaves the Euro, the credit spreads on peripherals will widen. This sets up a market "call" on the ECB. But remember, for Mario Draghi to give the market the "put" that it will demand, the government's of Spain and Italy will be forced to get down on their knees and beg the gods in Brussels and Berlin for a helping hand. To do that means that they would have to have very harsh terms imposed on them. An IMF team would run the finances of the countries involved.

Given that there is zero chance that Italy and Spain will do the necessary begging, the value of the promised Draghi "put" is now zero.

 

There is a chance that something can be done to stop what looks like a slide into an abyss. Those chance are now well below 50-50. The markets/seers are calling for a soft landing, while at the same time that outcome is looking less and less likely. The markets seem poorly positioned for what could result in a crisis. And this story is running at hyper speed. That' a very bad combo of events. Seat belts on - Impact Imminent!

 

impact