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Sunday, March 17, 2013

Wolf on Wall Street Special Report: Cyprus

This is this weekend's developments in Cyprus from 
Wolf on Wall Street

Cyprus- Another Example of Euro-Incompatence

Friday I posted quite a few charts of Credit, especially High Yield and in this post from Friday (March 15th), "Credit is Screaming" the very first chart I posted was of European Financials...
Since the start of the year, European Financial Credit has had a VERY different opinion of the situation than the easily manipulated stock market. As I almost always say as boilerplate when talking about credit as a leading indicator, "Credit leads, stocks follow". Perhaps we understand now.

Sharon Bowles, head of the European Parliament’s Economic and Monetary Affairs Committee, said:
  • Levy on deposits agreed under Cyprus bailout deal means circumventing EU deposit guarantee laws
  • “It robs smaller investors of the protection they were promised,”
  • The lesson here is that the EU’s single market rules will be flouted when the Eurozone, ECB and IMF say so,”

Saxo Bank CEO, Lars Seier Christensen had this to say among fuller comments...

"It is difficult to describe the weekend bailout package to Cyprus in any other way. The confiscation of 6.75 percent of small depositors' money and 9.9 percent of big depositors' funds is without precedence that I can think of in a supposedly civilised and democratic society. But maybe the European Union (EU) is no longer a civilised democracy?

heard rumours about this when I visited Limassol last week, but dismissed them as completely outlandish. And yet, here we are. The consequences are unpredictable, but we are clearly looking at a significant paradigm shift. *Perhaps the credit markets didn't find the rumors as outlandish and improbable late last week?

This is full-blown socialism and I still cannot believe this really happened."

What is this all about?

Friday after the market's closed, something big happened, whether this is what we have been seeing the last couple of days as I said on Friday, "It seems some very big money either is no longer willing to hold risk, or they just really don't want to hold it over the weekend".

Perhaps this is why...

European Finance Ministers announced their bailout (5th now for the EU) for Cyprus, with a big twist. The bailout funds come in at $13 billion Euro, additionally a levy of 6.5% on savings account under $100k Eur. and 9.9% on accounts > $100k Eur.; the levies are expected to raise $5.8 bn Eur.

Fund for the levy were immediately frozen in Cypriot bank accounts, while the bank run you would expect left ATM machines flat broke.

Why go after Cypriot deposits, here's a partial reasoning...

“As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders,” Dijsselbloem said, noting the country’s financial industry was five times the size of its economy."

Amazingly Jean-Claude-Juncker had this to say...

"Jean-Claude Juncker, has a warning that this "bailout" is the worst thing Europe could have done:
Skeptics including Luxembourg’s Jean-Claude Juncker had said that imposing investor losses in Cyprus risked reigniting the financial crisis that has so far pushed five of the euro zone’s 17 members to seek aid. Last year, the euro area took what officials called a unique step to ask Greek bondholders to absorb losses."

Russia a key player... One of the most asked questions was whether this applies to Cypriot citizens only or all bank deposits as Cyprus is sort of like the US's version of the Caymans for the Russians, the answer is ALL.

Corporate tax rates in Cyprus will rise to 12.5 percent from 10 percent as part of the deal, Dijsselbloem said. Rehn told reporters that Russia, whose banks have loaned as much as $40 billion to Cypriot companies of Russian origin, would ease terms on its existing loans to Cyprus as the rescue unfolds. Cyprus’s finance minister is scheduled to fly to Moscow on March 20.

Euro-Group President, Disjsselbloem had this to say when asked if this VERY unique approach of punishing anyone who dared to do the reasonable thing and save money in a bank account, is setting a precedent for future Italian or Spanish bailout requests...

On the question of whether a similar levy could be applied if Spain or Italy were to request bailout, Eurogroup President Dijsselbloem responded, “the situation in Cyprus with the specifics of the banking size and structure has led to this specific package and these instruments, full-stop.” Asked specifically whether he could rule out a deposit levy in a subsequent bailout in another country, Dijsselbloem replied, “It’s not being discussed at all, there is no reason to even discuss it, so I won’t discuss it or speculated on it. We have a very specific, very complex situation which we’ve had to deal with in a way that is leading to a very fair way of sharing the burden, and that’s the package that we have agreed here”.

That sounds like the concept is still on the table and it didn't take long (as we already see it happening in the US) for Germany's second largest bank, Commerzbank to suggest a wealth tax on Italy through a 1-time property tax to bring Italy debt to GDP below 100%. It seems Cyprus was a dress rehearsal, I don't know how you feel, but I'm feeling more and more like mattress money is the way to go.

What is even more horrific?

The President of Cyprus proclaimed this confiscation of up to 10% of savings in Cypriot banks as well as an additional tax of 20-25% on interest (which will be about zero after all the deposits -after levy- are taken out of Cypriot and probably other EU PIIGS nation banks come Tuesday morning when they re-open) is a GOOD DEAL, in context perhaps it was as Germany and the IMF had initially sought 40% of TOTAL DEPOSITS!!!

"Cyprus state broadcaster CyBC reported on Saturday that German Finance Minister actually entered the Eurogroup meeting on Friday proposing a 40 percent haircut on Cypriot bank accounts. Sarris stated on Saturday that this had also been the proposal of the International Monetary Fund."

Who have I said is the Euro-Zone's Task Master and de-facto leader? Germany of course.

So far I've described events up to about Saturday...For anyone who thinks this wasn't planned well ahead of time, imagine the logisitics of announcing a plan late Friday night and immediately having every ATM in the country already have taken or withheld the levy, no this wasn't a late Friday night deal, the markets in some form have known about this for a while.

Moving forward... THIS IS NOT A VICTORY LAP
The truth is, EVERY SINLGE Euro-zone bailout plan or mechanism from ESFS to ESM has been short sighted and essentially a total failure-How many bailouts is Greece on now and how fare their economy?

As of this morning (US EDT time), besides every macro-economic development that anyone with half a brain can envision including Euro-wide bank runs (if they did it to Cyprus why not to Italy or Spain) destabilizing the entire banking system from the PIIGS to the core, there's the political backlash that's poster child was a citizen parking his front loader in such a way to block the entrance to a Cypriot bank. And what of the Russian reaction? Most large deposits in Cyprus are Russian, how does Russia react to the EU, of which it is not a member, confiscating its citizens' money? The political parties in Cyprus called this more or less a coupe in which the President bore full responsibility as they were never consulted, look how that worked out for Mario Monti in Italy and the Euro-task masters who replaced not only the Italian, but Greek leader with Goldmanite Hacks.

The parliamentary vote to ratify the confiscation plan was delayed as it came to light that law-makers may be able to block the move. The President said if the vote/plan was not ratified, Cyprus' two largest banks would likely fail. With a bank holiday and no resolution with one potential outcome being the failure of the two largest banks, the market is more than a little jittery, look at how Lehman spider-webbed out to effectively contaminate Europe. The market hates uncertainty.

The President's Disy party holds 20 of the 56 seat legislature, leaving them 9 votes short of ratifying the confiscation, or as the market looks at it, "Or else". You see, simple math that the Euro-crats couldn't cobble together before announcing this horrific scheme, this is the ineptitude of European bailouts that I have talked about on the first day of their announcement since the Greek bailout, they can't seem to coordinate the most basic and simple concepts they need to push through their mind-numbingly ill-conceived plans.

There's another concept at play here and this is the "This time it's different" and how the smallest crack (Cyprus) can lead to the largest negative outcomes, even JPM asked the question, "Has Europe Bazookaed Itself in the Foot", the answer being yes as the precedent alone leads them to a "Risk Off posture".

Other thoughts in the JPM note...

"Significant near-term risks after flawed Cypriot deal
  • Significant chance that Cypriot Parliament votes ‘no’ (30%) or has to further delay the vote (40%)
  • Either outcome would be highly problematic, highlighting regional stresses
  • President to address MPs on Monday at 9.00am GMT. Earliest likely time for vote late afternoon GMT.
  • This could be pushed back significantly
  • A delayed vote could require an extended bank holiday in Cyprus to avoid broader bank run
  • Regional contagion impacts should be containable, but risks unclear with new precedents set
It is difficult to over-state the extent of popular anger in Cyprus over the bailout deal which was pulled together on Friday evening."

However before the Cypriot banks open or probably before any parliamentary vote takes place, we will see the rage of Cypriots as the first protest is scheduled for tomorrow at 3:30 
Now back to the ineptitude of Eurocrats... According to the WSJ and FT, the Eurocrats are looking to revise the original 6.75 and 9.9% confiscation rates.
"President Nicos Anastasiades is still intending to raise €5.8bn from Cypriot bank accounts to help fund the bailout, an unprecedented move by the eurozone that could yet spark wider concern about the safety of bank deposits in the bloc."
"However, a revised deal being discussed in Nicosia, with the blessing of the European Commission, would shift more of the burden on to deposits larger than €100,000, according to officials involved in the talks."
Read the following as shifting more of the burden to Russian depositors and some of the most unscrupulous characters around... talk about unforeseen consequences.
The WSJ has a little more, "the deposit "tax" would be under 5% for deposits under €100K, under 10% for deposits between €100 and €500K, and over 13% for deposits greater than half a million."
Again read as: Read the following as shifting more of the burden to Russian depositors and some of the most unscrupulous characters around... talk about unforeseen consequences. I wouldn't want to be paying my Russian Gazprom bill in Europe next winter (as Europe imports most Nat gas from Russia).

Tonight's Futures coming next....

Brandt Uses Worden's TeleChart and StockFinder 5 Exclusively

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