WASHINGTON, March 18, 2013 – Leave it to the Eurozone’s autocrats to create classic blunders when you least expect them. In a boneheaded, Black Swan move, The European Union is effectively ordering tiny Cyprus, currently in the throes of yet another European financial crisis, to steal 10 percent of its bank depositors’ funds.
This new “tax,” as it is being termed, is part of a plan agreed to by the Cyprus government and international lenders as a condition for an EU bailout of this Mediterranean island nation. The country’s financial situation has been brought low at least in part by its close fiscal association with neighboring basket-case Greece.
As word of the agreement leaked out, enraged Cypriot savers and depositors rushed to banks and ATMs to withdraw as much of their money as possible. Analysts and commentators don’t think the Cypriot panic will spread to other wobbly Eurozone countries like neighboring Greece, but the Maven is not so sure about that.
According to the Wall Street Journal, the government of Cyprus is attempting to halt the panic with a less harshly discriminatory proposal. “The new proposal will see smaller depositors, those with up to €100,000, taxed at 3%; savers with €100,000 to €500,000 taxed at 10%; and those with over €500,000 taxed at 15%, one official said.”
The problem is, the cat’s already out of the bag. Anyone bank depositor with half a brain—including American depositors—will watch these developments in Cyprus closely, fearing that if one country is willing to help itself unilaterally to bank depositors’ funds, then any country could do the same. The potential for a cascading Black Swan event has suddenly become significant and real. What’s happening in Cyprus, even if it ends up not going through, marks an existential threat for anyone who believes in the safety of their money in the banking system as well as the true value of “government insured deposits.”
Even Paul Krugman—economist turned left-leaning political pundit at the New York Times—gets the Maven’s grudging admiration for observing “It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying ‘Time to stage a run on your banks!'”
“If European policymakers were looking for a way to undermine the public trust that underpins the foundation of any banking system they could not have done a better job,” chimed in Michael Hewson, senior market analyst at CMC Markets.
As if to prove the point, both Asian and European stock markets have already been hit hard, as has the price of oil on world markets. In Europe, London’s FTSE 100 index was down 1.2 percent at 6,413 while Germany’s DAX fell 1.4 percent to 7,931. The CAC-40 in France was 1.8 percent lower at 7,932. Cyprus’ stock exchange is closed for a bank holiday, declared by its government to momentarily stem the panic.
The euro was taking a pounding, down 0.8 percent at $1.2944.
In Asia, Japan’s Nikkei 225 index slid 2.7 percent to 12,220.63, while Hong Kong’s Hang Seng dropped 2 percent to 22,082.83.
Benchmark oil for April delivery was down $1.04 to $92.41 per barrel at late afternoon Bangkok time in electronic trading on the New York Mercantile Exchange. The contract had risen 42 cents to end at $93.45 per barrel on the Nymex on Friday.
Additional hits were taken in other futures trading as wholesale gasoline fell 3.3 cents to $3.118 a gallon and heating oil dropped 1.7 cents to $3.014 a gallon. Substitute fuel natural gas rose 4.8 cents to $3.92 per 1,000 cubic feet, however.
In New York, stock market futures on all exchanges are sharply down.
Others weigh in on Cyprus debacle:
Zero Hedge: Cyprus “World’s Biggest Poker Game.” Re: the Eurozone.
- What did they do? Hit depositors.
- Why did they do it? Politics, economics, and because they think they can get away with it.
- Cyprus needs to vote on this and any delay of opening the banks on Tuesday is more risk-off.
Short term market reaction: Risk-off. The situation is fluid but watch politics, Cyprus bank runs risk, weak periphery banks impact and rating agencies. Worst case scenario? EMU exit talk. The Best case scenario? Germany is correct and the ECB bridges the time to when this is clear.
Big picture: This is toxic and a policy error. Long bunds, sell the euro, sell periphery, Spain could underperform Italy, but nobody in the periphery wins.
More here: Via Zero Hedge’s “The Rape of Cyprus.” Please note that until yesterday all depositors in Cypriot banks were insured up to the value of €100,000 with any one bank. Today that solemn governmental promise has been shown for what it is; a lie.
Jesse’s Café Américain: According to one of my friends, Dennis Gartman sent out the following:
“By now I suspect that most of you have heard the news from Cyprus over the weekend, but just in case you’ve not the Cypriot government has chosen to confiscate money from any and all accounts at any and all banks in Cyprus to pay for its banking problems…
This is astounding, and the decision was… if not fully decided in Brussels… was approved by Brussels and Berlin and Paris et al. This is unlike anything I’ve heard in my 40+ years of being in the market. This is HUGE news; this is massively bearish news for the EUR; this is massively bullish news for gold and this is THE MOST IMPORTANT BUSINESS NEWS OF THE YEAR THUS FAR. Please believe me on this; this is Europe’s ‘Lehman’ moment.”
Washington Post: It is a bad day to have your money deposited in a bank in the Mediterranean island nation of Cyprus. And it may just mean some bad days ahead for the rest of us.
TheStreet.com: Felix Salmon writes, “Don’t for a minute believe that this decision is part of some deeply-considered long-term strategy that was worked out in constructive consultations between the EU, the IMF, and the new Cypriot government. Instead, it’s a last-resort desperation move, born of an unholy combination of procrastination, blackmail and sleep-deprived gamesmanship.”
Trading this morning’s market:
We’ve had egg on our faces for the last few days as we recommended a continued paring back of stock positions. Today, sadly, is likely the day we’ll be vindicated, at least in part. Market open at 9:30 a.m. will be, to say the least, unpleasant for bulls. As we write this at approximately 5:15 a.m. (yes, we got up early to cover this event), Dow futures are down a whopping 71 points, more or less, although this is a considerable improvement from 11 p.m. Sunday night when they were down nearly 148. The S&P and NASDAQ also promise to be down considerably.
What’s likely to happen to stocks–aside from a cliff-dive opening–will make itself clearer during the day, but nearly everything is likely to be down while Treasuries and investment grade bonds are likely to be up.
We’d hold our fire at the opening bell, even though we’ll likely continue our sell program. Things will move so quickly at the bell that you won’t be able to catch a break with limit orders, as already existing stops will be swallowed almost immediately, adding to the dive.
Contrarians had best not toss buy orders into the mix at the open either. Limits will likely be tough to grab while market orders–either sells or buys–are likely suicide.
Oil stocks will be likely hit, at least initially, while gas stocks and ETFs may benefit. We currently hold a modest position in Marathon Oil (MRO) and are likely to get hit hard, something that started a bit on Friday as insiders clearly knew what was afoot in Cyprus. We have yet to make a decision on this otherwise promising stock, as this is one of those times when events “beyond our control” can adversely influence otherwise sound investments at least for the short term.
Short term, we’re tempted to put on the double short S&P 500 ETF (SDS), but only if we can catch it on an upside reaction to the open. We’d likely surf this for a very short term profit if we could, but again, it’s best to be careful when you get in and also best if you can stick by your computer and get right out again either if you can grab a quick profit, or squeak out for a small loss. These leveraged ETFs are dangerous, should not be available at all, but are useful if you’re careful.
As to the rest of our positions, it’s situation ethic time. Panicking out on a morning like this is always inadvisible. But riding everything down if this downdraft persists this week would be the height of foolishness. When small investors do this, they always lose while the Big Boys behind most of the ongoing financial nonsense, always gain at the little guys’ expense.
Stay safe. We’ll likely update this report a bit later in the day, either here or over in our other column.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Any positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
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