WASHINGTON, March 19, 2013 —A plan to seize up to 10 percent of savings accounts in Cyprus to help pay for a €15.8 billion financial bailout was met with fury in Nicosia Monday, leading the government to extend the island nation’s “bank holiday” until Thursday week while lawmakers wrangled over how to stave off national bankruptcy.
Although Cyprus accounts for a mere 0.2 percent of the EU’s economy, its almost absurdly supersized banking system is approximately seven times the size of that country’s economy, with a substantial proportion of bank deposits, estimated at 37 percent, come from people outside Cyprus and the European Union, much of it from Russia.
Resistance to the so-called tax spread throughout the island Monday as did resentment over the perceived influence of wealthy Greek and Russian depositors who park huge amounts of money in Cypriot banks to avoid taxation and, some say, to conceal laundered funds or criminal activity. It is much safer, it is said, for a corrupt Russian official to keep proceeds from illegal activities abroad, hiding information about their fortunes and holdings away from the prying eyes of Russian banking regulators.
“Not so curiously,” writes Dave Fry of ETF Digest, “Russia intervened denouncing the tax as a poor way of doing business. But, as this article reports, the country’s banks are loaded with money-laundered deposits from Russians. So, it seems Mr. Putin wants the EU to bailout Cyprus and his pals at the same time giving Russia a free ride.” The article Fry cites appeared in the Washington Post earlier this year and exhaustively chronicles the complex story of Cypriot and international banking that arguably led to the magnitude of the current crisis.
When news hit Monday’s markets here in the U.S., stocks took an early beating but partially recovered by late in the day with Wall Street averages closing moderately down. Asian stock markets rose Tuesday, shaking off jitters sparked by Cyprus’ financial crisis. European markets are off, however, and as of 5:30 a.m. EDT, Wall Street futures look for U.S. markets to open down again, although perhaps not as violently as Monday morning.
Meanwhile, Cypriot politicians scrambled to devise a new plan that would not be so burdensome for people with less than €100,000 ($129,290) in the bank, floating a tiered “tax” that would reduce the charge to 3% for savers and depositors with accounts below that amount. A vote on a revised plan was scheduled for today, but will likely be scrapped until later this week.
Even while playing down the chance of fresh market turmoil, experts warned that the surprise EU move on the Cyprus situation broke an important taboo against making depositors pay for Europe’s bailouts. As a result, it may have longer-term consequences for confidence in Europe’s banking system — and its ability to end its financial crisis.
“It’s a precedent for all European countries. Their money in every bank is not safe,” said lawyer Simos Angelides at an angry protest outside parliament in Cyprus’ capital, Nicosia, where people chanted, “Thieves, thieves!” As if to buttress this collective observation, Dario Perkins, an analyst at Lombard Street Research, noted that “the German government couldn’t be seen bailing out Russian mafiosi just before an election.”
“The damage is done,” said Louise Cooper, who heads financial research firm CooperCity in London. “Europeans now know that their savings could be used to bail out banks.”
Indeed, although the endgame to the Eurozone’s current economic cliffhanger may be resolved positively, the psychological damage to bank depositors’ mindsets could be irrevocable not only in Cyprus and in Europe but worldwide. It’s an existential threat and has likely caused permanent damage to the already weakening distrust of Western governments and officials to take care of the average voter or investor when it conflicts with the interests of government officials, mega-banks, or the wealthy.
Next up, our latest market advice/observations for those who still choose to brave today’s almost entirely unpredictable markets.
This morning’s trading strategies:
We mostly stuck to our guns yesterday, waiting for about half an hour (10 a.m.) to decide if the market was going to completely tank or, perhaps, recover enough to wait out the day.
While we were tempted to get rid of our position in refiner Marathon Petroleum (MPC) which opened substantially down, the Maven, operating on a hunch (which one must do on occasion in current markets), doubled down and purchased more MPC and was rewarded when the stock bounced hard to the upside. That position actually closed up yesterday.
On the other hand, the Maven dumped a perfectly good small position in Cleveland-based heavy truck manufacturer Hyster-Yale (HY) for a nifty short term profit, hoping to get back in if the stock continues to resist the downside pressure today or tomorrow.
We also picked up some utility shares, getting back into First Energy (FE) on weakness, having unloaded that stock about two weeks ago for a profit. With a stable yield approaching 6%, FE should be resistant to any big declines here, although it won’t be impervious to a market correction.
We also acquired a small position in oddball Minnesota-based utility Otter Tail Power (OTTR). Otter Tail conglomerated into other businesses years ago during the ill-fated deregulation craze, although it recently sold-off its interests in alternative power manufacturing. OTTR is also, to our knowledge at least, the only American utility owning power plants that are fueled by lignite, a super-compressed peat that still famously warms many homes today in Ireland.
Speaking of Ireland, we would actually like to take a small, contrarian position in the all-Ireland ETF, EIRL, and attempted to do so yesterday. The ETF has been resisting Euro contagions of late. But, as it’s thinly traded, the bid-ask spread is substantial, and it’s been tough to get a good price, so our attempt yesterday ultimately failed. We may try again today.
Otherwise, we will continue to sell profitable positions here and there as the situation warrants. This market wants and needs to go down, but didn’t do so yesterday, we suspect, due to the lingering effects of another helicopter money drop by the Fed last Friday. Maybe they knew something was up in Nicosia on Friday. Whatever the case, all that cash seems to have cushioned what was shaping up to be a market crash on Monday.
Whatever you do today, we continue to advise extreme caution. We are currently using our technical resources as a guide, not as Biblical truth. Until the Fed stops dropping money on this market, it’s what we have to do, as all this cash is making a mess of nearly every investment system currently. The Fed simply wants stocks to go up, and it’s determined to keep this activity up until everyone complies. It’s kind of the opposite, really, of what’s going on in Cyprus. But in the end, all government manipulation of its constituents is one and the same, isn’t it? A cheery thought for an overcast East Coast Tuesday.
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.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any ar500ticle under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.