Wednesday, 18 July 2018

On Cyprus and Black Swans keeping afloat

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Did we ever really doubt it? We might have talked about it but in out heart of hearts we all knew that somehow Cyprus would be kept afloat – and I quite intentionally say “kept afloat” and not “bailed out”. It has not been bailed out at all, even though in strict nautical speak bailing out and keeping afloat are pretty much synonymous.

Anthony Peters, SwissInvest Strategist

Markets never really behaved as though they had expected Cyprus to get unceremoniously flushed down the Suwannee River. On Friday, the Dax closed at 7,911.35 points, just 147 points below its recent high and just shy of 2,000 points higher than its low of early June last year when the eurozone crisis hit its more recent low point.

Today, the risk-on brigade will be out in force, albeit within the constraints of impending month end and quarter end.

I will not repeat the details of the settlement agreement which was reached in Brussels overnight – that will have been posted by all and sundry – but the strain and tiredness could be clearly seen on Christine Lagarde’s face during the press conference. A result had to be achieved and, by hook or by crook, nothing was going to stand in the way. However, while whistling through our teeth at how close we got to disaster and while getting long risk assets and the euro, let us reflect on the past week.

In terms of rampant incompetence, the Eurogroup’s handling of the Cyprus crisis struggles to find equal. I can’t remember how long ago it was that this column alluded to the financial train crash which was about to take place in Nicosia. And yet, when the bold announcement that all depositors in the Cypriot banks were to be hit with a 10% haircut, it appeared as though absolutely nobody had considered what the backlash would be and, frankly, it looked suspiciously as though the Brussels grandees had been totally unprepared and were shooting from the hip.

“How do you deal with black swans? Shoot them on sight and send the carcasses to Frankfurt!”

There is also little doubt that the Cypriots were equally unprepared as they could barely have expected to find themselves at risk of being dropped by both Brussels and Moscow as they clearly regarded themselves not too big to fail but too small to be let go when the implications of their financial failure would have to be seen as too great a price to pay for the miserable US$13bn which it would cost to rescue them.

Once again, it needed the ECB to tread on the politicians’ feet and to remind them that they can’t just sit back and expect the central bank to take care of all problems even though St Mario had meant what he said when he declared “…whatever it takes…” Yes, he does expect at least a token effort from the grand elected chambers across the continent.

So, where are we now?

So, there we are this morning with a Cyprus package in place. But what do we really have? We have a million people owing a further €10bn on top of the €4.3bn of outstanding government bonds and €3.8bn in international bonds which does not, I believe, include the large bilateral loan which Russia refused to renegotiate. We have a Cyprus which economically, aside from its banking sector and tourism, had little to offer and of which the former is now a busted flush. I recently compared the possible outcome for Cyprus with that of that post Allen Stanford Antigua and this morning it looks as though I might not have been that far from the mark.

How Cyprus and the Cypriots are ever expected to service the debt, let alone repay it, is beyond me but I’m sure that when Howard Wheeldon’s famous “Good Ship Jam Tomorrow” docks in Limassol, it will have the answer somewhere on board. Presumably it is stored in some of the surplus space in the hold where building materials used to be but which will no longer be required as the resident Russians pack up, take the residual 60% of their former wealth which is left to them, and naff off.

Has Georgia thought of establishing itself as an off-shore banking paradise yet?

Anyhow, once again the “Draghi Put” has been exercised and once again none of the manifold underlying issues which had led to the current situation have in any fundamental way been addressed, let alone resolved. I’m not quite sure when I last heard someone talk of “kicking the can down the road” but I suppose that in the prevailing asset price rally it’s not cool to “give me ‘dem negative vibes, man…”.

I have often thought of that poster which used to hang in our trading room which read “How do you ride a bear market? The same as you ride a bull market – in the direction in which it is going”. To that, I would love to add one which states “How do you deal with black swans? Shoot them on sight and send the carcasses to Frankfurt!”

Alas, all that aside, we are now in a technical period with a foreshortened week into the end of the accounting period and with holidays upon us along with the promise of unusually fine Easter skiing here in Europe, I would be careful in reading too much into market movements and corresponding price action.

However, most investors seem to have spent the last three months getting long risk assets and for the while I can see nothing wrong with that. However, don’t bring out too much Champagne yet for having been positioned correctly – in all likelihood the entire peer group will have done the same. 

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