Sunday, 22 July 2018

On doing the Cyprus thing and appeasing the Kremlin

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Monday was a wild day as all and sundry tried to make sense of Cyprus bail-in/bail-out announcements and what it really meant to the island itself, to the peripheral laggards of the eurozone, to the eurozone as a whole and, finally, to the rest of the world.

Anthony Peters, SwissInvest Strategist

After an initial rally in risk assets – quite expected – we ended up with the markets clearly weaker by the close - not expected, but probably understandable.

Perhaps the most lucid comment came from an old Cyprus hand who referred to some opinions in local blog slots which seemed to suggest that both Laiki and Bank of Cyprus are established incumbents and that their respective wealthy depositors are longstanding customers. In other words, they hold the funds of the Brits, the Germans and the French who have been “doing the Cyprus thing” for a long time as well as, of course, wealthy locals. The newer Russian money, so appeared to indicate, is supposedly to be found mainly in other resident banks. By focusing the bail-in on the two big guys, an elegant solution has been found to keep the major pain sharing away from the vital Russians.

There was an air of cynicism to be detected in markets yesterday as questions abounded whether, yet again, taxpayers money was being flushed down the drain in order to vindicate the “political will” to rescue the troubled single currency.

I clearly don’t have the numbers to back this story up I haven’t set foot in Cyprus for longer than I care to remember (I was last there three days before Neil Armstrong and Buzz Aldrin first landed on the moon) – and Cyprus in crisis, anywhere in crisis for that matter, is full of rumour and conjecture. Nevertheless, where there is smoke, there usually is fire and it is not at all inconceivable that whatever package was put together in Brussels will have been floated past the Kremlin before it was signed off.

If this local interpretation contains even the slightest shed of truth and if the bail-in structure really was cynically formulated in order to partially protect one group of foreign investors over an other, then I would understand why peripherals took it on the nose in Monday’s trading. Milan opened 1% up and closed 2.5% down and even that was off the lows.

Did investors suddenly decide that they had been presented with a scenario dominated by smoke and mirrors and that whatever package had been presented wasn’t really anything clever at all?

It’s fundamental

I noted in yesterday’s column that we are in a foreshortened holiday week which takes us into quarter end as well and that therefore markets would be highly technical. Institutions have broadly been overweight risk and a certain amount of index related position adjustment into the end of the accounting period has to be expected. Hence, any sell-off should not be immediately ascribed to fundamental causes.

Nevertheless, there was an air of cynicism to be detected in markets yesterday as questions abounded whether, yet again, taxpayers money was being flushed down the drain in order to vindicate the “political will” to rescue the troubled single currency.

One particularly worrying development is the way in which the Germans now no longer seem prepared to laugh off being handed all the blame for other countries’ need to rein in and reverse years of fiscal mismanagement. There was also disappointment at the way in which both Brussels and Nicosia seemed to have not really been prepared for the crisis and how it was, once again, a one-minute-to-midnight agreement which “saved the day”.

Just like its big cousin, Greece, Cyprus has been given financial breathing space but there still the glaring absence of a platform upon which growth can be built. Membership of the single currency might possibly stifle more opportunities to recover than it generates.

Meanwhile, the fate of the Republic of Slovenia and its banking system would appear to hang in the balance too. Is it the next Cyprus? In the past four years, only six of the sixteen reported quarters have shown any signs of GDP growth. Is this going to be the next “too small to fail” situation which will tax the Troika and which will revive the debate as to who benefits most from its putative rescue?

Every day, that German election date creeps closer and as one Frankfurt resident pointed out to me yesterday, Berlin now remains pretty much the only capital still in the hands of the same party which was in power when the Eurozone crisis began. I’m quite sure that Mutti Merkel wants to keep it that way and a Nicosia-like situation in Ljubljana will not help her to do so.

Perhaps this time a bit more considered preparation work by the competent authorities would not go amiss.

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