Sunday, 19 August 2018

The Cypriot chicken and the EU hen house

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Are you getting bored with back-of-a-fag-packet calculations as to how much the recapitalisation of the Spanish banking system really is going to cost or how many seats who is going to win in the Greek elections on Sunday? Trust me, you are not alone.

Anthony Peters, SwissInvest Strategist

I was chewing on a slice of toast this morning when I caught myself skipping any article in the paper which did not have either a Hellene or a Hispanic flavour. What a sad state of affairs.

When in doubt, I normally turn to my friend Alex Moffatt of J Palmer & Sons who writes a daily commentary out of Melbourne and for whom the glass is always either half full or completely full, bless him. However, in the process I found some notes which have been sent to me by a lady in Frankfurt who, many years ago as Sue Abbott and in her guise as a portfolio manager at DWS, used to scare the living daylights out of overenthusiastic and thrusting young bond salesmen. However, now long retired and a mother of two teen-aged boys, she still tracks events in the markets with great interest. 

For those who feel that its larger neighbour, Greece, has flouted the rules, look again. Just one of many examples is how it has treated its national carrier, Cyprus Airways.

The notes in question refer to Cyprus. While Moody’s downgraded Spain’s sovereign debt rating to Baa3 from A3 yesterday, it also took Cyprus’ rating to the wood-shed too and cut it from Ba1 to Ba3. Now, the probability of you holding any exposure to Cyprus is pretty slim and under normal circumstances it’s not the sort of thing which would attract broad attention at all. However, might now not be the case, for in sixteen days’ time Cyprus assumes the rotating presidency of the Council of the EU.

Many may know the story of how Jeffrey Archer was expelled from his position as a member of the British House of Commons for declaring bankruptcy, only to write a novel based on his failed business venture, and ending up worth a small fortune for being a leading provider of airport books. Well, a bankrupt might not be permitted to sit in Parliament but it evidently doesn’t prevent one from leading the European Union. And what leadership it is about to show.

For those who feel that its larger neighbour, Greece, has flouted the rules, look again. Just one of many examples is how it has treated its national carrier, Cyprus Airways. Direct government subsidies to airlines are not permitted so, in 2010, the administration stuffed €20m into the loss-making airline’s piggy bank and called it compensation for the flight ban it suffers over Turkey airspace. Did Brussels care?

Russian recap

There has been a number of €1.8bn circling which is what the recap of Cyprus’ banks is supposed to cost – the PIIGS definition has always been short of a “C” – but what is less frequently brought up is that it has already accepted a €2.5bn loan from Russia. For a country which is about to preside over the EU and with a total GDP of a mere €17.8bn, that’s not exactly chicken-feed.

Set against that GDP number the estimated loan volume of €23bn which the Cyprus Popular Bank and the Bank of Cyprus have outstanding to mainland Greek borrowers between them and you see that when it comes to dog’s dinners, tiny Cyprus makes both Greece and Spain look good. Given that JP Morgan’s annual net income, maybe even after a few minor upsets in its hedging strategies, still exceeds Cyprus’ total GDP, it is understandable that it doesn’t command too many headlines in the press.

The discreet €2.5bn which came from Moscow came without visible strings attached. Likely story. Natural gas has been found off the Cyprus coast and the guess is that where there is gas, oil can’t be far away. And where there is oil, there are all manner of geopolitical fandangos to be expected as part of the package.

President Cristofias is decidedly a communist which will make for lots of fun at a time when US/Russian relations are under severe strain over their respective roles in the Syrian civil war. It can’t be much more than 150km from Larnaca to the Syrian coast, a fact of which Secretary of State Clinton will probably be significantly more aware than the navel-gazing Eurocrats but certainly no less than the Putin administration.

Meanwhile, Cristofias can sit there smiling while the people of Cyprus continue to wonder where the funds came from to tidy up the centre of Nicosia in preparation for the impending Presidency. At least the expected EU bail-out team won’t need to be looking for pot-holes anywhere other than in the national accounts.

Apropos, Syria - strife in the Middle East must be expected to have some impact on oil prices, so hang on to your hats. However, the recent decline was seen reflected yesterday in the US PPI figure which dropped 1.0% MoM in May. Brent has now decisively broken down below US$100 pbb, closing at US$96.94. The softness in the Euro has it trading at €77.32 pbb which is going on 20% lower than as recently as March.

Has anyone noticed that at the pumps yet?  

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