It was a very muddled and confusing day in the markets as the news wires carried numerous rumors. The Cypriots were going to approve the lunacy and then they weren’t as the government couldn’t get the needed votes in parliament. Later in the day there was noise about a new compromise with the depositors with more than 100,000 euros bearing the brunt of the “TAX PLAN” and small depositors paying just 3 percent. The markets did not follow through with last night’s initial selloff and the U.S. equities tried to make a move higher late in the day but late selling pushed the markets down on the day by the close. The U.S. is fulfilling its role as a haven, but instead of bonds being the main recipient of global angst, it appears that frightened money is comfortable buying the asset base of U.S. corporations. Gold did perform as a haven but for all the turbulence in the market its rally was tepid. It seems that investors want an asset with some return rather than the mere store of value.
The Cyprus situation is being talked of as too small to have a major economic impact as it is only 0.25% of Europe’s GDP. This was the same pabulum that the talking heads were spewing at the beginning of the Greek debt crisis (Greece is only 3% of EU GDP). Don’t be fooled by the concept of FINANCIAL CONTAGION. When investors become nervous the power and speed of an adverse feedback loop can cause much pain in very quick disorder, especially in a system that is so highly leveraged. The present situation in Europe should be of no surprise to my readers as I have warned of the fragility of the European financial system and nefarious actions of its policy makers. The German effort to present Chancellor Merkel as a guardian of the German pocketbook can produce many unpredicted outcomes. Merkel’s effort to co-opt the German hard money crowd is forcing her and FM Schaeuble to take a hard stand against further ECB bailouts.
Mario Draghi hasn’t even had to deliver a new round of Quantitative Easing (OMT) and the Germans are posturing ahead of the September elections. The unintended consequences of the German hardline stance on Cyprus may push the ECB into some action if the Spanish banking system gets called into question because of nervous depositors. Today, the markets remained rather calm in the face of the Cypriot problem but I advise keeping your eyes on the two-year note markets and the 2/10 yield curves in the developed market. No pressure on the short-end of the market as the yield curves of the peripheries actually steepened by day’s end.
***The best idea to resolve the Cyprus situation was raised in a rumor that Russia’s huge energy company, Gazprom, had proposed lending the Cypriot banking system the needed funds in exchange for a lien on Cyprus’s supposedly large offshore gas fields. This is similar to what the U.S. Treasury did for Mexico when Bob Rubin was Secretary of the Treasury. In 1994-1995, Mexico was in a financial crisis and the U.S. Congress was in no mood to bail out the profligate Mexican government. President Clinton gave Secretary Rubin the authority to lend Mexico the needed funds but the export revenues of Pemex were deposited at the FED as collateral against the loan. The Mexican electorate wasn’t happy about the CONDITIONALITY of the loans but as the global economy recovered before the onset of the Asian contagion crisis, the U.S. loans to Mexico were paid off. The Gazprom proposal seems to be a measure of what some Germans proposed last year: A European Redemption Fund.
The idea of the redemption fund was based on the European debt plagued to pledge their GOLD into a fund and when the bailout funds were repaid the GOLD would be redeemed. As I have argued for the past two years, the IMF OUGHT to utilize its GOLD HOARD and issue gold-backed bonds as a funding source for the debt-plagued nations of Europe. It seems that IMF DIRECTOR Christine Lagarde has forgotten the lessons of last year for the news has been that the IMF was the major proponent of the BAIL-IN, which was to tax and confiscate the savings of all Cypriot bank accounts. Even Mohamed El-Erian admonished the IMF on CNBC today for its ultra-firm stance on demanding that bank depositors be the first to take a hit on their wealth.
It is time to listen to Vladimir Putin and contemplate the idea of a Rubin-type secured loan package. Otherwise, President Draghi is going to have to face the test of a genuine Outright Monetary Transaction and the conditionality of pledged assets will be easier to cope with then the conditionality of AUSTERITY BUDGETS in the time of high unemployment and political uncertainty.
Tags: Angela Merkel, bail-in, Christine Lagarde, Cyprus, ECB, EU, Gold, IMF
March 19, 2013 at 6:49 am |
Great point about contagion, the markets seem to be calming a bit now though. About OMT, I didn’t think it was quite QE because all the bond purchases will be sterilized. Does it really put new money into the system like QE does? OMT is tied to a political variable instead of an economic one which makes its scope harder to predict as well.
March 19, 2013 at 7:24 am |
Alex—that money from OMT has never been called upon and it will not be sterilized and I will say the issue will be of what conditionality will be placed upon the party in need—again Draghi just wants it available to him and fears having to enact an actual OMT prior to the German election
March 19, 2013 at 10:01 am |
Readers—Euribor is getting hit as June 2013 is down 8 ticks–trouble somewhere in the european banking world—just a heads up
March 20, 2013 at 6:31 am |
Some years back, Eliyahu Goldratt wrote “The Theory of Constraints”, primarily addressing manufacturing businesses, but applicable throughout any business in terms of process improvement and the results gained. One primary theme that I latched onto and used as ammunition with more senior executives who sought the constant repetition of restructuring and moving the manufacturing component of business to China or India, was: “You cannot cost-cut your way to prosperity” (paraphrased). In other words, you must somehow actually be successful at something in a positive way.
The theory actually tries to get us to think through process at both the detail and high level perspectives and remove the constraints to adding value.
This then makes me think that we have the wrong people trying to improve process when we rely on elected politicians (or unelected totalitarians) and any of the remoras, or bureaucrats that depend on them. The reason being that none of those ever have had the experience of trying to create more value. Aha! I’m wrong. They just view the “ruler” as the customer, and so think that creating more value, be it in wealth, power or both, for the ruller(s)/self.
Upon my short analysis, I see (again) that I have some misplaced perspective that Enterprise Value is the goal.