It made little sense to blog about Cyprus last night because the initial news release was so vapid it was of little use. Those who perceived a risk-on based “settlement ” proved to be disappointed this morning. Long before Dutch Finance Minister Dijsselbloem opened his mouth, the euro and its various correlated trades were in a turnaround from last night’s movement. Mr. Dijsselbloem also serves as the head of the ECOFIN (European Finance Ministers) so his voice carried more weight than the usually opining of a podium-addicted eurocrat. It seems that the ECOFIN honcho made it known that the severe punishment of investors and depositors in Cyprus was to serve as the TEMPLATE for all future European banking insolvencies. The stern tone of the message sent global equities lower and the DOLLAR and any currency not in Europe, rallying.
When Dijsselbloem was recovered from his power hangover saw the damage the TEMPLATE COMMENT did to the markets, he immediately recanted and claimed Cyprus was a one-off resolution. There are those who are applauding the firm stance taken by the German core hard-money crowd as it will drive a stake thru the blood suckers feeding on “MORAL HAZARD.” In a normal economic environment I might agree, but in times of economic downturn it is kicking the hornet’s nest to start invoking severe credit outcomes on the financial system. The overall unemployment rate in Europe is close to 12% and we know that Spain’s official jobless rate is close to 27%. Do you really wish to pressure bank balance sheets at a time that the economy is already squeezing troubled borrowers.
It is madness to keep money in European banks when depositors are so unsure as to the remedies of any crisis resolution. Spanish banks are going to be tested and the ECB is going to be challenged. It is of no small matter that ECB President Draghi has been so quiet throughout this most recent crisis. There has been no call for the Outright Monetary Transaction (OMT), the European QE program, though if depositors in Spain become nervous that will change. I advise you to remember that the OMT is based on the requesting country to adhere to an agreement to imposing harsh CONDITIONALITY on itself to meet the borrowing stipulation. Austerity in the face of a sovereign and/or banking crisis is a recipe for disaster. Mr. Dijsselbloem, did you really think about the words that came out of your mouth?
I wish all my readers a Happy Passover or Easter and wish you a holiday season of peace. It is spring and the calendar says redemption or resurrection are the words of the season. Peace to all of my readers.
Yra Harris
NOTE: I am going to repost two pieces from last week that have become my relevant after the lunacy of today
March 19: There Must Be Some Way Out of Here, Said the Joker to the Thief
March 17: The Europeans and Cyprus … The Idea of 10 Billion Euros = Five Hundred Billion Euros
Tags: Dijsselbloem, Dollar, ECB, Euro, Mario Draghi, moral hazard, OMT, QE
March 26, 2013 at 6:21 am |
Dear Yra,
Great post, thanks a lot.
I’d have two questions, if you can find some extra time, as the situation really stinks.
1) Do you think it was really a power hangover? Or could it be that it was intentional? Could it be that behind the scenes, Germany is playing “Bonzaï care” with the european banking system. By this, I mean, if I am Germany, I must be clearly pissed off to see that after 3 years of loans to the PIIGS, they still don’t respect their commitment on austerity, they cheat, their banks are insolvent but I don’t have any clue about the necessary amount for the bailout, nor how much it’s really going to cost eventually.
From this statement, are they “crazy” enough to want to provoke this crisis in Cyprus and through the PIIGS in order to put them the knife under their throat and thus, dictate their conditions? Germany would be in position to decide which bank will be spared and which will be erased with its depositors. The aim would be a consolidation of the european banking sector by cutting the bad branches of the tree, and putting QE only into the most solid banks, with the forced help of the depositors besides. As a result, the selected “bad banks” would be destroyed or merged for a penny inside stronger structures.
Is this scenario total fantasy or can it be true?
2) I have an account in Luxembourg, which until now I was considering safe. The bank is a reference, it shows a Tier one ratio of 15, which is quite “good” compared to most devastated big european banks. Do you think the bank run may spread up to this money center? A Tier 1 of 15 seems to me like this 20 feet high wall a Japanese village built to protect itself against tsunamis…until the one of Fukushima and its 40 feet high waves destroyed it all.
Thanks a lot for your lights,
March 26, 2013 at 7:07 am |
Great post, wish you and your family a holiday season of peace.
March 26, 2013 at 8:20 am |
Thanks Yra. Here’s to wishing you a peaceful holiday season as well.
March 26, 2013 at 9:56 am |
Yra…one day soon…just come out with it.
Give us your projections for where this is all leading, a timeline, and a prioritized “short list” of what you are doing to protect yourself and family. Perhaps some of your posts can include a discussion about each particular “item” on your “short list”, and include reader feedback.
Maybe we could all learn a bit from each other ?
Thankyou
March 27, 2013 at 9:53 pm |
Dan–good idea and will start looking at it.But as I trader my time perspective is short as an analyst the time horizon is far different,but I like your idea and hope it will generate some discussion
March 30, 2013 at 10:39 am |
Hi Yra-
Great post on a truly demented (or was it?) slip of the tongue out of Euro-Land. Just want to know one thing… might this be related to them falling into the Cave of the Crystal (i.e. rigid and breakable) Currency? I think even Indy would have a problem rescuing this one.
And that goes especially for your apt observation on the draconian requirements which OMT imposes on countries who request it… which Spain has managed to avoid to date by fudging the degree to which they don’t need it (unless one actually puts a realistic value on all those major bank property porfolios.)
Isn’t the really sad part of this the degree to which it is all necessary as part of Ms. Merkel’s re-election bid? Got to keep the Burghers of Bavaria happy until the election. Don’t want them to think there is any real cost to the Fatherland’s aggressive mercantilist approach to Euro-zone and external trade aided and abetted by the weakness of the currency fomented by worries over the Southern Sisters, now do we?
Best Passover Wishes to You and the Family-
Alan