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