The biggest looser (after Cyprus) today has been the EUR.USD. This was the dream-fade-trade for Forex traders. The news flow from early Monday morning when the agreement was reached was handed easily to “Europe”. All is well, Cyprus is fixed. Then as often happens one of the members didn’t play by the script. The Eurogroup head and Dutch Finance Minister, Jeroen Dijsselbloem, says Cyprus is a Template for restructuring… That sent the market into a downward directional tizzy which it has yet to recover from. He’s since recanted, clumsily.
The bailout-bailin looks like this: Cyprus’s 2nd largest bank will be shut down and those insured depositors of <100k Euros will be moved to the Bank of Cyprus. Anyone with >100k Euros is looking at a nice big loss. Cyprus will have to find 4.2 billion euros from the uninsured.
It’s Thursday evening and we’ve been watching the drama in Cyprus play out for nearly 1 week. There are 2 camps, debating Cyprus risk:
- “Cyprus’ represents only a small proportion of the EU, throw them under the bus, no big deal, let’s get on with the bull market.”
- And the, “this is just the tip of the iceberg, one domino ahead of reigniting Greece, Italy, and Spain, buy gold” camp.
This weekend a scary thing happened to Cypriots and anyone keeping money in Cyprus (think Russians). If you have under 100,000 Euros before the banks open on Tuesday you will donate 6.75% to the bailout of Cypriot Banks. In return they’ll give you stock. Now if you have over 100,000 Euros you can count on donating 9.9%. Solidarity…
What should you expect on Monday?
Lots of very pissed off savers and empty bank machines. Think how you would feel coming back from a weekend 10% poorer, because the government, the ECB, and your trusted bank decides to confiscate your savings.
Backpedaling might be on the agenda, in either case, this is sending some fear into the markets, it’ll surprise me if the markets shrug this off. As little as Cyprus is for the EU, the precedent will put fear into the Italian, French, and Spanish markets. Today the parliament was presumably going to ratify the money grab. But they’ve just postponed the debate until Monday, which probably means there is dissension in the political ranks… If the measure is rejected The Question will resurface. How does a country exit the Euro Zone? Presumably, Cyprus is the least painful to throw under the bus but that question has a consistent habit of killing the buzz. And that’s what’s going to happen this week. Buzz Kill.