Taking the union out of the European Union.

If I am honest I probably have more questions than answers on the situation that has occurred in Cyprus over the weekend. From what I have read it seems an unprecedented move and when actions like that happen it tends to throw up a lot of speculation and confusion as their is no defined “playbook” to turn to. In saying that I will give it stab later on as to what may happen.

To be clear what has happened so far :

The EU and the IMF have given a bailout package to Cyprus who are falling under the weight of their own troubled banking sector. This in itself is not a new scenario as we have seen this with Ireland, Greece, Portugal etc.

The size of the bailout is EU10BLN. Which equates to approx 60% of of gross national output of the country. Again this is fairly common theme amongst the bailout states.

Where the kicker comes from is that instead of the usual austerity regimes and cutbacks etc the EU and IMF have decided they are going to enact a one off tax on the deposit base of Cypriot banks in an effort to raise close to EU6bln of these funds. This is the first time that savers have been hit with such a tax.

The terms state that those with less than EU100k in savings will be hit with a 6.75% tax, and those above this threshold will be hit with a 9.9% tax. There are some provisions that state those affected will receive equity in the form of shares in the troubled banks which I’m sure is of little consolation.

They have already moved to ensure that any attempts to electronically transfer funds out are not processed until the tax is removed from the funds, and there is a bank holiday in Cyprus on Monday which gives them another day to ensure the administration of this in order to pre-empt a bank run.

There are a few reasons why this wont matter to markets around the world and there is one very big reason why it should matter to markets around the world. Lets start with why it shouldn’t matter.

Cyrpus is a tiny economy and pretty irrelevant in terms of the overal global macro picture. Yearly  GDP of approx EU18bln wouldnt even put a dent on some of the biggest companies in the worlds balance sheets ( see JPM’s loss of $7bln and they still operating). While I’m sure Cyprus is a lovely island renonwned for many things chief amongst them was that it is a hotbed for dirty money looking to be laundered or for evasion of tax. It would certainly have been a favourite of certain Russian millionaires etc. Cypriot banks used this deposit base to invest in Greek bonds which they obviously have suffered tremendous losses on due to recent haircuts etc. 

The real purpose of this tax is to get at that dirty money and tax it but unfortunately the average joe on the street who was prudent, saved and played by the rules is also getting caught up in the mess. 

As for the Russian millionaires- they may or may not raise an eyebrow over this as 10% tax still leaves them with  90% of a whole big pile of cash and as one commentator noted this will be viewed as the “cost of doing business.” 

So these are some points as to why this is almost irrelevant 

Why it is relevant is one major oversight by the EU in that it 100% calls into question the deposit base of any country currently involved or possibly may be involved in a bailout or assistance in the future. If you have been brave enough to keep your money in a Greek bank over the last few years maybe this would be the final nail on the coffin for you and you get out. While I would not call into question the stability of the banking system in Ireland at the moment there certainly will be people that will same goes for Spain and same goes for Italy. 

Also you can point to how the EU and IMF are being particularly onerous and almost experimenting with one of the smallest members of the EU. How is that going to make other similarly small members like Portugal, Malta, Slovenia, Estonia etc feel towards their position in the Eurozone.

I think that this “deal” has set a very dangerous precedent for the Eurozone and will serve to destroy the efforts at a banking union and completely undermine the notion that it is a “European Union.” You should always be judged on how you treat your weakest members of society and what has gone on this weekend I think is a major step away from anything that can be described as a union. 

From how I think the markets are going to react that is a difficult question but I will give it a stab anyway. I read a well written article souding very sensible that if this had happened a year or so ago it would be a no brainer trade as to what to do – sell the euro, buy the CHF, USD & YEN, buy gold, sell equities especially bank shares and buy German bonds. 

The picture is slightly muddier today as buying the Yen is not really on the cards as Japan furiously trying to devalue it, buying the Swiss franc against the Euro makes sense if it weren’t for a very determined SNB putting a cap on that rate.

Buying the dollar probably makes most sense at the moment or gold but not both. Also scandi currencies will probably see some inflows also against the Euro. Buying safe haven government bonds like German probably makes sense also.

That is of course if anyone actually cares. As mentioned Cyprus is a small economy and many would feel that taxing that dirty money was always going to happen in some shape or form its just a shame that a few innocent savers got caught up along the way. As long as the EU and IMF can do a massive PR job and convince the world this is a one off then carnage may be avoided but then it has been ingrained in my psyche over the last few years to not listen or believe a word that comes out of these people’s mouths. Filthy begging liars the lot of them.

http://online.wsj.com/article/SB10001424127887324077704578362180039767150.html?mod=WSJEurope_hpp_LEFTTopStories

 

 

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