15 April 2013: Chinese GDP unexpectedly slows

The Chinese economic growth unexpectedly lost momentum in the first quarter of 2013 as gains in factory output and consumption weakened; driving stocks and commodities lower on concern of a slowdown in global expansion. Gross domestic product, GDP, rose 7,7% from a year earlier. The GDP numbers did not meet analyst forecasts of 8,0% growth. March industrial production gained less than estimated. Retail-sales growth are, however, in line with forecasts.

The weaker than estimated forecasts put oil prices under new pressure. Brent crude fell to USD 101 a barrel as gold tumbled to a 21-month low. The steep decline in gold and silver prices started last Thursday and gained momentum during Friday night and early Asian trading. Gold hast lost USD 150 an ounce in less than one week and trades at 1441. The gold prices decline follows a bearish note from Goldman Sachs which foresees continued falls in the precious metals and strongly recommend sales.

The depreciation of the Japanese yen, JPY, has halted as US authorities warned Japan against devaluation. USD/JPY licked on 100 mark several days during last week. It is now trading at 97,67. Euro/USD keeps steady at 1.3074. USD/GBP (British pound sterling) stays at 1.5321. Inside the Euro zone it might be quiet before new storm forecasts. European finance ministers adopted last Thursday a 10 Billion Euro bail-out for Cyprus.

The Cypriot government has simultaneously lifted the forecasts of its own contribution to the banking bail-in from Euro 5,8 to the double amount. This will put private account deposits in the Cypriot banks under new hair-cut pressure. The increase in bail-in demand comes on top of rumors that Cyprus is selling major part of its gold reserves. That has added to the downward pressure on gold prices. The Governor of the Cyprus Central Bank, CBB, has voiced concern that the independence of the CBB is under government pressure.

The weaker growth in China adds to concerns that the global recovery is struggling. Monetary easing by injecting money into economic system has led to new records on the stock exchanges, but no new working places are added. There are fears that new record high stock markets barely represent a new bubble. The International Monetary Fund, IMF, is said to consider to lower its forecast for US growth. The guru investor, George Soros, warns that Germany shall be in recession by end of September. Soros is also forecasting a breakup of the Euro either by a unilateral German exit or by member states exiting following the Cyprus crisis.

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01 April 2013| Gloomy perspective for Cypriot investors

EURO/USD fell to its lowest level in four month Monday on concerns about the spill over from Cyprus bailout terms. The Euro hit 1.2791, just above the four month low of 1.2750 reached on Wednesday. The Euro was trading at a high of 1.3711 back in February. Trading activities have been low over the last days due to Easter holidays in Europe.

 The short and medium term effects of the Cyprus crisis inside the Euro zone are so far not fully digested. Russian investors are hard hit, but Western European companies and individuals using Cyprus for the same tax planning reasons have also suffered heavy losses as a result of the collapse of Laiki, The Cyprus Popular bank, and near bankruptcy of the biggest bank, Bank of Cyprus (BOC). This comes among rumours that the Cypriot banks lately have given politicians and close friends - favourable loans and credits.

 Small companies struggling to repay loans in Italy and Spain signal bigger problems on the horizon for the euro zone. Defaults by small and medium sized enterprises which are the biggest employers in Spain and Italy, are rising explosively spelling troubles for banks and countries in the heart of Europe’s debt crisis.  While Cyprus count for 0,2% of the total Gross Domestic Product (GDP) in the euro zone, Spain and Italy count for 28%.  Whether these countries will be able to pull themselves out of the crisis and avoid full-blown bailouts depends on their banks which are fighting with bad loans and decreased profitability.

 Recent news from the Cypriot Minister of Finance and the Central Bank tell that account holders would be hit much harder than firstly announced. Cypriot authorities are still putting strong restrictions on “safe” accounts with less than Euro 100 000 meaning that Cyprus for all practical purposes not any longer is a functioning member of a currency union. On deposits above Euro 100 000.00 - 37,5% shall be converted into shares in Bank Of Cyprus (BOC), 22.5% are going to be frozen and the remaining 40% might be used for recapitalization of BOC.

 This means that Russian depositors stand to lose billions of Euro in what Prime Minister Medvedev has described as a Soviet style confiscation of Russian accounts.  The Russian government will, however, not aid businesses that have lost money in Cyprus.  Deputy Prime Minister, Igor Shuvalov, stated yesterday that Moscow is going to continue to clamp down on flight capital to offshore financial centers. “It is a terrible shame that Russians lose money, but the government will not take action in such a situation”.

 Much of the Russian money in Cyprus, probably up to Euro 19 Billion in bank deposits, are flight capital where Russian companies and rich individuals have tried to avoid taxation in Russia. The authorities have formerly offered a tax amnesty for flight capital being brought back to Russia.
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26 March 2013: Markets negative to Cyprus bail-out

Digesting the details of the Cyprus bailout markets reacted negative to the scheme agreed in Brussels Monday morning. After initially rallying stock markets fell back yesterday evening and Asian shares eased as investors worried about the potential risk from the Cyprus bailout scheme. Euro/USD which rallied on the news and reached 1.3050, fell steeply back and trades at 1.2869 putting the single currency under new downward pressure. “Safe haven” currencies as USD and Japanese yen have strengthened. Gold is falling back after initially rallying to 1614.

Markets were positive to the news that a crisis was averted. But as the details of the bailout scheme became clear, markets were starkly reminded of the risk involved in the Euro zone. When little Cyprus with a million people and a GDP constituting 0,2% of the GDP in Western Europe, creates such waves in the financial markets what when a crisis occur in Spain or Italy? The EU handling of the crisis leaves serious questions and strengthens the impression that the Euro zone is living on borrowed time and a breakup of the common currency edges closer.

The Euro based on a lack of common taxation and financial policies has over the last years experienced 5 crisis situations ending up with bailouts in Ireland, Portugal, Greece, Spain and now Cyprus. While tax payers were doomed to pay the bill for the first four crisis, Cyprus is instituting a new unheard principle. Bank depositors are this time asked to pay for the mess created primarily by Bank of Cyprus and Popular Bank of Cyprus’s speculations with depositors’ money over the last years in crisis ridden Greece.

The new package exempts depositors with accounts below Euro 100 000. Depositors with a balance above EURO 100 000 will have their accounts frozen and the door kept open for future confiscations in the magnitude of 40%. EU officials stated yesterday that this step, confiscating private depositors’ funds, might constitute the rule for the future. Strict currency controls are introduced and the banks are going to open firstly on Thursday being closed for two weeks. Bank clients are permitted to subtract Euro 100 from their accounts using ATM machines.

EU and especially Germany have in their propaganda for justifying what they with a misled concept have called “levy”, made Russian depositors in Cyprus the scapegoat. Most observers with some knowledge are aware that the big chunk of the Russian cash in Cypriot banks has its root in the chaotic privatization following the fall of communism and the Soviet Union in 1991. The bank system broke down, and Russians used Cyprus as one of many new domiciles for cash stashed in their luggage. Nobody asked, too, many questions. The west supported the wild-west privatization as the true token of freedom and democracy. Cypriot auditors, law offices, real estate agents and bankers did not ask naughty questions and greatly thrived on the Russian business.

OECD in the late 1990-ies put Russia on the black list for suspected money laundering countries. After thorough investigations Cyprus was removed from this list in 2002. Removal from the black list was one of the preconditions for EU membership in 2004 and the entry into the Euro in 2006. The 10% corporate tax which now is going to be increased to 12,5%, was introduced as a result of negotiations and EU-agreement to facilitate a country that had to accept the common agriculture policies and prohibition of production of traditional products. The so called “troika” has for a long time demanded free access to banks and other institutions. Suddenly over the night Russian money and some “oligarchs” have been turned into a money laundering mafia.

President Nicos Anastasiades who has his fair share of rich Russians on his law office clients list, defended the bailout terms in a televised speech to the nation yesterday last night as the majority of Cypriots ask for independence and threaten to leave the Euro. Whether his arguments will dampen the anger of fury in a small country realizing being dictated from Berlin and Brussels, are open questions. The last two weeks have opened independent Cypriots’ eyes for what it means to be member of a rich man’s club in Northern Europe. Cypriots are as Greeks, Russians and Serbians orthodox. Religion plays an important role as strategic and security considerations did when Turkey invaded the island in 1974.

In this situation it may be dangerous to concentrate only on small figures and behave as elephants in a Chinese porcelain shop.

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22 March 2013: ECB gives Cyprus bailout ultimatum

The Cyprus drama escalated with furious banking employees protesting in front of Parliament as worries about the effect of the Cyprus-crisis on the euro zone intensified. Shares in Europe fall yesterday as did USD/EURO. The Euro is under continued downward pressure. The European Central Bank (ECB) simultaneously issued a bailout ultimatum that liquidity transfers to the Central Bank of Cyprus would be stopped on Monday unless Cyprus agreed on terms and conditions for a bailout.

In a bid to raise investments in a Solidarity Fund to raise the required Euro 5,8 billion that is necessary to unlock the EU/IMF’s Euro 10 billion financial assistance package for Cyprus, the Government yesterday succeeded in mobilizing support from all the political parties. The powerful and economically strong Greek Orthodox Church has also stated its willingness to contribute with cash injections and land assets. The Fund would be built up on possible future income from the oil and gas reserves on the continental shelf.

Any effort to speed up offshore natural gas exploration as a way of attracting desperately needed investment to save its teetering economy, might, however, be challenged by Turkey which questions Cyprus sovereign rights to explore and exploit what Turkey regards as disputed areas. According to the International Law of the Sea Convention agreement between the concerned parties is a prerequisite for starting drilling activities in disputed areas. A possible Turkish challenge gives an added dimension to the crisis as a stark reminder of the Turkish invasion of Cyprus in 1974.

Potential gas riches also seem to have been part of the negotiations the Minister of finance, Michael Sarris, is conducting in Moscow. The gas resources have been identified as one area where Russia might be interested in investing. A lot of rumors are surrounding these negotiations which so far has reached no breakthrough. Yesterday it was claimed that the second biggest bank, Popular Bank of Cyprus, was bankrupt, and that Gazprombank the financial arm of Gazprom, the world’s biggest gas company was ready to take over in a trade off with access to blocks on the shelf. That was denied by Gazprombank. It is, however, a fact that both Popular and the Bank of Cyprus are closed to bankruptcy.

Rumors were also spread that Cyprus has given Russia rights to establish a naval base in Meri. Russia might in connection with informal talks on the side line of the official negotiations, sounded out the opportunity to establish repair facilities for its merchant fleet in Cyprus. Similar sounding outs have been given to Greek islands. Nothing has yet been finally settled. Russia might be willing to extend the Euro 2,5 billion credit given to Cyprus for 5 years at 4,5% interest rate for 5 more years.

It is nevertheless worth reminding that England has had two military bases on the island since Cyprus gained its independence in 1960. There are also bases on the Turkish occupied northern part of Cyprus. On that basis a Russian naval base seems rather unlikely.

A delegation from the EU-commission headed by the President, Manuel Barroso, met yesterday with Prime Minister Dmitry Medvedev. Before the meeting Medvedev lambasted the EU’s handling of the Cyprus debt crisis comparing the “levy” with Soviet style confiscations. The fact that EU and the newly elected Cyprus president, Nikos Anastasiades, left Moscow, one of the most concerned parties, out in the dark regarding the bailout created outrage.

Officials in Moscow were privately skeptical to a Russian bailout or in Russia’s interest to provide further bridging loans. Commercial criteria would be the basis for any possible investments. This was clearly expressed by one Russian banker: “Buying worthless equity in a bank for a million or two. That is not going to bear very far here in Moscow”.

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20 March 2013: Cyprus might travel east

After serious miscalculations both on the part of the Cypriot government and the euro zones finance ministers, the newly elected President Nikos Anastasiades might be heading east. After building close and friendly relations with Angela Merkel and his German sister party, CDU, during the first month of his Presidency, the real content of these relations were put on a severe test during the Euro zone meeting last Friday.

Anastasiades was met with a done deal. His strong objections and clear statement that the proposed bailout would have no chance to pass Parliament, fell on death ears. When appealing to Merkel for flexibility when calling her on Monday, he was met with a cold shoulder and instruction to talk with the troika. Merkel also strongly advised against any contact with Russia.

This response and the Cypriot parliament’s flat rejection, might have given the Cypriot President exactly the encouragement he needed to demonstrate that he is nobody’s puddle. He is neither the property of the German Chancellor or the European Union. In a critical moment of need what the ruling technocratic elites in Europe were able to come up with, was a proposal to temper with private banking accounts and confiscate from 6.75 to 9,9% of their value. This infuriated everybody concerned from poor Cypriot pensioners to rich Russian oligarchs, Arab sheikhs and ordinary employees with small accounts. Nobody likes to have their savings stolen. Over the last days the Euro zone proposal has created an uproar. We can see the beginning of global financial crisis where the Euro falling as a stone and everybody asks which are the next banks to fall.

If this was a calculated risk on behalf of European technocrats they are paying a high price completely overlooking the explosive political dimension in Southern Europe. The President of European Central Bank, Mario Draghi, was as late as in September willing to take whatever it takes to save the Euro. By his strong statement he stabilized euro zone markets and the common currency. By treating a small, but very proud nation as a given entity, the euro zone and the financial markets are plunged back to where they were a year ago. The result of the German inspired austerities are there for everyone to see; negative growth, mass unemployment and new lost youth generations, especially in the periphery of Europe. This does not inspire belief in the high values of democracy and freedom preached by European technocrats.

During the session in the Cypriot parliament yesterday there was not a single vote in favor of the European bail out. Outside Parliament there were furious demonstrations and flag waving remarkably enough in favor of a Russian solution. No wonder that Anastasiades, humiliated and rejected from his Western European friends, feels for going east. His Minister of Finance is already in Moscow. If the President decides to take the next plane the whole nation shall stand behind him and wish him well in the negotiations. From being the “traitor” selling out Cypriot interests, he might during some days have turned into a national hero.

There is, however, be no easy sell for Anastasiades. President Vladimir Putin was furious and offended for not being consulted either by EU or Cyprus before last Friday’s decision. He found the proposed solution “unfair, unprofessional and with unforeseeable consequences”. Russians are world masters in chess, and each move must be carefully considered not at least from the Cypriot side.

But much is at stake also for Russia. The German Minister of Finance, Wolfgang Schaeuble, said this morning that Cypriots only have themselves to blame when they don’t understand that they have an overblown banking sector. From a logical point of view he might have a point. Psychologically he is building under the image of the arrogant German in a situation where the streets in Southern Europe are boiling and where especially bankers and the Brussels technocratic shall think twice before finger pointing. It might be easier for Anastasiades to find common language with their eastern orthodox brothers in Moscow than with a German Lutheran protestant.

Russia has recently given Cyprus a loan on Euro 2,5 billion. To prolong it with 5 years on better conditions might be the easiest part. But by playing hard ball with EU going east, Cyprus might be seeking a bail out partner for their banks in Moscow. For a Russia which already has deposited Euro 30 – 35 Billion in Cyprus, the 10 billion offered in bail out from EU, IMF and ECB, might seem such an excessive amount of money. And in addition: Qatari and Chinese money bags are flirting at the doors. Newly discovered gas on continental shelf is also a part of the game.

Might be that Western Europe in the end needs Cyprus more than Cyprus ever needed the euro. The Cyprus drama seems just about to begin.

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