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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27 March 2013: Asian shares gains on positive US data

Asian shares rose on Wednesday as positive US data confirm a moderate recovery. US Home sales and manufacturing fed optimism with the Dow Jones industrial climbing more than 100 points to a new record high. 14 559 beats he former record from March 5th 2007. Data showed that single family home prices in January rose at the fastest pace in six years. Durable manufactured goods also shot up in February. The numbers are boosting investor confidence and loading up on equities.

The rosy US picture is in stark contrast to Europe where the Cyprus crisis and its possible contagion impact on other vulnerable members of the euro zone take central stage. The Cyprus bank bailout inflicts huge losses; up to 40% on deposits above Euro 100 000. Banks are still closed. When they hopefully open tomorrow it would be strict restrictions on currency transactions to avoid a run on the banks.

The second biggest bank, the Popular Bank of Cyprus, has been closed down. Its healthy assets, deposits below Euro 100 000, will be transferred to the Bank of Cyprus in an effort to boost and save the island’s biggest bank. Minister of Finance Michael Sarris stroke a positive tone yesterday when he stressed that the banking transaction restrictions would last only for some weeks. Others are more realistic. Cyprus fears capital flight and a run on their banks. It is likely that big Russian, British and Middle Eastern clients will take their money out as soon as there is a chance.

The handling of the Cyprus crisis also threaten to set a bad precedence. For the first time EU, the European Central Bank, ECB, and the International Monetary Fund, IMF, has confiscated funds on private accounts to finance a bailout. That has violate sacred principles. European politicians have later indicated that this practice would be followed in connection with possible other bailouts inside the Eurozone. This has sent shock waves through the European financial system and threaten banking clients especially in countries like Italy and Spain which might be next in line.

The practical consequence of the Cyprus bailout is that it might have undermined public trust in a banking system ridden by high profile scandals and banker’s speculation and misuse of client funds. The way the EU, ECB and INMF has handled the Cyprus crisis has further increased the divide between north and south in Europe. Southerners are reacting with dismay on what they see as German and EU technocrat arrogance. Confidence in the common currency is thereby also hit. While bankers are saved with generous parachutes the EU and IMF imposed austerity measures have meant unemployment and misery for the people in the southern periphery.

The Euro/USD is under steady downward pressure and trades at 1.2849. Currency analysts are expecting 1.25 in a short two months perspective. Oil prices are up with NYMEX trading above 96 the highest level seen for weeks. Brent crude is above USD 109 a barrel on the better US data. The BRICS countries meeting in Durban in South Africa has decided to establish a new investment bank in support of weaker economies with acute payment problems. It is stressed that this banking establishment is not a substitute, but a complementary to IMF.

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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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