The Cypriot parliament today voted down the proposed bailout of the country’s banking sector using a combination of EuroZone money and cash generated by a fee on savings accounts. This is despite changes to the deal that would have exempted accounts holding less than 20,000 euros from what was, initially, a 6.7% fee. The vote wasn’t even close with 36 No votes and 19 abstentions from government members of parliament.
The rhetoric in parliamentary speeches was heated and very anti-German.
These comments to Bloomberg TV from Athanasios Orphanides, a former government of the central bank in Cyprus, exemplify the more moderate rhetoric:
“What we are witnessing is the slow death of the European Project. We are in a situation that some European governments are essentially taking actions that are telling citizens of other member states that they are not equal under the law.”
“What we have seen in the last few days is a very serious blunder by European governments that are essentially blackmailing the government of Cyprus to confiscate the money that belongs rightfully to depositors in the banking sector in Cyprus.”
What lies ahead after the vote by the Cypriot parliament?
EuroZone leaders and the Cypriot government can renegotiate a deal. The problem is that Cypriot banks need a huge infusion of cash–$18 billion—and that the economy of Cyprus is so small—about $18 billion—that the standard tools in this crisis—budget cuts and higher taxes—simply won’t work. The reason that the plan tapped saving accounts for 5.8 billion euros to begin with is that 5.8 billion euros is about 32% of the country’s GDP. Try getting that from austerity.
The solutions seem to be more money outright from EuroZone taxpayers (difficult when Cyprus has been portrayed in the German press as a haven for cash from the Russian mafia), an exit from the euro (horrifying as precedent given that Greece blackmailed the EuroZone into accepting Cyprus as a member initially and an exit by Cyprus would lead to threats (at least) of a Greek exit too), or some kind of bailout from Russia.
I think the last option is more likely than it seems. Russia’s Vladimir Putin is livid that the EuroZone didn’t even consult with his government before announcing this plan. Russian banks have lent 40 billion euros to Russian-owned businesses operating in Cyprus. Any plan that imposed capital controls—as a euro exit would—could lead to bank losses estimated a 2% of Russian GDP.
It’s unlikely that Russia would bail out Cyprus for free—even if Putin is mad enough to want to stick it to Germany and its allies in the EuroZone. But Cyprus does have significant reserves of natural gas and I could see a deal that used Gazprom, the government controlled Russian natural gas giant, to bail out Cyprus in exchange for part or all of those reserves. (Russian control of Cyprus’s natural gas would send a shock wave through European governments already worried about their dependence on Russian sources of gas.)
There’s not a whole lot of time to head off disaster. The current bank holiday is scheduled to end on Thursday. If banks reopen without a reassuring plan in place, bank runs across the country are virtually certain on Thursday. A big enough bank run in Cyprus would force the country to impose capital controls, which would, in turn, suck Greek and Russian banks into the crisis. (Big loans to Greek banks is how Cypriot banks got themselves so far into trouble.) And any withdrawal of bank deposits from Cypriot banks will just make it that much harder to prop up the country’s banking system.
Yesterday,, March 14, Germany left the EuroZone.
Oh, nothing official. And I’m not holding my breath waiting for any objective confirmation such as the re-introduction of the Deutschmark. But the new German budget marks the beginning of the eventual effective end of the EuroZone and the euro.
What exactly happened that’s so momentous? How can a single national budget make such a difference?
The German budget for 2014, announced by German Finance Minister Wolfgang Schauble Wednesday, March 13, on the eve of the March 14-15 European summit, includes another 5 billion euros in spending cuts. Total net new borrowing for 2014 will drop to 6.4 billion euro, a 40-year low. And it puts the German budget on a path to balance in 2015. That’s a year earlier than required by the German constitution.
If fiscal prudence is your goal, then this budget deserves the praise heaped upon it by Philipp Rosler, Germany’s Economy Minister, who said: “With all modesty, this is a result of historic proportions. The lesson from the sovereign debt crisis is that solid finances are essential. Thanks to this approach Germany is in the vanguard in Europe. Our success with a policy of growth-oriented consolidation is the envy of the world.”
The problem—aside from the smugness of those comments–is that fiscal prudence isn’t the most pressing goal in the biggest economies—next to Germany—in Europe. Read more
Financial markets rallied in 2012 and have continued that rally so far in 2013 despite worries over slow growth in the United States and the realities of no growth in Europe and Japan.
Why? Money from the world’ central banks and a belief in the power of those banks to backstop financial assets.
The traditional advice has been don’t fight the Fed. For 2012 that advice broadened into don’t fight the Fed and the European Central Bank. And in 2012 that was good advice as cheap money from the Fed and the European Central Bank and promises of even more cheap money if necessary more than made up for slow growth in the U.S. economy and no growth in European economies. Markets moved up on the central bank guarantee.
But I can see a major test of the belief in that guarantee shaping up around the middle of 2013. The big challenge to the markets this year, in my opinion, isn’t going to be the U.S. fiscal cliff or the battle over the debt ceiling or a continuing resolution to keep the U.S. government going.
We know from past experience that at some point, a market that believes it has a guarantee so over extends itself—the technology stock crash of 2000 and the housing crash of 2006-2007 are good examples—and that then the central bank guarantees turn out to be less powerful than everyone assumed and inadequate to head off the crisis. As I watch money flow back into Spanish and Italian bonds despite the lack of any solution to the underlying problems of the euro, I wonder if I’m watching a replay of that dynamic. I think not. I think the faith in the power of the central banks will weather this replay. But I can’t 100% rule out the possibility of the crisis getting serious enough to rattle that faith.
And with that in mind I think it’s worth taking a look at the shape of the likely replay of the euro debt crisis in an effort to see how much danger it represents to global financial markets.
I think I can make a strong case that we’re headed back to something like the same conditions that roiled markets back in the first half of 2012. I even think it’s fair to say that all the problems that were kicked down the road in 2012 rather than solved are about to return and bite us again in 2013.
What’s happened recently to convince me that we’re nearing crunch time in the EuroZone again? Read more
The euro climbed to $1.324 today. That’s the highest level against the U.S. dollar since May. The euro also hit a 16-month high against the yen today.
Lots of good news driving the euro today—most of it related to Greece.
Last night Standard & Poor’s delivered a six-notch credit upgrade to Greece. The move to B- (and stable) is the highest rating for Greece from S&P since May 2011. The previous rating was “selective default.”
The European Central Bank announced that it would again accept Greek debt as collateral for commercial banks that want to borrow from the central bank. The European Central Bank said that the move was recognition of the country’s economic reforms and its budget plans.
On the two news items prices for Greek government bonds have rallied sending the yield on Greek government 10-year debt to 12.1% from 12.8%.
I’ve got two thoughts to offer on this:
First, I hope that no one is thinking about going back to private bondholders any time soon to ask them to sell their bonds back to the government at a discount. Those investors—including Greek banks—that took part in the buyback are certainly feeling like chumps this morning.
Second, the reaction by Standard & Poor’s and the European Central Bank both seem excessive. Yes, the delivery of cash to Greece means that the country will be able to meet its bills for most or all of 2013. But we’re still talking about as country with an unsustainable level of debt and an economy stuck in recession as far as the eye can see. Maybe the European Central Bank felt a need to act as a cheerleader for Greece, but it’s hard to see why Standard & Poor’s would think it should play that role. (On the other hand, the rating isn’t terribly relevant since very few Greek bonds are left with private investors. Most are now owned by European governments, the International Monetary Fund, and the European Central Bank. Which, if you think about it, talked up its own position today.)
I don’t think I’d stand in the way of a rallying euro today (or tomorrow or next week.) Financial markets seem determined to see the glass as half full.
But the higher the euro climbs, the more vulnerable it becomes to the inevitable negative story out of Greece. I think you can probably even write the headline for that story: “Sinking economy means Greece won’t meet budget goals in 2013.”
Let’s say that Monday’s deal on rescuing Greece—again—holds together. The Bundestag votes Yes on the deal. Enough of that small collection of private holders of Greek debt decide to take the buyback offer to make the International Monetary Fund happy. Greece actually gets 42.5 billion euros in December, enough to recapitalize Greek banks and to enable the Greek government to pay suppliers that haven’t seen a drachma…I mean a euro…in eight months.
Then what? What does the Greek deal mean for financial markets?
And nearer to home, what does the Greek deal mean for your own portfolio?
Usually the answers to those questions begin and end with what’s going to happen in Europe. Will Spain go bust or break up? Will Ireland continue its recovery? Will France join the PIIGS even as Greece drops out (to turn PIIGS into PIIFS)?
But let’s call a jamon a ham and admit that Europe isn’t exactly the center of the financial action even if it isn’t in crisis. It’s not, after all, as if anyone is expecting any economic growth out of the EuroZone any time soon. Greece and Spain and Italy and France…are in recession and likely to stay that way for a while.
But that doesn’t mean the Greek deal isn’t extremely important to your portfolio. In fact the Greek deal and the (temporary) move of the euro debt crisis from boil to the back burner will be the defining event (or non-event, if you will) for global financial markets for the next few months. The Greek deal doesn’t mean you want to invest in Europe but it does point the way for where you do want to invest.
I can think of 10 ways that the Greek deal will shape success and failure in global financial markets over the next few months. Read more