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Cyprus Circus: This Movie Has Some Twists

Posted by nexvucapital on March 20, 2013

We try to stay focused on the long-term and the big picture and most certainly the Cyprus Circus will have a shorter run in the markets than the Greek Tragedy but OMG this is way more interesting. The best value opportunity coming out of this crisis will be the movie rights. Market wise, the Base Metals sector seems to be putting in a selling climax during this event.

Cyprus is a country of 1 million people and its economy makes up 0.2% of the EU economy and Cyprus has a problem because both the government and the banks need a bailout (distinct from Spain for instance where it is the banks that need the bailout). The path to insolvency for Cyprus was paved by the failure to diversify and is a direct result of the Greek Tragedy. The banks of Cyprus hold large amounts of both Greek and Cypriot government debt – ooops! The government of Cyprus also owns large amounts of Greek debt – so this is our first EU contagion so-to-speak. When Greek debt was re-structured during the Greek bailout this had a negative effective on the bank and government balance sheets of Cyprus.

In this circumstance a public/private debt crisis has afflicted the nation and so Cyprus had no choice but to pursue external help and this is where the story gets interesting. For those unfamiliar, Cyprus is a favourite off-shore tax-haven for Russian and Ukrainian money (~30 Billion Euros worth). Russian corporate taxes run around 20% and Cypriot corporate taxes are 10% …nough said. The source of some of this Russian and Ukrainian money brings some spice to this story with a colourful cast of characters including mobsters and oligarchs – is that redundant btw?

Long-story-short…Cyprus went to the Eurogroup, the ECB and IMF (the Troika) and asked for a bailout. The Troika proposed that stakeholders in Cypriot Banks needed to contribute to the bailout as the amount of the bailout (~16 Billion Euros) if added to current Cypriot government debt (traditional government bailout) would make the government balance sheet impossible to service. Whereas, an approximately 6 Billion Euro contribution from Cypriot bank stakeholders would reduce the burden on the government balance sheet and allow for Cyprus to achieve a more manageable long-term Debt to GDP ratio of less than 100%.

screen shot 2013-03-17 at 7.18.49 pm

Those contributing to the tax were to receive equity in the the banks and half the amount was to be guaranteed by future natural gas revenues. As an aside: in my humble opinion the bank shares and NG revenue sharing would probably be a better long-term holding than cash.

Cyprus-bailout-cartoon-EU-with-gun

Well all that sounds reasonable until the decision was announced: bond-holders would be protected and all deposit holders would pay a one-time deposit tax of 6.75% on accounts under 100,000 Euros and ~10% on accounts over 100,000 Euros. Sounds like something from Monopoly.

The problems created here were two-fold:

  1. Bank Deposits under 100,000 in Cyprus were supposed to fall under the states Depositor Insurance Program
  2. That little issue with the Russian and Ukrainian deposits being ~30 Billion Euro of the +60 Billion Euro total in Cypriot banks deposits

Side note: Cyprus is currently in negotiations on an extension for a $2.5 Billion loan from Russia that is coming due…timing is everything.

Fast Forward: On Tuesday, the Cypriot Parliament rejected the bailout with not a single vote in favour (heh maybe Washington could end its political stalemates if it added angry mobs and mobsters to the mix) and now we head back to the negotiation process…stay tuned.

As for the markets:

Nothing effects our long-term thinking that the US is leading what will be a global growth cycle (yah – including the EU at some point as these are reset events not end-of-the-world events). The immediate effect of the Cyprus Circus is reflected in the EUR/USD pair:

Euro

The materials sector was hit but was due for a correction:

Materials

Interesting, we see little effect in the Gold Juniors which have been outperforming the Gold Seniors of late (most junior resource companies have been showing a pulse lately – wink wink):

Gold Juniors

Copper was hit but this has the appearance of a selling climax as copper has been correcting on China…and if the HSBC PMI comes in better this week we expect the SSEC and copper to react in a positive manner:

Copper

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