The decision by the European ministers to levy a tax on the bank deposits in Cyprus banks was not well received. Quite naturally, those with bank deposits there drained the cash machines in an attempt to protect their funds. Critics of the EU money grab have been politically as well as geographically diversified. A Bloomberg editorial, Europe's Reckless Raid on Cyprus' Savings, said:
"Depositors, however, will see this for what it is: a raid on their savings. Such an attack on ordinary depositors is unjust, politically obtuse and economically destructive..."
The Russians are exceptionally furious.
"Vladimir Chizov, Russia's envoy to the EU, likened the levy to a "forceful expropriation" that could wreck Cyprus's financial system. "When the banks open, people will rush to withdraw their deposits - that's another threat - and then the whole banking system can collapse," he said.
Russian officials also moved to avert concerns that its own banks could face difficulty if the taps remained turned off in Cyprus.
The ratings agency Moody's estimated that Russian banks had extended up to $40bn in loans to companies in Cyprus."
For the German Chancellor Angela Merkel, the Cyprus rescue is a delicate affair. Her campaign has been based upon the perceived sanctity of austerity which will lead to a better Europe. She contends the process will not be a cost to the German taxpayers. Cash EU payments to Cyprus would appear as a transfer of German funds through Cyprus to the Russians. In what might be a very close election this September, this would lose her votes.
The troika is paying a price for the unintended consequences of the forced write downs of Greek loans by the private banks. The Cyprus banks were big buyers of Greek sovereign debt. The Greek bail out did protect the IMF and the ECB from losing money in the troika administered Greek saga, but with the failure of the Cyprus banks, the "chickens are coming home to roost." In a fashion the troika is trying to pass off the Greek loan losses to Cyprus depositors, many of whom were Russian, as well as banks financed by the Russians.
Yesterday the Cyprus Parliament voted against the EU plan to tax deposits so the banks remain closed. Chancellor Merkel, responding to the vote, had some choice words of tough love:
"I regret the vote of the parliament yesterday," she told reporters. "But of course we respect it and will now look to see what proposals Cyprus makes.
"From a political point of view, I say that Cyprus needs a sustainable banking sector. Today's banking sector is not sustainable," she added.
Cyprus is an important hub in the forex market. Until 2009, the forex market was largely unregulated, but then in June of that year the Cyprus Securities and Exchange Commission was founded. Minimum capital requirements for a forex broker, who was not a principal or a market maker was about €200K ($258.9 million U.S.), and for a broker/market maker the capital need was about €1M ($1.29 million U.S.). These requirements were attractive to the trade and the business flourished there. I was advised capital requirements may now be somewhat less.
With the banks in Cyprus now closed, this has to be a mess. Granted most of the client funds are probably with banks outside of Cyprus so there customers should have no cause for alarm. Managing a financial firm without a bank, however might be a more serious challenge.
In an article on March 12th we expressed a view there were too many potential euro problems. Our choice was to sell strength and look for an initial target of 1.2850. The most recent low took us down to 1.2845 prior to a bounce of a little more than 100 pips. It is hard to anticipate what the politicians are going to propose. There is no doubt the expropriation of customer bank funds in any EU sets a bad precedent. This will foster the hunt for safer havens. But this does not mean you sell the EURUSD (FXE UUP) at any price.
The gap left on Sunday night when the trade restarted was excessive, probably the result of open stops being hit in a quiet market (by the way, a reason to hedge risky positions on Fridays). It will take a rally back to about 1.3050 to fill this gap. Our inclination is to wait for a rally to at least that level before reestablishing new short positions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.