Why Slovenia Could Be The Next Cyprus

Includes: CEF, EWP, FXE, GLD, SLV, UUP
by: Jason Tillberg

When a country's stock market index collapses and its net international investment position deteriorates, it could well be game over.

Cyprus is a country with a population of 1.116 million as of 2011. Its GDP was close to $25 billion in 2011.

The Cyprus stock market index was around 5500 in the fall of 2007 and is now 102.

Here is a chart from Bloomberg of the stock market index over the last 5 years:

Net international investment position is basically derived from how much assets the citizens and corporations that reside in a country own outside of the country minus how much assets are foreign owned within the country.

What has occurred in many of the European countries since joining the Euro was a massive shift in the net international investment position, to the downside to where foreigners now own much of the assets within the country.

Expressed as a percent of GDP, Cyprus saw net international investment position collapse into 2011.

This charts show the net international investment position for Cyprus from 2002 to 2011 as a percent of GDP:

Cyprus became heavily foreign owned, which meant that much of the income or profits from the domestic economy left the domestic economy and headed back to their foreign owners.

I decided to take a look at Slovenia, as it seems the countries that are getting wiped out first are the smaller ones.

Slovenia has a population of a little over 2 billion as of 2011 and a GDP of $49.54 billion as of 2011. Basically, Slovenia is about twice the size of Cyprus.

Slovenian stock market index from Bloomberg, Slovenian Blue Chip Index, was 1,967 in May of 2008 and is now trading at 593. So the stock index is down about 70% in a little less than 5 years.

As for Slovenian net international investment position, it too has deteriorated. This chart of their net international investment position as a percent of GDP goes from 1999 -2011:

Perhaps it should not come as a surprise, yields on Slovenian Government bonds are soaring. The 2-year bonds yields hit almost 7% today.

It seems the smaller peripheral countries are the first to see their banking systems collapse. This rather stunning precedent of confiscating depositors savings accounts to so called "bail in" the banking system can only lead to a less confident continent.

The issue is, Europe has larger economies that are also in bad shape from a standpoint of both their net international investment position and their ability to issue debt at reasonable interest rates.

For perspective, here is the net international investment position of Portugal as a percent of her GDP from 1999-2011:

Their net international investment position is negative over 100% of their GDP now for over 3 years running. The yield on 10-year Portuguese Gov't bonds is 6.37% as of this writing.

Here is Ireland, Greece and Spain (NYSEARCA:EWP), all also heavily foreign owed:

Yields for 10-year Gov't bonds on Ireland, Greece and Spain are 4.13%, 12.2% and 4.91% respectively.

All three of the above countries have a negative net international investment position of nearly 90% of their GDP.

At a minimum, I would expect confidence in the Euro Currency (NYSEARCA:FXE) to deteriorate and with that, for the US dollar (NYSEARCA:UUP) to soar as capital flows move out of the Euro and into US dollars.

This could very well put pressure on assets priced in dollars like gold and silver (NYSEARCA:CEF) (NYSEARCA:GLD) (NYSEARCA:SLV) during this interim of a strong dollar.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UUP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.