Thursday, March 28, 2013

A Few Thoughts On Cyprus

This note from last week's Economist magazine makes an important point about the Cyprus banking crisis (I added the highlight):

Cyprus is odd, because virtually all its banks’ liabilities are deposits (as opposed to longer-term bonds). Yet, of the 147 banking crises since 1970 tracked by the IMF, none inflicted losses on all depositors, irrespective of the amounts they held and the banks they were with. Now depositors in weak banks in weak countries have every reason to worry about sudden raids on their savings. Depositors in places like Italy have not panicked yet. But they will if the euro zone tries to “rescue” them too.

The fact that the European Central Bank (ECB) is going to force depositors, not taxpayers, to take losses in return for an ECB bailout may mark an important change for investors to consider.

Here's the take of Gemma Godfrey, head of investment strategy at Brooks Macdonald and a frequent CNBC commentator:

So what does this mean for investing? Two interesting outcomes. Firstly, we may see a wider divergence within the banking sector as greater scrutiny over capital adequacy rewards some and punishes other. Funding costs within the periphery are unlikely to ease. Secondly, it casts a severe shadow over the value of stress tests to gauge the safety of investment in a bank. Cypriot banks passed tests in 2011, which raises doubts over the veracity of the Fed’s own investigations which led to 17 out of 18 US banks passing. Optimism in both cases could be argued as too high.

With the Fed likely to remain accommodative, bullish market sentiment may continue to overshadow concerns elsewhere. However, Cyprus has highlighted that we’re far from an end to the crisis.

Much of the blame for the Cyprus crisis has been blamed on Russian "flight capital" seeking an offshore haven.

However, columnist Heidi Moore writes in the London Guardian that wealthy Russians had known of the bank problems in Cyprus for months, and had been moving assets to other safer locales, including New York:

The meltdown of the Cypriot financial system came as no surprise to well-connected, wealthy Russians, who bundled some of their money to the United States. "Many of our clients had a heads-up on this issue," said {New York attorney} Mermelstein. "Cyprus had started having the conversations about what it was intending, and that's been going on for half a year." 

That's why some wealthy Russians seemed insulted by the insinuation that the collapse of the Cypriot banking system this week caught them by surprise. Cypriot banks were suffering "substantial outflows" for weeks before the meltdown, according to the country's finance minister, Michael Sarris.

It was only a few years ago that commentators were writing of the ascension of the euro block nations versus the U.S. Now it would seem that the U.S. is the unexpected beneficiary of the turmoil in other parts of the world.