Friday, March 22, 2013

Cyprus the latest victim of Kress cycle

Just when investors thought it might be over, the drama continues to unfold in the euro zone.

The latest scare out of Europe occurred during this week’s EU Summit.  European finance ministers agreed to extend a bailout for Portugal and Ireland. They also agreed on a 10 billion euros rescue plan for Cyprus, a reduction from the original 17 billion euros.  

The European Central Bank (ECB) had planned on forcing banks in Cyprus to impose a 9.9% levy on deposits compared to the previously announced 6.75% levy on bank deposits up to 100,000 euros.  Cyprus politicians on Mar. 19 voted the levy down in defiance of the ECB, however.  In response the ECB backed down and agreed to proceed with supplying liquidity to Cyprus banks without the tax. 

Had it been implemented, the unprecedented levy could have triggered a widespread panic over similar levies being imposed on other peripheral European banks.  This in turn would have raised additional concerns on the European debt crisis, resulting in capital flight to safer havens.  The mounting problems in Cyprus have increased demand for alternatives such as gold and safer assets such as U.S. Treasuries.  But the move to gold so far has been a slow walk instead of a spirited run.  That could change next week if phase 2 of the ongoing drama in Cyprus doesn’t unfold according to plan.

Banks in Cyprus will remain closed until at least Monday, the same day the country must come up with a plan to rescue its banks or lose the emergency funding that has been keeping them afloat.  In a press release dated Mar. 21, the ECB said it has “decided to maintain the current level of Emergency Liquidity Assistance” until Monday.  “Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF program is in place that would ensure the solvency of the concerned banks.”

The European Union and International Monetary Fund have promised Cyprus 10 billion euros in assistance if the island nation can come up with an additional 5.8 billion euros.  After rejecting the plan to tax insured and uninsured bank deposits, Cyprus is now racing to come up with alternative plans such as borrowing pension-fund assets, selling the island’s two biggest banks and getting a loan or investment from Russia, whose citizens have large deposits in Cyprus banks.  None of these options are very promising, according to experts, and most observers think taxing deposits will be part of any solution.  In Cyprus, bank deposits up to 100,000 euros (about $130,000) are insured.

All of this falls under the category of “the more things change, the more they stay the same.”  It would seem that even after only three years of failed experience, ECB authorities are still trying to impose heavy-handed austerity type measures on the citizens of beleaguered countries.  Italian voters voiced their clear displeasure with austerity in the recent parliamentary elections.  Even some ECB members were forced to concede that the central bank’s insistence on heavy tax measures against member countries isn't working. 

Once again we see Europe’s leaders trying to impose an economy-killing tight money policy on failing nations.  The latest round of turmoil in the euro zone only goes to illustrate that the impact from the falling 120-year deflationary Kress cycle is still being felt and can manifest in myriad ways between now and late 2014 when it’s scheduled to bottom.  Investors in strong countries like the U.S. should remain wary of the potential spillover impacts from the overseas crises, which will likely reach our shores by late 2013/early 2014. 

For now the main trend for the U.S. remains up but this could change if the euro zone and/or China real estate bubble become uncontrollable.  Remember to closely monitor your trading positions and use conservative stops on all trades.

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