Tuesday, March 19, 2013


Good evening Ladies and Gentlemen:

Gold closed up by $6.70 to $1611.30 (comex closing time).  Silver fell by 3 cents to $28.81.

Here are the final access closing of gold and silver:

gold:  $1613.30
silver: $28.92

Gold started off poorly early this morning from Europe but eventually rose as physical demand overpowered the paper shorts.  Silver however still languished behind and this is very worrisome as the bankers always precede a raid when silver is faltering as well as the gold/silver equity shares.  The bankers are desperate to keep the paper game alive and prevent the masses from obtaining physical silver and gold and they raid despite the huge demand for physical.

In physical news at the comex, the CME reported a huge gold delivery notice filed equal to 601 notices or 60,100 oz , the number of gold ounces standing for delivery rose by  58,000 oz and thus 12.286 tonnes of gold is standing for March delivery.  No doubt this is a record for gold deliveries in the off delivery (non active) delivery month

The big news of the day is Cyprus again.  Late in the day, their Parliament reconvened and the politicians voted no.   No doubt they were probably frightened to vote no, due to the high amount of Russian black money in the Cypriot banking system. They were just too afraid to look into the barrel of a Russian gun.

Unless some deal is formalized shortly, the ECB will cut off all ELA emergency funding which will place the two major banks into bankruptcy.

All citizens with deposits of less than 100,000 euros are insured but the 30 billion euros necessary to put these citizens whole will not be coming forth as sovereign
Cyprus is itself broke.  Cyprus then must declare another bank holiday and print new "Cypriot pounds"  which is the currency they had before the converting into the Euro.  No doubt the initial devaluation will be in the area of 40% and all bank accounts denominated in euros will be replaced with pounds with a value equal to 60% of its former self.

The USA banks and many European banks will take a hit with derivative losses in the form of credit default swaps.  Greece will probably fail as Cyprus is a close partner to it in trade.

Peripheral European nations will see their bond yields rise as the threat of default rises.  Gold and silver should rise.

The default by Cyprus will probably be the first of many to cascade.  So hang onto your seats.

Let us now head over to the comex and assess trading over there today:

The total gold comex open interest fell by 3913 contracts falling from  447,314 down to 443,801.    The non active front month of March saw it's OI rise by 580 contracts from 61 up to 641.  We had 0 notices filed on Monday so in essence we gained 580 contracts or 58,000 oz of additional gold will stand for March delivery.  The next big active delivery month is April which is  2 weeks away from first day notice.  Here the OI fell by 11,632 contracts from 188,553 down to 176,921.  The estimated volume today was strong at 167,622.  The confirmed volume Friday was even stronger at 206,046.

The total silver open interest fell by 613 contracts from 150,805 down to 150,192.  The OI for the entire complex remains elevated.
The active front month of March saw it's OI rise by 2 contracts from 340 up to 342. We had 0 delivery delivery notice filed on Monday so in essence we gained 5 contracts or 25,000 oz of additional silver oz will  stand for the March delivery. The non active April contract rose by 33 contracts up to 401.  The next big active delivery month contract for silver is May and here the OI fell by 231 contracts from 79,825 down to 78,594.  The estimated volume today was kind of weak at 29,983.   The confirmed volume on Thursday was stronger at 39,012 contracts. 

Comex gold/March contract month:
March 19.2013    

Withdrawals from Dealers Inventory in oz
6719,542 (Scotia)
Withdrawals from Customer Inventory in oz
130,133.462 (HSBC,JPM,Manfra)
Deposits to the Dealer Inventory in oz
Deposits to the Customer Inventory, in oz
No of oz served (contracts) today
 601   (60,100  oz)
No of oz to be served (notices)
40 (4,000) oz
Total monthly oz gold served (contracts) so far this month
3910  (391,000 oz) 
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month


We had no activity at the gold vaults.
The dealer had 0 deposits and 1   withdrawal.

We had 6,719.542 oz withdrawn from the dealer at Scotia.

Total dealer withdrawal:  6719.542 oz

We had no   customer deposits:

total deposit: nil   oz

We had 3  customer withdrawals :

Out of HSBC:  113,623.759 oz
 Out of JPM:    15,464.064 oz
Out of Manfra:  1,045.639 oz

total customer withdrawal:  130,133.462  (another huge withdrawal)

We had 2 huge adjustments:

i) out of HSBC vault: 11,010.487oz was adjusted out of the dealer account and into the customer account at HSBC.

ii) out of the JPMorgan account:  29,978.365 oz was adjusted out of the customer and into the dealer account at JPM.

 net total adjustments:  18,967.878 oz landed into the dealer from the customer.
No doubt some of this was used in the delivery process today.

Thus the dealer inventory rests tonight at 2.679 million oz (76.79) tonnes of gold.

The CME reported that we had 601 notices filed for 60,100 oz of gold today.   The total number of notices so far this month is thus 3910 contracts x 100 oz per contract or 391,000 oz of gold.  To determine how much will stand for March,  I take the OI standing for March (641) and subtract out today's notices (601) which leaves me with 40 notices or 4,000 oz left to be served upon our longs.

Thus the total number of gold ounces standing in this non  active month of March is as follows:

339,100 oz (served ) + 4,000 oz (to be served upon) = 395,000 oz or 12.286 Tonnes.

we gained another 580 contracts or 58,000 additional gold ounces will stand in March.  The amount standing is extremely large for a non active delivery month and I believe a record for a non delivery (non active) gold month.


March 19.2013:   The March silver contract month

Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory 352,308.386  oz ,(CNT, HSBC)
Deposits to the Dealer Inventorynil
Deposits to the Customer Inventory  386,907.41 (Brinks)
No of oz served (contracts)3  (15, oz)  
No of oz to be served (notices)339  (1,695,000  oz) 
Total monthly oz silver served (contracts) 1772  (8,860,000  oz) 
Total accumulative withdrawal of silver from the Dealers inventory this monthxxxxx
Total accumulative withdrawal of silver from the Customer inventory this monthxxxxx

Friday, we  had good activity  inside the silver vaults.

 we had 0 dealer deposits and 0 dealer withdrawal.

We had 1 customer deposits of silver:

i) Into Brinks: 64,440.25 oz

 total customer deposit: 64,440.25  oz

we had 1  customer withdrawals:

i) Out of CNT:  247,608.37 oz

total customer withdrawal:  247,608.37 oz

we had 2 adjustments:

i) Out of Delaware:  14,692.737 oz landed into the dealer from the customer at Delaware
ii) Out of Scotia:  14,872.90 oz landed into the dealer from the customer at Scotia.

Registered silver remains Friday at :  42.506 million oz
total of all silver:  163.444 million oz.

The CME reported that we had 3 notices filed for 15,000 oz of silver for the March active contract month. To obtain what is left to be served upon our longs, I take the OI standing for March (342) and subtract out today's notices (3) which leaves us with  339 notices or 1,695,000 oz left to be served upon our longs. 

Thus the total number of silver ounces standing for delivery in silver is as follows:

8,860,000 oz (served)  +  1,695,000 oz (to be served upon)  =  10,555,000 oz

we gained 25,000 oz of  silver standing.

The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.

Now let us check on gold inventories at the GLD first:

March 19/2013:



Value US$63.273  billion

March 18.2013:



Value US$62.859  billion

March 15.2013:



Value US$63.232  billion

March 14.2013:



Value US$63.025   billion

March 13.2013:



Value US$63.155  billion

March 12.2013:



Value US$63.345 billion

we finally  gained 2.71 tonnes  of gold at the GLD tonight.

And now for silver:

March 19.2013:

Ounces of Silver in Trust345,095,059.100
Tonnes of Silver in Trust Tonnes of Silver in Trust10,733.66

March 18.2013:

Ounces of Silver in Trust345,095,059.100
Tonnes of Silver in Trust Tonnes of Silver in Trust10,733.66

march 15.2013:

Ounces of Silver in Trust345,095,059.100
Tonnes of Silver in Trust Tonnes of Silver in Trust10,733.66

Ounces of Silver in Trust344,128,591.100
Tonnes of Silver in Trust Tonnes of Silver in Trust10,703.60

March 13.2013:

Ounces of Silver in Trust344,128,591.100
Tonnes of Silver in Trust Tonnes of Silver in Trust10,703.60

March 12.2013:

Ounces of Silver in Trust342,292,222.100
Tonnes of Silver in Trust Tonnes of Silver in Trust10,646.48

March 11.2013:
Ounces of Silver in Trust342,292,222.100
Tonnes of Silver in Trust Tonnes of Silver in Trust10,646.48

 Today the inventory at the SLV remained the same.


And now for our premiums to NAV for the funds I follow:

Sprott and Central Fund of Canada. 

(both of these funds have 100% physical metal behind them and unencumbered and I can vouch for that)

1. Central Fund of Canada: traded to a positive 0.9 percent to NAV in usa funds and a positive 1.0%  to NAV for Cdn funds. ( March 19 2013)   

2. Sprott silver fund (PSLV): Premium to NAV fell to 2.14% NAV  March 19/2013
3. Sprott gold fund (PHYS): premium to NAV  rose to 1.68% positive to NAV March 19/ 2013.


And now for the major physical stories we faced today:

As expected JPMorgan cleared (so far) from the silver probe.
Remember that the CFTC has not released its findings on the silver manipulation.
Also major discussion on Cyprus.

(courtesy Goldcore

JP Morgan Cleared Of Conspiracy "To Drive Down Silver Prices"

Tyler Durden's picture

From GoldCore
JP Morgan Cleared Of Conspiracy "To Drive Down Silver Prices"
Today’s AM fix was USD 1,602.50, EUR 1,238.41 and GBP 1,059.78 per ounce.
Yesterday’s AM fix was USD 1,599.50, EUR 1,236.09 and GBP 1,057.45 per ounce.
Silver is trading at $28.86/oz, €22.38/oz and £19.16/oz. Platinum is trading at $1,605.25/oz, palladium at $757.00/oz and rhodium at $1,250/oz.
Gold climbed $13.70 or 0.86% and closed yesterday at $1,578.10/oz. Silver hit a high of $29.05 finished +0.56%. A national holiday was observed in Ireland yesterday and markets were closed.
The Troika's raid on the deposits of families and businesses in Cyprus is still being digested but it may be another watershed moment leading towards gold again becoming a foundation asset and key core holding of savers and investors internationally.
JP Morgan Chase & Co won their case of a nationwide investors' lawsuit accusing them of conspiring to drive down silver prices.
U.S. District Judge Robert Patterson in Manhattan said the investors, who bought and sold COMEX silver futures and options contracts, failed to show that JPMorgan manipulated prices, by creating long short positions that were not in synch with market events at the time period.
The judge acknowledged that the firm could influence prices, but said that it was not proven that the bank "intended to cause artificial prices to exist" and acted accordingly.
The plaintiffs had nearly 43 complaints filed from 2010-2011, which accused banks of profiteering in over $100,000,000 by illegally manipulating silver prices.
The lawsuits against major Wall Street firms were consolidated, naming JPMorgan and 20 unnamed individuals as defendants.
The complaint had sought triple damages for what it saw as antitrust violations in jiggering silver prices from 2007-2010, including through alleged "fake" trades during low market volumes. 
The CFTC began investigating queries of silver price manipulation in 2008, and after 2 years it tightened its regulations to foil traders who try to manipulate prices.
Silver remains a vital diversification and remains undervalued vis-à-vis gold and most assets.
"Safe Haven Demand" for Gold Seen Amid Fresh Cyprus Chaos, But #1 ETF Shrinks Again

-- Posted Tuesday, 19 March 2013 | Share this article | Source: GoldSeek.com

London Gold Market Report
From Adrian Ash

The GOLD PRICE continued to hold above $1600 per ounce in Asian and early London trade on Tuesday, easing back from Monday's 3-week high as world stock markets struggled again amid fresh uncertainty and rumor over Euro-member Cyprus' banking crisis.

Silver below $29 per ounce held flat alongside other commodities, while major-government bond prices rose.

Ahead of the US Federal Reserve's 2-day policy meeting, 10-year Treasury yields edged down to 1.94% per year.

Consumer price inflation was reported at 2.0% on Friday.

"[The Eurozone's] long-running problems...are not going to be resolved quickly," said New Zealand's finance minister Bill English in an interview this morning.

"I think over the next five to seven years, you're going to see these occasional outbreaks of [Eurozone] anxiety in quite unexpected ways."

Following Monday's jump in the gold price, "Whether this will be enough to push prices sustainably higher remains to be seen," notes the latest Precious Metals Update from German refining group Heraeus.

"In the past, such measures fuelled investors' uncertainty and gave a boost to bullion demand."

Monday saw turnover in US gold futures contracts jump 28% from the previous week's average, but the outstanding number of open contracts was barely changed by session's end.

The giant SPDR Gold Shares – briefly the world's biggest exchange-traded trust fund when Dollar gold prices peaked in late-summer 2011 - saw yet another outflow from its holdings, down for the 32nd time this year to a 20-month low beneath 1,220 tonnes.

By value the SPDR Gold ETF slipped beneath $63 billion for the first time since July 2011.

Silver ETF holdings, in contrast, rose to a new all-time record at 19,738 tonnes according to Bloomberg data.

Silver prices again touched $29 per ounce in Asian and early London trade today, before slipping back unchanged from last week's finish.

"We now see the gold market building a solid base at [$1600 per ounce]," says a London bullion-bank trader in a private note, with "the fundamentals for gold as a 'safe-haven' coming back in force."

"For as long as there is a lack of clarity," agrees today's note from Commerzbank, "and especially if the situation should escalate, gold should continue to remain in high demand as a safe haven."

Cyprus last night declared an emergency 3-day Bank Holiday, giving parliament time to argue and vote on the proposed "bail-in" which would cut bank deposits below €100,000 by 6.75% and by 9.9% above that level.

Nicosia's finance ministry has now proposed a "zero levy" on savers with less than €20,000, according to the BBC.

After the Kremlin in Moscow said it may call in a €2.5 billion loan to Cyprus in retaliation for the tax hitting Russian savers, energy giant 
Gazprom this morning denied Greek press reports that it has offered to pay all of Cyprus's €16bn rescue in return for oil and gas exploration rights.

"Cyprus is shaking...the people are bleeding," says editorial comment in German tabloid newspaper Bild.

Publicly criticizing the levy on German TV on Saturday, German finance minister Wolfgang Schaeuble had in fact "
demanded a 40% depositor tax" according an un-named Cypriot official quoted by Bloomberg.

"The blackmail...peaked at 3.00am on Saturday," 
according to local reports, when Germany's Jorg Asmussen apparently phoned European Central Bank president Mario Draghi, and told him to prepare the ECB for the collapse of two Cypriot banks.

Looking ahead meantime to Wednesday's updated Budget from the UK's coalition government, "There is little room to move on fiscal policy," says FX strategist Simon Derrick at BNY Mellon.

"[So] monetary policy remains the principal tool for providing additional support to the economy."

"With the economy flatlining," agrees analysis from HSBC bank – also 
quoted by CNBC – "the mood music certainly suggests some sort of change [to the monetary policy framework] is on the cards."

Japan's central-bank governor Shirakawa last night ended his term and was replaced by so-called "radical inflationist" Kuroda.

The Bank of Japan has already set itself a 2.0% target for annual inflation.

The Japanese Yen has lost almost one-fifth of its value against the Dollar since the new Abe administration took over in November.

Indian gold prices meantime rose Tuesday as the Rupee fell hard – and the Mumbai stock market dropped 1.5% – following an interest-rate cut and news that the ruling coalition government has lost the support of a key member party.

"With the federal elections next year," Reuters quotes Bank of Baroda economist Rupa Rege Nitsure, "political stability is key for all economic reforms" planned in the world's No.1 gold consumer nation, now struggling with a large balance of trade deficit.

"[The exit of the Dravida Munnetra Kazhagam party] will surely delay them."

Adrian Ash

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold and silver in Zurich, Switzerland for just 0.5% commission.

(c) BullionVault 2013


The authors here miss the point badly.  The outflows of gold at the GLD are feeding the huge appetite for gold by the Chinese, Russians, the South Koreans and the citizens of India. It has nothing to do with weakness in demand for gold.

(courtesy Brendan Conway/Barrons) 

Gold Price Withstands ETF Outflows: Commerzbank

By Brendan Conway

You’ve read Barclays Capital strategists arguing that gold’s loss of "stickier" exchange-traded fund investors is the single biggest risk to the metal’s price. Well, Commerzbank’s commodity strategists are taking a different view.
The firm writes this morning that ETF outflows continue, but the mess in Cyprus is drawing other buyers back into the market:

Gold is holding its own at above the $1,600 per troy ounce mark on the back of continuing uncertainties over Cyprus. Now that the debate and subsequent vote on the law to tax bank deposits, originally scheduled for yesterday, have been delayed, it appears increasingly unlikely that a majority in the Cypriot parliament will vote in favour of the controversial law. For as long as there is a lack of clarity in this context, and especially if the situation should escalate, gold should continue to remain in high demand as a safe haven. What is more, the yellow precious metal appears to be immune to the latest outflows from the ETFs. The gold ETFs tracked by Bloomberg recorded outflows of more than 18 tons yesterday, their highest daily outflow since the end of February. Since the start of the year, outflows have thus totalled over 180 tons. This means that in the first 2½ months of this year alone the gold ETFs have seen outflows of nearly two thirds of the holdings which, according to the WGC’s data, were built up in the whole of last year. Evidently the ETF outflows are being offset by strong physical demand elsewhere. In our opinion, the gold price should continue to gain ground.
SPDR Gold Trust (GLD) is rising by 0.1% Tuesday morning and iShares Gold Trust (IAU) is ahead by 0.2%. The closed-end Sprott Physical Gold Trust (PHYS) is up 0.7% and Central Fund of Canada (CEF) is up by 0.3%.
Gold-mining stocks are holding onto Monday’s gains. Market Vectors Gold Miners (GDX) is ahead by 0.2% and Market Vectors Junior Gold Miners ETF (GDXJ) is down by less than 0.1%.



 Dave from Denver strongly believe in what Jim Sinclair is stating to us.  I also agree with Jim.
There is probably far greater cash deposits of Russian origin in the Cypriot banking system:

(courtesy Dave from Denver)


Gold: The Bottom Is In And We're Going MUCH Higher

Gold is about to take out $1,600...We may never see that $1,600 level ever again. - Jim Sinclair on King World News - Jim Sinclair, King World News interview  LINK
I highly recommend reading all of Jim Sinclair's recent interview postings on King World News, as he does a great job explaining the significance of the Cyprus crisis, what it means for gold and why the mainstream media is completely missing the mark in reporting the situation.

The way I see the Cyprus situation, it is the trigger we've been waiting for to ignite the next big, long-term move in gold:
Based on the current QE program, the Fed's monetary base projects out to be at $4 trillion by 2014 - a 31% increase from where it is today. If we assume that gold does a "mean reversion" in its correlation with the Fed's monetary base - a high probability assumption given the high correlation observed since 2008 - a 31% increase in the price of gold as of today - $1610 - would imply that gold has a high probability of going to $2100 by the end of 2013. In fact, I will make that my price prediction for gold for 2013.
You can read my entire commentary on this - and the indicators I'm using as my "sign-posts" here:  LINK

Those who have known me for awhile know that - because of the massive Central Bank/Government intervention in the gold markets (and all the markets) - I do not usually put out specific price and time-frame targets for gold.  But I remember the last time Jim Sinclair put out a specific price target - $1650 - he was low by $250.   Since he's forecasting $1900 on this move, I feel pretty good with my $2100 by year-end target, especially since my target is based on observable statistics.

Quite frankly, if my target is wrong by proving to be too low, then it means my worst fears about what is really going on behind the scenes in the global financial system - especially as it applies to this country - are correct.

The fact that U.S. Mint silver eagle sales midway thru March are already at 33% of 2012's full year totals - LINK - tells me that a lot more people in this country are starting to understand the same things I can see going on.  It also means that the price of silver (and gold) can not possibly stay down this low relative to the fundamentals for much longer.


And now for our more important paper stories which will have an influence on gold and silver.

First  your early market sentiment which shaped the trading in NY:

1.  German confidence rises in the ZEW confidence report from 48.2 up to 48.5
2. However Eurozone construction output data plunged by 7.3% Y/Y completely negating the German confidence.
3. All eyes are focusing on Cyprus as to whether they will accept the deal or not.

4  JIm  Reid of Deutsche Bank provides the details.

Overnight Centrally-Planned Futures Levitation Weighed Down By Cyprus

Tyler Durden's picture

Not even the usual monthly futures panacea (which in fact manages to fool the entire centrally-planned market twice every month, all the time), the always rising German ZEW Economic Sentiment survey, which mysteriously did not come at an all time high, but still rose from February's 48.2 to 48.5, despite expectations of a decline to 48.1, has managed to push the EUR higher in overnight trading, as a result keeping a lid on any of the generic no-volume futures levitation we have all grown to love. The reason is not that concurrently with the German data we got abysmal Eurozone Construction Output data, which plunged -7.3% Y/Y, the most in four months, following a slump in French and Spanish activity offsetting the German "confidence-boosting economic miracle" but simply because there continues to be no clarity whatsoever on events in Cyprus, where as noted earlier, the parliament may vote as soon as 6 hours from now to veto the proposed deposit confiscation "bailout/in" plan, which could lead to the first Eurozone banking system collapse, and the first expulsion of a member Eurozone nation, setting the wheels in motion for the unthinkable.
A recap of where global markets stand as of last check:
  • S&P 500 futures down 0.1% to 1545.4
  • Stoxx 600 down 0.4% to 295.5
  • US 10Yr yield down 2bps to 1.94%
  • German 10Yr yield down 3bps to 1.38%
  • MSCI Asia Pacific up 0.3% to 134.5
  • Gold spot down 0.2% to $1603.2/oz
Europe and Asia:
  • 14/19 sectors falls, led by miners, construction
  • U.K. February Inflation Accelerates to Fastest in 9 Months
  • Italian Output Unexpectedly Rose in January Amid Ongoing Slump
  • ASIA Asian stocks pare earlier gains, Japan’s Nikkei 225 outperforms.
  • MSCI Asia Pacific up 0.3% to 134.5
  • Nikkei 225 up 2%, Hang Seng down 0.2%, Kospi up 0.5%, Shanghai Composite up 0.8%, ASX down 0.6%, Sensex down 1.4%
Deutsche's Jim Reid recaps the overnight action:
The view we had yesterday on the Cyprus situation still stands that in systemic terms this is a slow burner of an issue more than an immediate macro shock but not one to be under-estimated in importance medium-term. For now assuming the proposal gets passed (the votes are seemingly not yet there – see below) and even better watered down with small depositors bearing less or even none of the levy, Europe will likely only see small short-term collateral damage. However in spite of the protests that Cyprus is a unique case, the incident has probably ensured that if a bank or banking system in Europe is again under strain then depositors are, as a minimum, likely to be on the table as a bargaining tool and these depositors would be rational to think hard about the safety of their money and potentially seek alternatives.
However if you’re looking for a positive, the outcry over the turning back on the pledge to protect depositors, especially those with less than 100k, might perhaps persuade the EU to tread more carefully in the future even though where the levy was set may have ultimately not been their call. They did sanction the deal though and perhaps both the EU and the Cypriot Government have been surprised by the verbal backlash, even if markets were less aggressive in their reaction.
Late yesterday evening, the Eurogroup issued a statement saying that the Cyprus government will introduce “more progressivity in the one-off levy” and reaffirmed the importance of “fully guaranteeing deposits below EUR100,000”. While it’s unclear exactly what this statement means, there has been talk of reworking the levy to 3% for deposits under EUR100,000 (from 6.7%); while account holders with EUR100,000 to EUR500,000 would be levied at 10% and deposits above EUR500,000 levied at 15%. At the same time, Bloomberg quoted an unnamed EU official as saying that Cyprus could meet its target of generating EUR5.8bn in funds by imposing a 15.6% levy on deposits of more than EUR100,000 and no levy on deposits below that amount. If they do go the whole way and exempt those with less than 100k it probably won’t be great for EU/Russia relations given the geographical concentration of large depositors. Although we aren’t experts on the Cypriot economy we can’t help thinking that its GDP still relies on its financial system. Indeed, a bigger hit to the larger depositor, who are likely to reside overseas and therefore have more alternatives, may actually be counter-productive to the Cypriot economy even if it makes ethical sense. So there are dilemmas for the domestic Government.
In terms of the banks, the Cypriot finance ministry has extended the bank holiday to March 20th meaning that in practice the government has a couple more days to pass legislation approving the deposit levy. On this front, unconfirmed reports suggest that Cypriot President Anastasiades held a telephone conversation with European Economic and Monetary Affairs Commissioner Olli Rehn on Monday night to inform him that there might not be enough parliamentary support for the levy (Ekathimerini). The parliamentary vote has reportedly been rescheduled to this afternoon, while earlier news reports had suggested that the vote had been postponed indefinitely. It’s possible that a reworking of the levy might help build the necessary votes.
Recapping the market reaction yesterday, the Stoxx600 opened 1.25% weaker, before rallying to close to finish just 0.2% lower on the day with investors
probably taking some comfort from comments by European officials that the levy in Cyprus was one-off, driven by a “unique” set of circumstances.
Unsurprisingly, European banking stocks were the underperformers yesterday with the sector closing 1.76% weaker. It was a similar story in credit, with the European senior and sub financials indices finishing 10bp and 15bp wider respectively, underperforming the European iTraxx (+4.25bp), although all indices were well off the day’s wides seen earlier in the session. Risk sentiment seemed to improve further with the US market open. The S&P 500 closed only -0.55% lower on the day – with a strong performance from tech stocks including Dell and Apple helping US equities find a floor. EURUSD closed 0.9% lower yesterday but is managing to claw back some of those losses in overnight markets.
Turning briefly to Asian markets, and with the exception of Chinese stocks, most equity indices have rebounded modestly from yesterday’s losses, paced by gains on the Hang Seng (+0.27%) and KOSPI (+0.60%). The regional outperformer is the Nikkei (+2.05%) which is trading near last Friday’s closing levels.
BoJ governor Shirakawa steps down from his post  today, while incoming governor Kuroda has officially resigned from his current post as Asian Development Bank president according to newswires. Asian and Australian credit markets are 3-4bp tighter, while the Australian dollar (-0.2%) is marginally weaker against the USD after the release of a relatively dovish set of RBA minutes. Despite, the better risk sentiment, 10yr UST yields are broadly unchanged at 1.95%, as is gold at $1605/oz.
Looking at the day ahead, Cyprus’s parliament is scheduled to begin its debate on the deposit levy at 6pm local time (4pm GMT). Ahead of this, we have a number of data releases today including inflation and house price data in the UK. We also have the German ZEW survey; as well as housing starts and permits in the US. So there is a fair bit going on today, not to mention Pope Francis’s inaugural mass which will be attended by a number of heads of state.


A discussion on currency crosses this morning from Europe courtesy of Marc to Market:

(courtesy Marc to Market)

Dollar Firm, Anxiety Still Running High

Marc To Market's picture

The US dollar continues to sport a firm profile, but largely within the ranges seen yesterday. The notable exception is its performance against the yen, where it rose to JPY95.75 in Tokyo, extending yesterday's recovery off the shock JPY93.60 area low yesterday. Asian equities mostly traded firmer and the MSCI Asia-Pacific Index gained about 0.3%.  
India equities tumbled about 1.5%, the most in three weeks. Although the central bank's 25 bp rate cut to 7.5% would have been expected to support the market, comments from the central bank indicating little support for additional easing, and more importantly, a key government ally pulled out of the coalition, leaving the Singh administration without a majority.
European equities are broadly lower, with the Dow Jones Stoxx 600 off around 0.5% near midday in London, though here too, yesterday's ranges remain intact.  Core European bonds are firmer, while peripheral bonds are softer.   We note that the US-German 2-year interest rate differential continues to move in a dollar-supportive direction.  At 23 bp today it is the largest US premium since the start of the year.  The gap created by yesterday's sharply lower opening in the euro is found between yesterday's high ($1.2970) and last Friday's low ($1.3000).  This area is important technically, and all the more so given that it appears on  the weekly charts.
In contrast, we note the US-Japanese 10-year spread, at 133 bp is near its 10-day low.   This would seem to have a more negative dollar factor than is reflected in prices.    The dollar filled its gap and more against the yen.  It surpassed retracement levels seen from the March 12 high near JPY96.70.  We now peg support for the greenback near JPY95.00.  
Cyprus developments remain front and center today.  The situation remains very fluid, to say the least.  It is not clear if there will be a vote today, which has previously been indicated for noon (EDT, 16:00 GMT).  The newly elected Cypriot President seemed to have been among the strongest advocates of taxing small depositors has been forced to reconsider.  Germany and other European countries have been quick to claim that they had not wanted to tax small depositors.  The Cypriot government and parliament are searching for alternatives to raise 5.8 bln euros.  The problem is that there are not many other places to turn in Cyprus and a narrower base for the wealth tax will require much higher taxes on the more limited number of larger deposits. 
Many, including the French Fiance Minister are claiming some taboo has been broken.  Others claim a Rubicon has been crossed.  We are less sanguine,.  First, the generic category of wealth tax in contrast to income and sales tax is not uncommon in Europe.  Second, a tax on deposits is also not unprecedented.  For example, recall that in July 1992, Italy's government under Prime Minister Amato took 0.6% of all bank deposits (imposed a 0.3% tax on all real estate).   It is not the amount of the tax or the moral justification that is the issue, but the principle and precedent.  Third, throughout this crisis, the burden of the adjustment has fallen on those who are generally less well off. .  Minimum wages have been cut.  Health care benefits have been cut.  Pensions have been cut.  All for the sake of keeping some investors whole. 
Each aid package has been tailored to the uniqueness of each country.  The role as an offshore tax haven is the unique feature in Cyrpus.  This means that the banks rely almost solely on deposits,  rather than funding in the wholesale market or by issuing bonds.   There are not many other places to turn to raise the 5.8 bln euros that the Troika is insisting upon, which as they say is why Willie Sutton robbed banks in the first place.
We do not see the developments in Cyprus (any more than the developments in 1992 developments in Italy did) portending a massive wealth grab by European countries.  It is not a test case or the beginning of some process.  However, it does seem to signal a greater willingness of the officials to seek a broader involvement in assistance programs, perhaps emboldened by the ECB's OMT and extra time to reach fiscal targets by the EU, with a greater focus on the structural balances.
Otherwise, there are four economic developments to note.  First the RBA minutes were much like last time.  The easing cycle may not be over, but the RBA shows no urgency to resume cutting rates.  No one was expecting a cut in April, but even a cut in the May-June period is being pushed out. 
Second,  the UK consumer inflation was in line with expectations (0.7%/2.8%), though producer prices rose more the expected (input 3.2%/2.5%) warning of potential squeeze on margins.  The budget presentation tomorrow is anxiously awaited.  
Third, the German ZEW survey should improvement especially in the assessment of the current situation (13.6 from 5.2).  The euro responded positively to the headline (~$1.2960), but just as quickly returned to where it was before.  
Fourth, in Italy Berlusconi has provided a path toward a new even if limited government by offering to support the PD's Bersani as prime minister in exchange for a PDL candidate becoming president.  The President in Italy is largely ceremonial but can appoint life time Senators (like Monti) and has an important role facilitating elections and new governments. Separately, the EC indicated a willingness to allow Italy to borrow more to repay debts, especially to small and medium sized businesses, many on the verge of bankruptcy due to the uncollected funds from the government.  The EC comments suggest these new borrowings would be not counted against its fiscal targets.  Estimates of the governments arrears range between 50 and 80 bln euros.


A terrific historical review of Cyprus and how they arrived at the current situation.
The report is long but a worthwhile read:

(courtesy Ben Davies/Hinde Capital)

Cyprus - Oh The Irony!?

Tyler Durden's picture

By Ben Davies of Hinde Capital
Cyprus - Oh The Irony!?
In history seemingly innocuous events portend more serious outcomes – albeit we recognise them in hind(e)sight. This is the dramatic irony of history. Just as a single shot in Sarajevo, took out a largely unknown European aristocrat, Archduke Franz Ferdinand, who would have known then that the world would plunge into World War I. The Cypriot savers must have thought the authorities were being highly ironic, of the Socratic kind, when they were told they were receiving a bail-out, except it was a “bail-in”. I don’t know the Greek/Turkish for – you are having a laugh, but I bet that’s what they are saying. So what is a bail-in?
A bail-in takes place before a bankruptcy, and involves losses being imposed on bondholders, something that has rarely taken place throughout the GFC and euro crisis. In fact taxpayers (the government) have consistently bailed-out the private sector in full. The Cypriot bank rescue is no exception, except this time there is a bail-in and ironically again not of bondholders but of the depositors first. This is a direct contravention to the usual legal claims on the capital structure.
So there you have it – on Friday 14th March Cyprus became the 5th country to receive an EU bail-out (in), except this one was a bail-in but one with a significant and severe twist of fate. The Cypriot government in Nicosia is scheduled to vote on a EU bail-out plan which calls to extract a “tax” on bank depositors (savers) some €5.8 billion: 6.75 per cent for anyone with less than €100,000 in a Cypriot bank account, 9.9 per cent for anyone with more than that.
This is an unprecedented assault on individual property rights and every individual in the developed world should take notice, and far from stabilizing the eurozone, the bail-out likely heightens contagion risk across the EU.
Why bother holding a bank account when your government can expropriate your savings? Far from containing a bank run in Cyprus it will exacerbate it, absent capital controls, and likely begin significant depositor flights across the European periphery.
These events I believe signify one of the most alarming developments in the Eurozone crisis and by dint the global economy since the financial crisis began.

Cypriot Disputes and Levies
For a sovereign entity so small, Cyprus is a country that has had more than its fair share of international controversy and disputes. Cyprus has a long and convoluted history with the British, Turks and Greeks, whose tensions have wreaked havoc across Europe over two World Wars. This weekend marked yet another period of disquiet in the history of this troubled island.
Cyprus is reeling from an oversized and ailing banking system.  Technically bankrupt, domestic banks stand at €126.4 billion in size, or over 7 times the size of the economy.  Without a bail-in, depositors would be wiped out and Cyprus would undergo economic collapse, bringing along with it all the attendant social misery and deprivation of a depression. 
Ironically Cyprus is no stranger to levies.  The British extracted taxes in the 19th century to cover the compensation they owed to the Ottoman Sultanate, who had conceded the island to the British.
In 1878, under the Cyprus Convention, the Cyprus became a protectorate of the British in a secret agreement between the United Kingdom and Ottoman Empire. The Greek Cypriots believed the British would eventually help Cyprus unite with mother Greece, just as with the other Ionian Islands. The indigenous Cypriots believed it their natural right to reunite the island with Greece; after all the very first census showed the population was comprised of 74% Greeks and 24% Turks.
Fast forward half a century and most of us over the age of 40 refer to the Cyprus dispute as that of the conflict between the Republic of Cyprus, and Turkey, over Turkish-occupied North Cyprus. My knowledge of the origins of the Cyprus dispute is a little sketchy but as I understand it, the dispute originally was born out of the Cypriots’ desire for self-determination away from the British Crown, which had unlawfully declared itself the constitutional ruler after Greece failed to fulfil its WWI obligations to invade Bulgaria; in return the Republic of Turkey recognized British rule of the island.
Eventually this colonial dispute became an ethnic one between Greek and Turkish islanders and their respective mother countries. In 1974 Turkey invaded Northern Cyprus and declared unilateral independence, as well as itself a sovereign entity – the Turkish Republic of Northern Cyprus – but has never received UN and international recognition. There has been a UN no-go zone buffering North and South ever since.
Another irony of the day was that in return for the British protectorate the Ottoman Empire received military support against Russia in Asia. As I will cover later Russia has been integral to the demise and now the future well-being of Cyprus. Another legacy dispute that has compounded the Cypriot collapse was their adherence to EnosisThis refers to ‘the union’, literally speaking, of the Greek-Cypriot population to incorporate the island of Cyprus into Greece.  Observance of this tradition led the Cypriot banks to misguidedly purchase vast amounts of Greek sovereign debt before and during the euro crisis. Cyprus became a casualty of the Greek’s very own bailout restructuring. Oh the irony again. 
Creditor Structure
Bank depositors by now will have realised that bank deposit guarantees are not worth the paper they are written on and the legal precedent to label this confiscation of assets as a ‘stability levy’ or tax has no doubt been framed as such so as to circumvent EU deposit guarantee law, which this levy clearly violates. This is stealing – period.
Every saver in Italy, Spain, Portugal, but not limited to these countries, as it potentially applies to any saver in northern Europe and the UK, are at risk of a confiscation of their hard-earned money.  We will likely see depositor flight from the periphery to the supposedly more robust surplus countries – principally Germany. This is despite the very large outstanding Target2 balances owed Germany by the periphery, but don’t expect the man in the street to be aware of this fact.  This is unfortunate as some progress was being made in the reduction of Target2 imbalances as deposits in the periphery showed renewed signs of growth. 
The Troika has run roughshod over the rule of law. By calling for a universal bail-in of depositors (the securest part of bank capital ladder) before extracting money from shareholders, junior and subordinated bondholders, the EU bureaucrats and IMF have unilaterally ripped up the legal framework for property rights. This is a truly worrying and frightening progression – actually regression – in economic freedom.
At Hinde Capital, we have no issue with uninsured depositors contributing to the bail-out of a banking system, even as unpalatable and clearly undesirable as this would seem.
Unfortunately bank depositors (savers) have long been under the misguided impression that they are potentially immune from a bank collapse, with the State providing a safety net in the form of deposit guarantees up to a declared sum.  I would argue that individuals, partly due to government propaganda in the good times, have long since forgotten – or indeed have never understood – that once you deposit your money into a bank, you give up your right to ownership, ie, It’s a LOAN! An asset which is lent out multiple times as is the agreed practice under fractional reserve banking, clearly has a risk of no return, albeit a seemingly a low risk when confidence and trust is high in the economic system.
In truth the correct order of claims on the creditor structure in this ‘bankruptcy’ proceeding has been largely ignored as the Cypriot banks have such a small sliver of equity and debt, and have an unusually large depositor base.  It is the involvement of the depositor base that turns this whole debacle into a plot of immense political intrigue and, indeed, even conspiracy. 

Cyprus-sia ‘Tax’ Haven
It has been long known that Cyprus has held a vast sum of deposits from Russian lenders, and because of that Russia has been its biggest direct foreign investor. Low corporate tax rates, sub 10%, were the attraction, with Russians transferring their money into companies based in Cyprus. Some of this was then reinvested back in Russia.  According to Der Spiegel: 
An internal study by the German foreign intelligence agency, the Bundesnachrichtendienst (BND), says banks in Cyprus hold $26 billion (€20.33 billion) in deposits by Russian investors. According to the BND, most of this money has been illegally moved abroad to evade Russian tax authorities. By Cypriot standards it’s a tremendous sum given that the island’s entire annual GDP amounts to €17 billion.
The Cypriot government on Monday denied the money-laundering accusation. A government spokesman said SPIEGEL was trying to besmirch the reputation Cyprus has as an international investment location. The country had effective money-laundering rules and adhered to EU law, the spokesman said.
Indeed, Russians aren’t the only ones who sought the refuge of this once tax safe-haven, and consequently other European countries were not keen to be seen to be using their own tax payers’ money to afford a bail-out for ‘tax dodgers’ and money laundered in Cypriot banks by Russian KGB, mafia and their own citizens. So you could call the tax on uninsured depositors actually a levy on money laundering – call it a 10% haircut for washing your dirty linen. I bet any good money launderer worth his salt would take that cut. 

Conspiracy Talk
The question is why have the small savers been penalised? This is the point in the plan which makes the EU bureaucrats look so dysfunctional or at best dishonest – I meant to phrase it that way round. By penalising small depositors, mostly local Cypriots, they, as I have stated, undermined the universallyagreed EU depositor guarantee that currently stands at €100,000. The talk is that the Cypriot government who took a line of credit of some €2.5 billion from Russia in 2011, and having utilised it fully, wanted to appease the ‘motherland’.  So they have agreed not to levy the full tax on deposits above €100,000. By doing this they hope for further assistance from Russia. I suspect they will offer support as Russian banks have loaned in excess of $40 billion to Cypriot companies of Russian origin (according to financial reports).
The Private Sector Initiative (PSI) on depositors is a victory for the ‘northern league’ of Europe, for now at least.  With a German election year in full swing Merkel needed to satiate German taxpayers by no longer exposing their euros to the profligacy of the periphery. Yes, a victory in round one for Merkel and the CDU, but ‘ding ding’, here comes round two: I bet the Cypriots pull a few punches by pushing back on the levy on small depositors. ‘Ding, ding’ – round 3 – I say Merkel gets knocked off her feet as depositors flee the periphery and then (eventually) Mario has to step in and decide whether to cite ‘irreversibility’ status as a clause to stem a banking sector collapse in Europe, and provide unlimited monetary support, but without the conditionality clause of austerity. I say ‘eventually’ as Mario had repeatedly slapped the EU finance ministers, and Schauble particularly, for advocating a haircut on bank deposits. So he could really make Germany sweat by holding back on a re-load of its big bazookas’ – long-term LTROs and OMTs.
In the interim the national central bank (NCB), in this case Cyprus is no doubt utilising the ELA (Emergency Liquidity Assistance) to supply the Cypriot banks with sufficient funds to remain liquid in the event of insolvency and failure.  This is at the risk of the NCB concerned and outside the ECB’s refinancing operational framework.  It is completely opaque and in truth it will appear as a Target 2 ledger or on the ECB asset side as ‘Other assets’.
For now the Cypriot banks are now on holiday, forcibly closed for business until at least Thursday at time of writing, so depositors cannot withdraw their money. Likewise, ATMs have been deactivated and electronic wire transfers suspended. They will be opened once the Cypriot parliament has ratified (or not) the deposit levy and other terms of the bail-in. It could well be that the terms change yet to protect small savers as they should have been all along. Either way, the psychological damage has been exacted across European populations. 

Contagion Risk
Those who think there is little risk of a levy being imposed on other periphery members are missing the point. The seeds of doubt have been planted. As a saver facing zero yields on deposits and a potential haircut, why keep your savings in a bank? Sure it is convenient for electronic transactions, but individuals can adapt easily. As one of my more amusing colleagues put it, “mattresses now hold a 10 per cent premium”.
Talk of ‘exceptional’ circumstances and a ‘one-off’ are true but only because Germany and the Troika would never succeed in enforcing such illegal measures on Italy and Spain without risking social unrest and a collapse of the euro. The Cypriots have more leverage than they realise. The Russians don’t need a failure as it could mean Russian bank risk. Moreover, Target 2 imbalances likely ensure that the ECB would not cut off the ELA and risk a euro currency break-up.

What this should reaffirm to you all is how the handling of the crisis has only succeeded in heightening the risks associated with this current monetary order.  The excessive amounts of debt have continued to grow and are clearly not sustainable. Policymakers have resorted to draconian methods of expropriating private sector assets (households, pension funds and corporates) either by excessive explicit ‘taxation’ and/or stealth taxation administered by a policy of negative real rates to help reduce the fixed real burden of debts.
It also reinforces our long-held views that when push comes to shove policymakers (the State) will escalate oppressive tactics against their electorate in a bid to maintain their status quo and that of their fiat currency system.
Of most importance is the adherence to retrospective changes of law and different rules for different people and countries. Insolvencies are generally well-defined in law. First equity, then subordinated debt, then deposits and senior bonds together, take the hit in that order.  The creditor structure has been up-ended and more than merely tweaked over the last few years.  I suspect with levels of ignorance high amongst populations they haven’t quite woken up to the reality that the state is not in fact here for your protection as it once was and that we all need to take on self-reliance and a heightened sense of responsibility for ourselves. Some notable rule changes of late are subtle but growing in number:
  1. The ECB, holders of Athens-law and foreign law Greek debt all received different treatment
  2. The Dutch didn’t restructure SNS Reaal paper, they confiscated it
  3. The Irish banned lawsuits against the ultimate wind-down of Anglo Irish
  4. Portuguese private pensions were confiscated
The list is long but you get the idea.  Rule-changes are getting ‘regressively’ more creative and sinister. As a friend  pointed out to me this as if the “football referee has gone from being a quasi-neutral arbiter, to pulling off his black shirt to reveal a Manchester United one underneath and awarding himself a series of penalties.”
The bail-out should have been a legal bail-in whereby equity is wiped out, and all bank debt is written down. Then unsecured (uninsured) depositors ie above €100,000 should have taken a double digit hit. By doing this EU finance ministers and lawmakers would have been respecting the creditor hierarchy while adhering and honouring the rule of law. The retrospective change of law is what should alarm us all. The insidious and subtle nature of this encroachment on our civil rights sets an ominous precedent and those who glibly mock libertarians for their ‘rants’ are no doubt those same people who thought PIIGS really do fly.
The bail-in announcement for the Cypriot banks late Friday night was one of those events when we all look back and think that was the beginning of the end of the real global financial crisis. This should leave any individual in Europe under no illusion that the political elite will enact whatever it deems fit to protect their positions in the name of the euro and their own positions of power.
It is very clear that markets and investors underestimate the reality that debt restructurings are very necessary but won’t necessarily be enacted which leaves only more private sector wealth transfers (confiscation) and likely circumvention of the underlying problem of sovereign insolvency by central bank deficit financing.
So much for EMU solidarity…comrades.


Cyprus events for today:

We start off early this morning when the President stated that Parliament will still reject the bailout plan

(courtesy zero hedge)

Cyprus President Says Parliament Will Still Reject Bailout Plan, "Making Other Plans"

Tyler Durden's picture

So much for the credibility of Reuters' Greek FinMin "unnamed" source. After the newswire presented the latest Eurogroup statement as if it was one where all deposits under €100,000 will be tax exempt, which was not the case, CNA reported a little while ago that the government has submitted a revised bill according to which only deposits under €20,000 would be exempt, and everything between €20K and €100K would still see the previous 6.75% levy. The parliamentary economic committee would discuss the bill ahead of plenary a debate scheduled for 6 p.m. Cyprus time. However, now as MarketNews reports, that is likely moot.
Amusingly enough, this echoes what Russia's former FinMin Alexei Kudrin just said, who added fuel to the fire:
Of course, as we said nearly a day ago, if there is no consensus on the term of the bail-in, it is assured that there will be no vote today either, and possibly none tomorrow, and so on, which means that with both banks and stock markets closed through Friday, Cyprus may end up in permanent stasis indefinitely.
Alternatively, parliament may just vote, reject the bailout, tipping the country into bankruptcy, forcing it to exit the Eurozone, and finally pushing Europe beyond the Rubicon.  From a somewhat more credible Reuters:
Cyprus's parliament was set to reject a divisive tax on bank deposits in a vote scheduled for Tuesday, a government spokesman said, a move that would push the island closer to a default and banking collapse.

A weekend announcement that Cyprus would break with previous practice and impose a levy on bank accounts as part of a 10 billion euro ($13 billion) EU bailout prompted some turmoil on European financial markets on Monday.

Cypriot and euro zone officials have sought to soften the initially proposed levy of 6.75 percent on depositors of up to 100,000 euros and 9.9 percent above 100,000 to ease the burden on small savers.

But passage of the bill in the 56-member chamber, where no party has a majority, was unlikely and it was not clear if the vote would even go ahead later on Tuesday if leaders were sure it would be rejected.

"It looks like it won't pass," Cypriot government spokesman Christos Stylianides told state radio.

The House of Representatives was expected to meet at 1600 GMT (12:00 EST) . Rejection of the measure would effectively block a bailout that Cyprus needs to keep its banks afloat and government paying wages and welfare.
Finally, just to give a taste of what would happen if things work out as hoped, the country's Central Banker, appropriately named Panicos, said Cypriot banks stand to lose more than 10% of their deposit base within a matter of days if a levy on bank deposits is imposed.  "If the draft bill passes, we would see deposit outflows of 10 percent or maybe more in the first few days," central bank chief Panicos Demetriades told the Cypriot parliament's finance committee. He added that the central bank's and the European central Bank favoured scrapping the levy for all deposits below 100,000 euros, in line with the position expressed by euro zone finance ministers late on Monday.
He is absolutely correct, except for being a little dyslexic - what he meant was 100%.


Then this Finance Minister resigns:

Cyprus Finance Minister Resigns … but the resignation was rejected
11:53 Markets move lower or unconfirmed talk the Cyprus Parliament is set to reject the bailout plan today

Various sources also report the Parliament will debate the bail out today but may not vote until tomorrow
In addition to those rumours, various news sources reported that Cyprus Finance Minister Sarris may has submitted his resignation,
€/$ 1.2900 


Ambrose Evans Pritchard finally adds his take on the Cyprus "daylight robbery"

(courtesy Ambrose Evans Pritchard/UKTelegraph)

Ambrose Evans-Pritchard: Daylight robbery in Cyprus will come to haunt EMU

By Ambrose Evans-Pritchard
The Telegraph, London
Monday, March 18, 2013
One's first reflex is to gasp at the stupidity of the EU policy elites, but truth is that most EU officials handling the Cyprus crisis know perfectly well that their masters have just set the slow fuse on a powder keg -- and they can only pray that it is slow.
The decision to expropriate Cypriot savers -- even the poorest -- was imposed by Germany, Holland, Finland, Austria, and Slovakia, whose only care at this stage is to assuage bail-out fatigue at home and avoid their own political crises.
This latest debacle has caught me on the hop, literally, since I am in Tokyo learning about Abenomics, so let me just make a few quick points before going off for a pint of sake.

The EU creditor states have at a single stroke violated the principle that insured EU bank deposits of up $100,000 will be guaranteed come what may, and in doing so they have more or less thrown Portugal under a bus.
They appear poised to seize large sums from Russian banks -- E1.3 billion from state-owned VTB alone, and therefore from the Kremlin -- prompting the condign riposte from Vladimir Putin that the action is "unfair, unprofessional, and dangerous."
They have demonstrated that the rhetoric of EMU solidarity is just hot air, that they will not force their own taxpayers to share a single cent of clean-up costs for the great joint venture of monetary union -- in which northern banks, insurers, pension funds, and indeed governments, were complicit.
Their refusal to pay is entirely understandable in one sense -- and if I were a German taxpayer, I would not care to swallow these losses either -- but then the leaders of these creditor countries can hardly expect the world to believe that they will in fact do whatever it takes to hold EMU together. Quite obviously, they will not.
The sooner this is made clear, the better. The sooner they take the proper course of withdrawing from European monetary union and organise the breakup the euro in the least disruptive way, the sooner Europe can recover.
We have already seen the EU solidarity mask slip a few times, not least in the repeated retreats over Greece, and again when German-led quartet resiled from last year's summit deal to let the ESM bailout fund take some of the weight of recapitalising banks off the shoulders of the Irish and Spanish states.
What is clear is that Angela Merkel will not risk defeat in the elections in September by ceding a single vote to Social Democrats determined to hold her feet to the fire over a bailout for "Russian oligarchs, money launderers, and tax evaders" in Cyprus, or by ceding votes to the new anti-euro party Alternative fur Deutschland. She will look after her own political interests, and all the rest is humbug.
It is a fast-moving story. The Cypriot parliament may throw out the deal. It may be rejigged so that depositors under $100,000 pay less than the 6.75 percent levy agreed, and those above may pay more than 9.9 percent.
The creditor powers appear to think that the contagion risk is manageable now that the ECB has its bond rescue mechanism in place for Spain and Italy. But they made just such an assumption when they imposed a haircut so cavalierly on private investors in Greece, only to precipitate a full-blown crisis across Club Med. And don't forget, the reason why Cyprus has gone belly up is because of the knock-on effect on Cypriot banks from the Greek haircuts.
It is far from clear that the ECB backstop for Italy still exists, given that there is no compliant government in Rome able to meet the rescue conditions.
Portugal is not safely out of the woods. Its slump has been deeper than expected. Its debt dynamics are nearing the danger zone faster than feared. Citigroup, Nomura, and many others think it almost certain that Portugal will need a second rescue, and probably debt-restructuring. What happens then? Are savers going to wait patiently for their own scalping as this becomes clearer?
As for Spain, we learn from leaks in the Spanish press that officials from the ECB and the Commission warned Eurogroup ministers that the raid on Cypriot savers posed a grave contagion risk to Spanish banks, threatening to set off deposit runs.
EMU commissioner Olli Rehn promised that there will be no losses imposed on depositors in other countries, but the decision will be made in Berlin, the Hague, Helsinki, Vienna. He has no authority to make such a pledge. He is just a civil servant.
The danger may not be immediate but if the economies of Portugal, Spain, and Italy languish through this year in deep slump with no green shoots of recovery starting to sprout in the second half -- as many fear -- this new dispensation will be tested. The fatal precedent of haircuts for depositors will start to matter a great deal. Hell hath no fury like a saver robbed.


Jim Sinclair believes that the total bank deposits in Cyprus are far greater than written due to the secretcy granted to the Russians.

(a very important read for you/courtesy Jim Sinclair/GATA)

Bank deposit expropriation in Cyprus is far larger than thought, Sinclair says

12:20p HKT Tuesday, March 19, 2013
Dear Friend of GATA and Gold:
Continuing his interview with King World News today, Jim Sinclair says the bank deposits being expropriated or suddenly "taxed" in Cyprus are far larger than thought and that since most of the money is Russian, Russian interests will be prompted to move out of currencies and into gold. An excerpt from the interview is posted at the King World News blog here:


The drama continues as Cyprus aims to let the small savers out of the deposit tax.
Later in the day it will prove futile:

(courtesy Reuters)

Cyprus aims to let small savers out of deposit tax; veto still likely

NICOSIA | Tue Mar 19, 2013 8:28am EDT

(Reuters) - Cyprus's government proposed on Tuesday to spare small savers from a divisive levy on bank deposits but said it expects parliament to reject the measure, needed to secure an international bailout and avoid default and a banking collapse.

Unless parliament accepts the levy on deposits, EU countries say they will withhold a bailout, plunging one of the smallest European states closer to financial oblivion with potentially severe consequences for the rest of the troubled euro zone.

"The feeling I'm having is that the house is going to reject the bill," President Nicos Anastasiades told reporters. Asked why, he added: "Because they feel and they think that it is unjust and it's against the interests of Cyprus at large."

Asked what he would do next, he said: "We have our own plans."

Europe's demand at the weekend that Cyprus break with previous EU practice and impose a levy on bank accounts as part of a 10 billion euro ($13 billion) bailout sparked outrage among Cypriots and unsettled financial markets.

Anastasiades refused to accept a levy of more than 10 percent on deposits above 100,000 euros, which meant taxing smaller accounts too. That hurts ordinary savers with deposits that they thought came with a state guarantee.

Stunned by the backlash and fearing rejection by Cypriot lawmakers, euro zone finance ministers urged Nicosia on Monday to avoid hitting accounts below 100,000 euros, and instead increase the levy on big accounts, which are unprotected by the state deposit-insurance system.

The European Union and International Monetary Fund are demanding Cyprus raise 5.8 billion euros to secure its bailout, needed to rescue its financial sector.

A revised draft bill seen by Reuters would exempt savings under 20,000 euros from the planned 6.75 percent levy on deposits of less than 100,000 euros. The government has not explained how it would fill the funding gap this would create.

French Finance Minister Pierre Moscovici said the euro zone could not lend Cyprus any more, since the country's debt would become unmanageable.

"Above 10 billion euros we are entering into a size of debt that is not sustainable," Moscovici told reporters in Paris.

It was not clear if the vote on the measure would even go ahead in the fractious 56-member parliament later on Tuesday, if leaders were sure it would be rejected.


The House of Representatives was expected to meet at 12:00 p.m. EDT. Tuesday's vote, originally planned for Sunday, has been postponed twice already. Three parties have said outright they will not support the tax, while a fourth, in the governing coalition, said it cannot support it as it stands either.

IMF Managing Director Christine Lagarde said in Frankfurt that the global lender supported Cyprus's effort to achieve what she called "more progressive rates" in the levy on deposits.

Anastasiades continues to resist raising the levy on big deposits - many held by foreigners including rich Russians - fearing for the island's banking business model and reputation as a safe haven.

He asked the EU for more aid during a telephone conversation with German Chancellor Angela Merkel on Monday, with a second call expected on Tuesday.

Government spokesman Christos Stylianides said Anastasiades may also speak to Vladimir Putin, the Russian president, who described the tax on Monday as "unfair, unprofessional and dangerous."

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," said Vladimir Chizov.

Cypriot Finance Minister Michael Sarris was due to hold meetings in Moscow on Wednesday, partly to try to get an extension to an existing 2.5 billion euro loan.

Russian authorities have denied rumors that the Kremlin might offer more money, possibly in return for a future stake in Cyprus's large but as yet undeveloped offshore gas reserves, which have further raised the island's strategic importance.

The divided east Mediterranean island, home to two large British military bases is a pawn in geopolitical rivalry.

An influx of Russian money and influence since the collapse of the Soviet Union has led some Brussels officials to complain privately that Cyprus acts at times as a "Trojan donkey" for Moscow inside the European Union.


Stunned Cypriots emptied cash machines over the weekend and banks are to remain shut on Tuesday and Wednesday to avoid a bank run. Hundreds of protesters rallied outside parliament on Monday, honking horns and holding banners saying "We are not your guinea pigs!"

"If they vote for this tax they will face the fury of the people," said Markos Economou, a 47-year-old physics teacher and father of two. "The banks and the politicians should pay for this mess, not the people."

The island's stock exchange also suspended trading for another two days.

International market reaction has been muted so far but if a vote was lost, or postponed, that could change. The uncertainty saw the euro drop 0.2 percent as it remained near a three-month low and European shares fall 0.4 percent in early trade.

While Brussels has emphasized that the measure is a one-off for a country that accounts for just 0.2 percent of European output, fears have grown that savers in other, larger European countries will be spurred to withdraw funds.

(Additional reporting by Lionel Laurent in Paris; Writing by Peter Graff and Paul Taylor; editing by Janet McBride)


A very important commentary from the legendary Steve Hanke of the Cato Institute:

(courtesy zero hedge)

Cyprus, Why Now? Follow The Money

Tyler Durden's picture

Authored by Steve Hanke of the Cato Institute,
While the Cypriot Parliament may be dragging its feet on a proposed rescue plan for Cyprus' banks, the country ultimately faces a choice between Brussels' bitter pill... and bankruptcy. Cyprus' newly-elected President, Nicos Anastasiades, has quite accurately summed up the situation:
"A disorderly bankruptcy would have forced us to leave the euro and forced a devaluation."
Yes, Brussels and the IMF have finally decided to come to the aid of the tiny island, which accounts for just 0.2% of European output -- to the tune of roughly $13 Billion. But, this bailout is different. Indeed, the term "bail-in" has emerged, a reference to the fact that EU-IMF aid is conditional upon Cyprus imposing a hefty tax on its depositors. Not surprisingly, the Cypriots, among others, are less than pleased about this so-called "haircut".
Still, the question lingers: Why now? The sorry state of Cyprus' banking system is certainly no secret. What's more, the IMF has supported a "bail-in" solution for some time. So, why has the EU only recently decided to pull the trigger on a Cyprus rescue plan?
One reason can be found by taking a look at the composition of Cyprus' bank deposits...
There are three main take-aways from this chart:
1. European depositors' money began to flow out of Cyprus' banks back in 2010.

2. Indeed, most European depositors have already found the exit door.
3. Over that same period, non-Europeans (read: Russians) have increased their Cypriot exposure.
If the proposed haircut goes through, Russian depositors could lose up
to $3 billion. No wonder Vladimir Putin is up in arms about the bail-in. Perhaps a different "red telephone" from Moscow will be ringing in Brussels soon.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


Bruce Krasting on today's events  prior to the no vote:

Impact Imminent?

Bruce Krasting's picture

Zero Hedge has the latest Cyprus update - There is no parliamentary support in Cyprus for any bail-in deal. Tyler Durden begs the question:

Neither we, nor anyone else, has any idea what comes now.

The folks at FTAlphaville have some thoughts on the state of play:

A bank run spreading to Spain looks a non-starter in the short term.

The risk of any wider bank run looks pretty small so far, with market reaction relatively benign.

I've been following the Press coverage of Cyprus, the talking heads are saying that Cyprus is a manageable issue. Nothing to worry about at all.
I'm going to disagree with FTA and the TV folks. The chances of a bank run have never been higher. Tyler's right. We're looking at a black hole.

The "Other" scenario for Cyprus is a shell shocker. Forget the shareholders or the senior bond guys - they will end up with Dick's hat band. Those Russians who were at risk of losing as much as 15% of their deposits - They get zip too. At best, they are getting an IOU. That IOU will have a value of 10 cents on the dollar.
Those small depositors that were going to get hit for an unfair loss of 6% now face a vacuum. Their bank statements may not reflect a loss of principal, but they won't be able to withdraw a dime from those accounts. The local banks will remain closed, when they do reopen those deposits will be converted to some new currency. It's possible that the new currency will be the Turkish Lira. You thought the poor folks in Cyprus were getting a bad deal on Monday? Wait till Friday before you pass judgement.
What happens if Cyprus does a "drop out" of the EU? That result immediately makes a lie of Mario Draghi's words that the Euro was Uber-Ales. This is precisely what Super Mario said "would never happen".
If Cyprus goes turtle and leaves the Euro, the credit spreads on peripherals will widen. This sets up a market "call" on the ECB. But remember, for Mario Draghi to give the market the "put" that it will demand, the government's of Spain and Italy will be forced to get down on their knees and beg the gods in Brussels and Berlin for a helping hand. To do that means that they would have to have very harsh terms imposed on them. An IMF team would run the finances of the countries involved.
Given that there is zero chance that Italy and Spain will do the necessary begging, the value of the promised Draghi "put" is now zero.

There is a chance that something can be done to stop what looks like a slide into an abyss. Those chance are now well below 50-50. The markets/seers are calling for a soft landing, while at the same time that outcome is looking less and less likely. The markets seem poorly positioned for what could result in a crisis. And this story is running at hyper speed. That' a very bad combo of events. Seat belts on - Impact Imminent!


And finally late in the day:

(courtesy zero hedge)

Cyprus Parliament Rejects European Bailout Proposal: Calls Germany's Bluff

Tyler Durden's picture

Just as we predicted yesterday, the Cyprus bailout vote has not passed parliament in a move that was merely there to force Germany's bluff.
What happens now, nobody knows. Prepare for a litany of very angry headlines out of the inner sanctum of Europe's despotic chambers. Hopefully Pisani can explain it all.


And the official Reuters account on the negative vote:

(courtesy Reuters/GATA)

Cyprus parliament rejects bank deposit tax, putting bailout in disarray

By Michele Kambas and Karolina Tagaris
Tuesday, March 19, 2013
NICOSIA, Cyprus -- Parliament on Tuesday overwhelmingly rejected a proposed levy on savings in banks as a condition for a European bailout, throwing international efforts to rescue the latest casualty of the euro zone debt crisis into disarray.
The vote in the tiny legislature was a stunning setback for the 17-nation bloc; lawmakers in Greece, Portugal, Ireland, Spain, and Italy have all accepted unpopular austerity measures over the last three years to secure European aid.
With hundreds of demonstrators facing riot police outside parliament and chanting "They're drinking our blood," the ruling party abstained and 36 other lawmakers voted unanimously to reject the bill, bringing the Mediterranean island, one of the smallest European states, to the brink of financial meltdown.
EU countries said before the vote that they would withhold 10 billion euros ($12.9 billion) in bailout loans unless depositors in Cyprus, including small savers, shared the cost of the rescue; the European Central Bank had threatened to end emergency lending assistance for teetering Cypriot banks, which were hard hit by the financial crisis in neighboring Greece.

The demonstrators were unbowed: "This is a great decision for Cyprus," said Andreas Miltiadou, a 65-year-old pensioner among the crowd. "The voice of the people was heard."
The ECB said it "took note" of the vote and remained "committed to provide liquidity as needed within the existing rules."
Newly elected President Nicos Anastasiades earlier told reporters he expected parliament to reject the tax on bank deposits -- "because they feel and they think that it is unjust and it's against the interests of Cyprus at large."
He was due to meet party leaders at 9 a.m. on Wednesday to explore a way forward.
Europe's demand at the weekend that Cyprus break with previous EU practice and impose a levy on bank accounts sparked outrage among Cypriots, who emptied bank cash machines, and unsettled financial markets.
Combined with Anastasiades' refusal to accept a levy of more than 10 percent on deposits above 100,000 euros, that meant taxing smaller accounts too, which savers had thought were protected by state guarantees.
An important issue in negotiations has been the high level of deposits held in the island's banks by non-EU citizens and companies, notably from Russia, where Cyprus has established itself as a major provider of offshore financial services.
Cypriot Finance Minister Michael Sarris flew to Moscow on Tuesday to seek Russian financial assistance. He denied by text message to Reuters reports that he had resigned, which had rattled markets' nerves as lawmakers were poised to vote.
Stunned by the backlash, euro zone finance ministers urged Nicosia on Monday to avoid taxing accounts below 100,000 euros and instead increase the levy on big accounts, which have always been unprotected by the state deposit guarantee.
The European Union and International Monetary Fund are demanding Cyprus raise 5.8 billion euros from bank depositors to secure its bailout, needed to rescue its financial sector.
A revised draft bill would have exempted savings under 20,000 euros from a 6.75 percent levy on deposits of less than 100,000 euros, leaving a shortfall. But that was not enough to sway lawmakers, even in the ruling party, to accept the tax.
"You can't take a 10,000-metre jump without a parachute. And that's what they're asking of us," said George Perdikis of the Greens Party.
French Finance Minister Pierre Moscovici said the euro zone could not lend Cyprus any more, since the country's debt would become unmanageable for its 1.1 million people.
"Above 10 billion euros we are entering into a size of debt that is not sustainable," Moscovici told reporters in Paris.
International market reaction has been muted so far but that might change.
"In the very short term, this will be a small victory for the more rational observers who had looked at this move as, frankly, outrageous. But it leaves Pandora's Box wide open," Mike Moran, senior currency strategist at Standard Chartered in New York, said of the plan to make bank depositors contribute.
While Brussels has emphasized that the measure was a one-off for a country that accounts for just 0.2 percent of European output, fears have grown that savers in other, larger European countries might be spurred to withdraw funds.
Dutch Finance Minister Jeroen Dijsselbloem, who chairs the group of euro zone finance ministers, said there would be no need to impose a levy in any of the 16 other euro countries.
Deutsche Bank Chief Executive Anshu Jain said in Frankfurt: "We see near-term contagion risk as limited. This is unlikely to be a model for other European Union states."
Anastasiades has continued to resist raising the levy on big deposits -- many held by rich Russians -- fearing for the island's business model and reputation as an offshore financial haven.
He asked the EU for more aid during a telephone conversation with German Chancellor Angela Merkel on Monday.
Some Cypriots hope they could instead get aid from Russia, which has bailed out Cyprus in the past. Many Russians keep their money in Cyprus and operate businesses from there.
Government spokesman Christos Stylianides said Anastasiades might also speak to Russian President Vladimir Putin, who has called the deposit levy "unfair, unprofessional, and dangerous".
Russian authorities have denied that the Kremlin might offer more money, possibly in return for a future stake in Cyprus' large but as yet undeveloped offshore gas reserves, which have raised the island's strategic importance.
An influx of Russian money and influence since the collapse of the Soviet Union has led some Brussels officials to complain privately that Cyprus acts at times as a "Trojan donkey" for Moscow inside the European Union since it joined in 2004.
Stunned Cypriots emptied cash machines over the weekend and banks are to remain shut on Tuesday and Wednesday to avoid a bank run. The island's stock exchange also suspended trading for another two days.

The markets become fast going in every direction:

(courtesy zero hedge)

European Funding Pressures Spike Most In 14 Months

Tyler Durden's picture

One of the most important indicators of stress in the financial markets of Europe during the heady days of the crisis was the EUR-USD basis swap. Simply put it is an indication of the trouble that European banks are having funding themselves. Thank to the LTRO and a wash from the ECB, it has been largely off the radar for most media types. However, we note that today the1Y EUR-USD basis swap smashed lower (more stressed) by the most since December 2011 and is at its most stressed since November. It seems trouble, no matter how much Draghi promises, is not too far under the surface...

French Minister Tasked With Fighting Tax Fraud Resigns For Having A Secret Swiss Account

Tyler Durden's picture

While everyone awaits in stunned silence to see what Citadel, GETCO and of course the NY Fed will do with stocks in the aftermath of the shocking Cypriot decision, which nobody hasany idea how to respond to because as Europe made it very clear ahead of the vote, there is no "Plan B", here is some comic interlude. The name Jerome Cahuzac should be familiar to our readers: he is the French Budget minister who had beentasked with battling tax fraud. Well, technically it is not is butwas: moments ago Monsieur Cahuzac resigned, for the same reason he had been investigated several months ago. Namely, having an "undisclosed" Swiss bank account. Minister in charge of battling tax fraud... resigns for having a secret Swiss account. We'll let that sink in for a bit before we go back to that other farce in the eastern Mediterranean.

our early Tuesday morning currency crosses;  (8 am)

Tuesday morning we  see minor euro strength  against the dollar   from the close on Monday, trading below  the key 1.30 mark at 1.2950. The yen this the morning  is a touch weaker  against  the dollar,   at 95.39 yen to the dollar.  This will eventually cause problems as Japanese citizens bail out of their bond/yen holdings because of inflation.    The pound, this morning is a littler stronger against the USA dollar touching the 1.51 barrier at  1.5115. The Canadian dollar is weaker  against the dollar at 1.0231.   We have a  risk is off  situation  this morning with the major European bourses in the red  Gold and silver are higher  in the early morning, with gold trading at $1603.40 (down $1.20) and silver is $28.85 up 1 cent in early morning European trading.

The USA index is up 06 cents at 82.70.

Euro/USA    1.2950  up .0001
USA/yen  95.39 up .031
GBP/USA     1.5115 up .0020
USA/Can      1.0231 up .0007


And now your closing Spanish 10 year bond yield:

a very big rise of .08 in yield:  (yields back over 5%)


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5.040.08 1.57%
As of 12:59:59 ET on 03/19/2013.

yesterday's yield



4.960.04 0.85%


And now our Italian 10 year bond yield:  (a rise of .09%)

Italy Govt Bonds 10 Year Gross Yield

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4.730.09 1.96%
As of 12:59:56 ET on 03/19/2013.

yesterday's yield


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4.630.04 0.76%
As of 12:59:57 ET on 03/18/2013.


Your 5:00 pm closing Monday currency crosses:

The Euro plummeted  this afternoon settling at 1.2888 (closing). The yen strengthened a bit co this afternoon  to finish at 95.08 . The pound remained constant  finishing at 1.5095.  The Canadian dollar weakened terribly  against the dollar closing at 1.0268. The currency moves were very fluid.

The USA index remained constant from the morning session with the final index number up 26 cents to 82.97. 

Euro/USA    1.2880 down  .0063
USA/Yen  95.08 down .236
GBP/USA     1.5095  flat
USA/Can      1.0268  up  0044


Your closing figures from Europe and the USA:

red ink

i) England/FTSE down 16.60  or 0.26%

ii) Paris/CAC down 49.22 or 1.30% 

iii) German DAX:  down 62.91 or .79%

iv) Spanish ibex down 186.8 points  or  2.20%

v) Italian bourse (MIB) down  253.57  points or 1.59%

and the Dow up 3.76(.03%)


Finally tonight, I will leave you with this commentary courtesy of the respected "Open Europe"

(courtesy Open Europe)

What Does A 'No' Vote Mean For Cyprus And The Eurozone?

Tyler Durden's picture

All at sea – what does the 'No' vote mean for Cyprus and the eurozone?

19 Mar 2013
The Cypriot parliament tonight voted against a bill to introduce a tax on bank deposits, in return for a €10bn bailout offered to the country by Germany and other eurozone governments. Not a single Cypriot MP voted for the deal. The structure of the tax in the bill is shown in the table below. The vote leaves Cyprus’ place in the eurozone hanging in the balance and threatens the escalation of the crisis to a new level, though the most likely outcome is that the Cypriot parliament votes a second time, on a revised deal.   

Results of the vote
The governing party (DISY) abstained (with one member absent), while the junior coalition partner (DIKO) voted against – this signifies the huge political divisions at work in Cyprus. Even if a bailout deal is eventually approved the government’s position continues to look untenable.  
What does the vote against the deposit levy mean?
As we have noted before, this has the potential to be a very serious twist in the eurozone crisis. Previously, Germany and the eurozone have stressed that Cyprus has no alternatives to the deposit levy. Now, all eurozone partners are forced back into difficult negotiations.  
What timeline are Cyprus and the eurozone working on?
Cyprus will run out of cash on 3 June, when it has to repay a €1.4bn international bond. However, the decision will need to be taken long before that. Cypriot banks cannot stay closed for long but they cannot be reopened until a decision is taken, otherwise there will almost certainly be a deposit run.  While people can reportedly withdraw up to €700 per day from ATMs, businesses, large and small, cannot function without banks being open. We would expect some decision would need to be taken by early next week before the lack of liquidity and lack of economic activity begins to severely harm the Cypriot economy.  
What are the possible outcomes?
Both sides have some serious decisions to make. Below we outline the potential scenarios (as highlighted here):  
1. Cyprus votes again and approves a revised tax: The governing party pushed for the vote to be delayed and hence abstained. This may be seen as delegitimising the result, not least because they hold 36% of the seats in the Cypriot parliament. The deal could see a few small tweaks along with some additional cash (either from the eurozone or Russia – see below), which would then be put to another vote in parliament – after all, being asked to vote twice is a common practice in the EU. But such a decision and vote must come quickly. In addition to running out of government cash, banks would have to remain closed during the interim period, meaning businesses and the wider economy could not practically function. The vote would therefore have to take place by the start of next week to avoid another escalation of the crisis. In our view, this remains the most likely option (possibly in combination with part of option 2).  
2. The eurozone blinks: With the possibility of a country exiting the eurozone becoming very real and the “irreversibility” of the single currency coming under direct threat the eurozone may present Cyprus with a more palatable deal. After all the cash in question – €5.8bn – is only 0.06% of eurozone GDP. The real issue will be how to provide this cash while keeping Cypriot debt sustainable.  
Options include:   
  • providing the full €17bn loan but with very long maturity and low rates;
  • linking the repayment of the loan to future gas revenues;
  • using the ESM or another vehicle to recapitalise banks directly;
  • restructuring domestic bonds to extend maturity;
  • accepting losses on some of the official loans.
None of these is perfect but if push came to shove, one or several could be moulded to make the deal look viable – at least on paper.  
The main issue here remains political. It would be very tricky to push any increased bailout / relaxed conditions through the German, Finnish and Dutch parliaments, who don’t want to be seen to prop up a bloated Cypriot financial sector dominated by Russian interests. After all that is partly why we got here in the first place. Such a deal would be also reliant on the ECB agreeing to continue providing liquidity to Cypriot banks.  
3. Cyprus looks to ‘other plans’ (i.e. Russia):  Cypriot President Nicos Anastasiades suggested that Cyprus is considering “other plans” in case the parliament voted down the deposit levy and no new bailout deal was forthcoming. As of now, it is not clear exactly what these plans are, however, it is a decent bet that many, if not all, involve Russia in some way.  
Cypriot Finance Minister Michalis Sarris will be in Moscow tomorrow to discuss the situation with his Russian counterpart. As we have argued before, Russia has significant self interest in helping Cyprus out – it could reduce the losses for the reported €20bn in Russian deposits held in Cyprus, it could gain favourable terms for future contracts on gas exploration in Cyprus (and therefore the future revenues) and it could also improve its geopolitical foothold in the region (as we have highlighted before, there is speculation that Russia has previously sought to move its naval base from Tartus, Syria to Cyprus).  
Russia may therefore step up and provide additional financing, potentially to cover the circa €2bn which may have come from Russian depositors under the tax. Reports have also suggested that Sarris may propose a 20% tax on Russian deposits in Cyprus in exchange for a stake in a future Cypriot national gas company and board positions at Cypriot banks.  
However, the EU will not want to see one of its members become so closely intertwined with Russia, so could actually strengthen Cyprus bargaining chip.  
4. Cyprus exits the eurozone: No compromise can be found under any of the scenarios above (at least not within the necessary timeline – see above). With the largest Cypriot banks going without a recapitalisation, the ECB could be forced to follow through on its threat to withdraw liquidity from Cypriot banks – not just to reduce its risk exposure but also to ensure its threat of action remains credible to the rest of the eurozone and financial markets. If so, the ECB Governing Council would also probably promptly vote (a 2/3 majority is needed) to turn off the Emergency Liquidity Assistance to Cyprus leaving the banks illiquid and insolvent.  
This combined with the previous threat of a deposit tax would likely lead to a deposit run on the banks and their likely collapse. In the face of all this, without an ECB or eurozone backstop, Cyprus would find it impossible to bail out its banks or support the guarantee of deposits – it would be forced to exit the eurozone and print its own currency.  
The logistics are messy, but as we suggested with respect to Greece, some use of Article 50 in the EU Treaty to exit the EU would be the most likely option.  
The new Cypriot currency would have little international trust, particularly in financial markets – not least because it would have just defaulted on a significant amount of its debt, particularly foreign-held debt. This would be worsened by the Cypriot Central Bank having to print massive amounts of liquidity to keep the banks afloat and backstop deposits. It would likely also have to monetise the government deficit, which is due to be 4.5% of GDP this year, or Cyprus would have to enforce massive austerity. In any case, this scenario has all the hallmarks of an inflation spiral and collapsing GDP.  
This could be combined with option 3 to some extent. Russia could offer Cyprus a significant bailout, particularly of the banking sector. Alternatively some currency link could be envisaged. In either case this would help increase trust in the new currency and the Cypriot economy.  
Would the ECB really pull the plug on liquidity to Cypriot banks?
The key turning point here will be whether the ECB cuts off Cypriot banks. It is to some extent the vital difference between option 2 and 4, while keeping liquidity on could help facilitate option 1. To pull the plug on ELA the ECB needs a 2/3 majority (15 out of 23 votes) at the ECB Governing Council. Although the Bundesbank and maybe the Dutch and Finnish central banks might vote to turn off the ELA a 2/3 majority is not certain. In fact since Mario Draghi took over the ECB it has not been particularly hawkish. Bloomberg reports that the ECB said after the vote: “The ECB reaffirms its commitment to provide liquidity as needed within the existing rules”. The crisis has shown so far that the rules of the ECB are incredibly malleable, so what exactly that statement means is unclear, but the vote could certainly go either way.


See you tomorrow night

All the best





Cyprus does revert to the Pound and start printing it I assume that these Pounds
will be traded for Euros at the bank. In fact , I assume that Cypriots will
have to exchange all of their Euros for Pounds. This being the case, in that
the Euro is still a viable currency, would not the collected Euros become
foreign reserves, and thus a windfall for Cyprus?

PeaknikMicki said...

Interesting question. Who gets the Euros? Does Cyprus have a central bank or would they create a new central bank? Would it be Government controlled central bank or banking cartel controlled CB? (most likely the latter I am afraid)
I would guess the CB exchanges the Euros for new Pounds. So if it is a cartel controlled CB I don't see it being any windfall to Cyprus in general.
It would however give the local CB room then to bail out the banks if it wishes so.
Would the new Pound crash straight after? The Ruskis invested a lot there before Euro even existed so it is not that Cyprus can't have a sustainable local currency. I'm thinking the question is what the rest of their economy is like and how much more new Pounds they will be printing once they get their own printing press.
Would be good to see some more posts on the subject.

highandwired said...

There are NO Euros!!! That's why the banks are BROKE! They can't pay with money that does not exist. The Euros have been used to buy European Bonds! Good luck with that Cyprus. There is no way out. This is the black swan we were waiting for. Either way, the Russian money will be gone. Where is that going to come from. This is a total clusterfuck!!!

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