{"id":36954,"date":"2013-03-19T13:24:20","date_gmt":"2013-03-19T17:24:20","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=36954"},"modified":"2013-03-19T13:24:20","modified_gmt":"2013-03-19T17:24:20","slug":"the-cyprus-crisis-and-what-it-means-for-investors","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/03\/19\/the-cyprus-crisis-and-what-it-means-for-investors\/","title":{"rendered":"The Cyprus Crisis and What It Means For Investors"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

I\u2019ll give the European Union credit: at least they are creative at finding new ways to upset the world\u2019s capital markets.<\/p>\n

Instead of demanding just the usual austerity measures of higher taxes and lower spending\u2014and a potential haircut on speculative creditors such as hedge funds\u2014the EU bailout negotiators insisted over the weekend on extracting a pound of flesh from the customers of Cypriot banks.\u00a0 Savers would see as much as 10% of their checking and savings accounts expropriated to help cover the cost of the bailout, and the levy would apply even to accounts insured by the Cypriot equivalent of the FDIC.<\/p>\n

Ouch.<\/p>\n

Needless to say, the news didn\u2019t go over well in Cyprus; it led to a small-scale bank run as depositors rushed to get to their cash.\u00a0 It also didn\u2019t go over particularly well in Russia.\u00a0 Cyprus is notorious as a haven for Russian funds of\u2026ahem\u2026questionable origins.\u00a0 Roughly a quarter of all Cypriot bank deposits are owned by Russians.<\/p>\n

As I\u2019m writing this, it looked likely that Cyprus\u2019 parliament would shoot down the bailout agreement hammered out between the government and the European Union on the grounds that it wasn\u2019t fair to small local savers who assumed their deposits were protected by government guarantee. (Imagine any democrat or republican approving something like that here; it would be political suicide.)\u00a0 The government is also reluctant to \u201csoak the Russians\u201d out of fear that it will destroy confidence so badly as to end Cyprus\u2019 existence as an offshore financial center.\u00a0 And I can\u2019t say I blame them for not wanting to anger the Russian mafia dons or Russian President Vladimir Putin.\u00a0 That\u2019s not good for your health.<\/p>\n

So what happens now?<\/p>\n

Good question. My best guess is that the deal is slightly tweaked to allow the Cypriot government to save face but that the bailout goes through and the depositors get hit.\u00a0 Politically, German Chancellor Angela Merkel and French President Francois Hollande cannot ask their taxpayers to come to the rescue of dirty Russian money, nor should they.<\/p>\n

If the bailout flops, the options quickly get messy.\u00a0 I don\u2019t see the EU backing down this time and watering down the deal, nor do I see the European Central Bank continuing to provide emergency liquidity.\u00a0 This means that without the bailout, the Cypriot banking system will collapse, and given that the banking system is eight times larger than the economy, there is no way that Cyprus will be able to make its depositors whole.\u00a0 Barring some sort of last-minute emergency loan from Russia (which would presumably come with some pretty wicked strings attached), Cyprus either accepts the EU bailout and goes about its business or it drops the euro, issues a new currency, and then falls into hyperinflationary oblivion.<\/p>\n

What does this mean for the Eurozone?<\/p>\n

The fear was that seizing bank deposits would set a terrible precedent and lead to bank runs in Spain, Italy and other indebted countries and plunge us back into crisis mode.\u00a0 Once bank depositors are seen as a viable target, you create a slippery slope.<\/p>\n

But judging by the market\u2019s reaction, this is a non-event.\u00a0 European stocks took a small hit on the news, though it caused nothing like the turmoil over Greece, Spain and Italy last year.\u00a0 Bond yields in these problem countries spiked up but hardly to levels that would cause alarm.<\/p>\n

There are a couple reasons why the bank run didn\u2019t happen\u2026or at least hasn\u2019t happened yet.\u00a0 To start, Spain and Italy already effectively had bank runs last year.\u00a0 Funds have been leaking out of both since the onset of the crisis, and their respective banking systems have been kept solvent by the ECB.\u00a0 But more basically, it\u2019s an open secret that Cyprus is a haven for dirty money (wink wink), and investors see clear differences between their own banking systems and that of Cyprus.<\/p>\n

There is also the \u201cDraghi Put,\u201d or the belief that ECB President Mario Draghi will live up to his word to do \u201cwhatever it takes\u201d to keep the euro intact.\u00a0 This, more than anything, has been what has stabilized the Eurozone over the past nine months.<\/p>\n

And finally, don\u2019t underestimate the effects of \u201ccrisis fatigue.\u201d\u00a0 After three years of crisis, these sorts of headlines simply don\u2019t have the ability to move the market like they used to.<\/p>\n

Things could still get very ugly very fast in Europe if the feared contagion finally does happen.\u00a0 But for now, it looks as though this too shall pass.<\/p>\n

Cyprus may choose to leave the Eurozone before this is over or may well become a Russian client state; anything is possible at this point.\u00a0 But I don\u2019t see any of these outcomes changing the direction of events.\u00a0 The Eurozone will undergo deeper integration.\u00a0\u00a0 With or without Cyprus, the rest of the Eurozone will sink or swim together.<\/p>\n

This makes things a little awkward for non-Eurozone EU members like the UK, Sweden and Demark.\u00a0 But even as the cumbersome, confusing mess it is, the Eurozone will muddle through.<\/p>\n

How are we to invest in this environment?\u00a0 I would recommend using any sell-offs to accumulate shares of some of Europe\u2019s finest companies.\u00a0 One in particular I like at current prices is Spanish telecom giant Telefonica (NYSE:$<\/span>TEF<\/a>).<\/b>\u00a0 Telefonica is quietly paying down its debts, and I expect the company to reinstate its dividend within the next 1-2 years.\u00a0 In the meantime, it\u2019s an excellent way to get exposure to the growing markets of Latin America, where it gets more than half its revenues.<\/p>\n

SUBSCRIBE\u00a0<\/a><\/strong>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

Disclosures: Sizemore Capital is long TEF.<\/p>\n

The post The Cyprus Crisis and What It Means For Investors<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

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