Cyprus Averts Default
Last Updated: 03/24/2013 - The turmoil in Cyprus seems to have reached temporary relief (at least for the time being) with the EU finance ministers, ECB and IMF reaching an accord today with the Cypriot government and agreeing to provide the €10 billion loans to save the country from default. The second largest bank in Cyprus (Cyprus Popular Bank, or Laiki) is going to be shut down with the fate of accounts with deposits over €100,000 unknown.Deposits over €100,000 are not insured, similar to $250,000 limit by FDIC in US. Hence these account holders are going to take a big 'haircut', most of which are probably of Russian corporations and personnel.
Also interesting is the concept of the 'good' bank and the 'bad' bank setup similar to what happened with Citigroup with the creation of Citi Holdings just after US financial crisis in 2008 - 2009 and as we know Citi Holdings is still getting hit on those bad mortgage loans.
After Cyprus, Who's next to shake the Global Markets
Last Updated: 03/28/2013 - We have been able to avoid a sovereign default and a messy exit from the EU by the tiny Cyprus, but attention is shifting towards who's next in the EU to go through similar phase and bring down the global markets down to its knees.Global equity markets have shrugged off latest financial turmoil in the EU due to Cyprus but any financial instability at any of the bigger EU countries like Italy or Spain can bring those memories of summer of 2011 and 2012 back, in the blink of an eye.
S&P 500 closed on 03/28/2013 at 1569.19 with a YTD and Q1 2013 gain of a fantastic 10%, its highest closing since October 9, 2007. Dow followed closely with a gain of ~11.3% YTD and Q1 2013. The question now is what's next for the major indices, which have seen one of the most 'hated' rallies, with hardly any major pullbacks. Investors should keep a close eye at EU, since around similar time last couple of years we have seen huge pullbacks driven by incidents out of EU. Although the major sell side houses have been calling for above 1600 year end closing for the S&P 500, I think we are going lower before we go higher from here.
On the EU front there are lot of things boiling currently in Greece, Italy, Cyprus and elsewhere. One EU country's name which has come up and seems financially weak is Slovenia whose borrowing rates crossed 7%, similar levels which prompted ECB to take 'whatever action necessary' promise for Greece, Spain and Italy last year. CDS spread for Slovenia jumped up 123 bps to 405 bps according to Markit data. Slovenia has bond maturing in early June and it will be very interesting to see how it plays out. Slovenia's bank assets are around 135% of GDP compared to around 800% for Cyprus. For now all eyes should be focus on EU and on North Korea to see how development there affects the global equity markets which so far this year has withstood all financial turmoil.
