International Forecaster Weekly

The Latest Hairbrained Scheme of Eurocrats

Cyprus about to sink, no vote yet on the Cyprus levy deal, failures have sparked protests against any deal, Europeans rushing back to gold, threats on senior bond holders, bank debt is getting more expensive to insure.

James Corbett | March 20, 2013

Shhh. Do you hear that? If you listen carefully, you can hear the sounds of worried Eurocrats trying to back away from their latest harebrained scheme. Or at least re-wrap it in a different box.

            As of press time, there has still been no vote on the Cyprus bank levy deal, but it's looking more and more certain that it is not going to pass in the form that it was presented to the world last weekend. The original deal would have seen deposits over 100,00 Euros “taxed” (to use the polite word for robbed) at 9.9% and under 100,000 Euros at 6.75%. Either the Eurocrats, IMF, and Cypriot government never considered the knock-on effect that a confiscation of funds from the Eurozone “guaranteed” 100,000 Euro deposits would have on the entire continent's banking sector, or this is part of a testing of the waters to see how far the public can be made to go along with it. If it's the latter, they seem to have failed miserably judging from the vociferous Cypriot protests against the deal and the Merkel effigies that are being lampooned at the marches taking place on the island last weekend.

            The immediate effect of this on the markets was to reverse the trends we'd been seeing in treasuries and gold. For weeks now we'd seen gold testing a lower trading band, but news of the great EU bank robbery and the potential for greater instability in the Eurozone had investors rushing back to the shiny metal to anchor their holdings during this particular storm. Gold shot back up over $1600 on Monday and as of press time was flirting with the $1615 mark. Treasuries, meanwhile, all gained as well as the so-called great rotation that they're itching to get going from bonds into stocks looks delayed a while longer. 10-year notes were down 4 basis points in morning trading on Tuesday, while the 30-year was down 2 basis points and the five-year was down 1 basis point.

            Another “unforeseen” (really?) consequence of this unprecedented proposal is to scare the daylights out of senior bank bondholders. Now they're worried that they're going to be forced to take a haircut the next time a faltering Eurozone economy needs a bailout. As a result, credit default swaps overing senior band debt jumped Monday, with the Markit iTraxx Financial Index registering a 19 basis point gain to end up at 162. In other words, bank debt is getting more expensive to insure, giving further disincentives for investors to take it on board.

            In non-Euro news, a spate of strong economic data from the US including ISM manufacturing data that shows the strongest manufacturing numbers in almost two years has put even more wind in the sails of the equity bulls. Goldman and Stanley have both raised their forecasts for the S&P 500 this year, with the former raising their target benchmark for 2013 to 1625 and the latter pegging 1600. Meanwhile the Federal Open Market Committee is wrapping up a two-day meeting today, but the only possible effect they could have is to signal a change in commitment on easing, and it would be more likely that pigs would begin to fly than for that to happen this week.