Thursday, March 21, 2013

More of the usual Eurocrisis drama

So the Cypriot parliament has rejected the terms of the Troika's rescue deal. Their finance minister is in Moscow and there were stories floating about that the quid pro quo for a Russian rescue of Cyprus would be a Russian naval base (via Business Insider). Should the EU and NATO be concerned?

I don't think so. The Russians had a chance to expand their geopolitical footprint in November but they passed. Here is what I wrote back then (see Europe dodges another bullet (Not the Catalan election)) [emphasis added]:

The wild card that I had been watching for is for Greece to turn to Russia instead of the Troika for financing. What if the Greeks got tired of the pain and turned to Putin for relief? Moscow has long had a historical desires for the warm waters of the Mediterranean for centuries. A financing deal could have shook up NATO and significantly shifted the geopolitical balance in the Eastern Med.

The test case was Cyprus. Russian nationals have a large presence on that island. As its banks got into trouble because they were stuffed full of Greek debt, the Cyprus economy was in peril. As the New York Times reported in June:

The Russian government last year gave Cyprus a three-year loan of 2.5 billion euros, or $3.1 billion at the current exchange rate, at a below-market rate of 4.5 percent to help it service its debt. Cyprus now needs at least 1.8 billion euros, or $2.3 billion, by the end of this month to buttress its ailing banking sector.
Instead of turning to the EU, they turned to Russia [emphasis added]:

Now many on this tiny island nation, whose banks and government are facing economic insolvency, are hoping for financial salvation from Russia rather than Germany and the European Union.

“I would much rather be saved by Moscow,” said Elena Tsolia, 30, an attendant at the department store Debenhams, where Russian shoppers snap up bottles of Dior and Chanel perfume. “We are a small island and we don’t want to be owned by Germany.”
I speculated that Russia could have not only rescued Cyprus, but Greece in return for naval basing rights:

Cyprus would have been the test case of Russia flexing its financial and geopolitical muscle in the Eastern Med.

Today Nicosia, tomorrow Athens? Can you say "Russian Black Sea fleet base in Athens, or Crete"?
So what happened? Cyprus turned back to the Troika instead of Moscow:

A little noticed announcement came across my desk. The headline was CYPRUS Government - Troika reach agreement:

The Government of the Republic of Cyprus informed on the 25th of June 2012 the appropriate European Authorities of its decision to submit to euro area Member States a request of financial assistance from the EFSF/ESM.
Any talk of a rescue from Moscow is likely just that - talk. The Russians demonstrated their lack of interest in November when they had the chance.

Cypriot crisis tripwires
Here is what I am watching for as signs that the markets believe that the Cyprus crisis is getting out of hand. The chart below shows the relative return of the ETF of Greek stocks (GREK) against large cap eurozone stocks (FEZ). The GREK/FEZ ratio has declined and it is testing a relative support zone. Should it break support, then it's time to get more cautious.

I use this ratio for two reasons. Cypriot banks are highly exposed to Greek debt. As well, the Greek stock market is the high beta "canary in the coalmine" of risk in the eurozone.

Looking at a similar ratio of the Athens Index to the Euro STOXX 50, it gives me further comfort that the market isn't overly concerned about the Cyprus situation. This ratio isn't even testing the relative support level yet:

So take a deep breath and relax. The headlines represent the usual European negotiation drama in a crisis, with one or both sides leaking stories of catastrophe should there be no agreement.

On the other hand, the message from the markets is that this crisis will be resolve in a relatively benign manner. Listen to the markets. Calm down.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


Anonymous said...

I am hoping the markets will crash, actually, as I'm short the US and EU indexes and that was before the Cyprus fiasco.
I would bet (or rather I am betting) - we'll know soon - that billions are disappearing from PIIGS savings accounts as Cyprus is being "rescued".

The recovering price of gold is showing how calm (or not) investors are.
Today's pathetic manufacturing numbers ("unexpected", of course) out of Germany are just one of many indicators tha how fake and bloated stock prices are.

SBTrades said...

Why can't Cyprus get in bed with the Turksih and take the Lira. Eventually Turkey will enter the EU, but until then they get to have a strong currency, and can swap all thier lowly Euro's for Lira and a strong partner.

I guess that would never work as long as the greeks control the place.

Humble Student of the Markets said...

SBTrades - Notwithstanding the geopolitical element that you pointed out yourself, if Cyprus were to exit the euro, its days as an offshore banking center would be over. People go there because Cyrpus banks in euros.