Sunday, November 25, 2012

Europe dodges another bullet (Not the Catalan election)

I have written in the past about how tail risk is diminishing in the eurozone. Another recent event occurred which further racheted down the probability of another black swan event.

No, it wasn't the results of the Catalan election, where the ruling secessionist CiU underperformed expectations that it would get between 60 and 64 seats (via FT Alphaville). Instead, it appears to have won a measly 50 seats, with the left wing separatist ERC in second place with 21 seats. Together they could form a majority that could call for a referendum. However, Masa Serdarevic of FT Alphaville noted:
It’s also important to notice that the independent parties together are instead expected to obtain a clear majority. United, they could thus still approve a motion calling a referendum on independence. It would however be a completely unusual coalition centred on the conservative CiU and the leftist ERC.

The Russian Black Sea Fleet in Athens?
No, 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.”
It didn't hurt that Noble Energy announced a large gas field discovery in Cyprus waters [emphasis added]:
Noble Energy Inc. said a field off the coast of Cyprus may hold as much as 8 trillion cubic feet of natural gas, the first discovery off the divided island nation.

Results from the Cyprus A-1 well indicate from 5 to 8 trillion cubic feet of gas, with a gross mean of 7 trillion cubic feet, Houston-based Noble Energy said today in a statement. The field covers about 40 square miles (100 square kilometers) and requires additional appraisal drilling before development, the company said.

The gas discovery in the exclusive economic zone of our country creates great prospects for Cyprus and its people, which we shall seriously, prudently and collectively exploit to serve public interest,” Cypriot President Demetris Christofias said at a press conference in Nicosia today. “Cyprus is coming into Europe’s energy map with prospects of substantially contributing to the EU’s energy security.”
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"?

On Friday, 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.

This agreement has closed the door to a Russian financial rescue of Athens - and the ultimate black swan event of 2013. Tail risk in Europe just fell some more.

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.

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