Will be Cyprus Rubicon moment?

cyprusI think that the Cyprus situation was a dominant one during the last week. I do not want to bother you with the same information you already read somewhere else and which are not probably accurate because the situation is changing every minute. I would like just to make some small comments. First, Cyprus has a small economy and the rescue package is something about € 16 billion, approximately € 3 billion less than the last year loss of the Bankia – Spanish bank. It is nothing compare to Italy, Spain or another problematic countries. The fact is that investors do not trust small countries in trouble but still believe bigger players. But be aware of another fact. The situation is very same and sometimes even worse in these bigger players’ homelands. Second, Cyprus shows us the real political game; let´s look at the Russians interests (gas, Cyprus as a Russian bank, potential military port), European interests (unity of the Eurozone, Germans election or Britain’s interests) and consider the news that Cyprian politicians withdraw 4.5 billion of their money from the country once they knew about the taxing of deposits. The only sad moment of this game is that politicians play not with cards but with fate of real people. Third Cyprus was considered as a problem just only partially. Do you remember a few months ago as German Finance Minister Schaube declared probably because of the German elections that there is no systematic threat concerning Cyprus? We have to say that ECB and the Commission representatives have different and more accurate opinions. They were aware very well of the fact how the system works. If any part of the chain breaks it could hurt all other parts. The proposal to tax banks deposits is the moment when the chain could crash. People could realize now that their money could not be safe in banks accounts anymore. And these questions are coming. Just as an example the American Banking Association reminded Americans that there is absolutely nothing to worry about when it comes to the sanctity of US deposits which are backed by the $25 billion in the FDIC insurance fund. Put it into the perspective looks like this:

2_rescue fund exposition

And from this point of view as David Franklin said Cyprus could be a Rubicon Moment. If people lose their confidence in the banking sector it is the beginning of the end. Bank runs could break the whole fractional banking system or we could face a hyperinflation. Cyprus could be the beginning. Why? Not because of itself. Because we are facing bigger problems than Cyprus.

One of them is China. Moody’s said last week that China’s local-governments are facing greater risk of default, as regulators warn 20 percent of their loans are risky. And it is nothing non remarkable. The local governments owe approximately 9.1 trillion to 14.5 trillion Yuan, or 18 to 30 percent of China’s gross domestic product, according to a BNP Paribas SA report published in January.

Governor Kuroda – Bank of Japan is prepared to do anything to end two decades of stagnation. “The BoJ must expand monetary stimulus both in terms of volume of assets it buys and type of assets it targets, and push down yields across the curve,” he said. Japan gross debt will reach 245 % of GDP according to the IMF this year and it seems to me than they plan to erase it by inflation.

Britain is closer to losing its triple “A” credit rating at Fitch Ratings. The reasons behind are rising debt and weak performance of U.K. growth due to the fact of the EU slowdown. This could cause the downgrade of the rating by the end of April.

The radars of mainstream media are not focused on problems in US right now but it is worth to mention that the monetary committee of the FED will continue with its support of economic recovery and decided to continue purchasing mortgage-backed securities and longer-term Treasuries at a pace of $ 85 billion per month. Only one member of the committee was against the action because she was afraid of something like long term inflation – the term which nobody understands or doesn´t want to understand. Ok. Simply given; the FED will continue to print. Chairman Bernanke also speculated about his future which need not be connected with the FED and that he is not the only person who can manage the exit of $ 3 trillion FED´s balance sheet. Does it mean that he will quit the office? Who cares? What really matters is not who but how the FED will manage its balance sheet in the future and if the US dollar keeps its confidence as the global currency. That is the question.

Matúš Pošvanc

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