Is Cyprus the subprime of the euro crisis?
Experts say Cyprus banking crisis won't hurt U.S. banks. Sure. Right.
Cyprus is not one of the so-called PIIGS -- Portugal, Italy, Ireland, Greece and Spain -- that the world worried about during the start of the European debt crisis. The tiny island nation was too small to be considered an issue. However, I say that Cyprus can become the straw that breaks the camel's back.
Overnight we learned the European Union. with possible help from the International Monetary Fund might provide the $13 billion (10 billion euros) in financing that's needed to shore up the Cypriot banking system. To get the money Cyprus has to raise $7.51 billion (5.8 billion euros).As I sort through the news stories on this subject it appears the EU is encouraging Cyprus to set up a Good Bank/Bad Bank solution, to raise the cash needed. The process will eventually fold Laiki Bank the island's second largest, into the Bank of Cyprus, the largest. While doing this, deposits of 100,000 euros and smaller will be guaranteed by the EU. Then, the uninsured deposits above 100,000 euros would become part of the source of the 5.8 billion euros -- with a haircut reported to be 30%, maybe 40%.
According to Reuters, Cypriot banks hold $87.57 billion (68 billion euros) in deposits and nearly $49 billion (38 billion euros) are in accounts in excess of $128,780 (100,000 euros).
To me, the overnight positive reaction in the global stock markets is quite surprising, given the hit depositors in Cyprus will take. Could similar Good Bank/Bad Bank ideas spread to other countries? Is this type of crisis similar to the subprime situation in the U.S. that eventually froze our banking system?
Fed Chief Bernanke chimed in on Cyprus issue recently, saying that Cyprus poses "no major risk" to U.S. banks or the economy. Change the word Cyprus to subprime and isn't that's what Bernanke said in 2007?
In my opinion there could be significant fallout around the world, as citizens in every country will worry that the seizure of assets might be "necessary" before the "great credit crunch" comes to an end.
According to the FDIC Quarterly Banking Profile for the 2012 fourth quarter, there are $7.1 trillion in insured deposits in the U.S. banking system, versus a total of $9.4 trillion in total domestic deposits. If the U.S. Treasury decided to seize 40% of the $2.3 trillion excess they would raise $920 billion. My advice: make sure you have less than $250,000 in any one bank, just in case.
I see the "Cyprus solution" as putting concrete in the can that keeps getting kicked down the road. Even a minor run on the banks could make a can full of concrete impossible to kick.
I still worry about exposures to notional amounts of derivatives, which ended 2012 at $224.1 trillion, down 2.3% sequentially as shown in the FDIC Quarterly Banking Profile. Exposure to derivatives is up 34.9% since the end of 2007.
So, is there a "London Whale" lurking off the coast of Cyprus?
We will soon observe how Cypriots react to this bailout in the streets of Nicosia. If you take c-y-p off the word, you'll see what that spells!
On March 11, I wrote Downgrading Two of Four 'Too Big to Fail' Banks -- and I bet these huge money center banks have their tentacles in the Cypriot banking system. Today only Citigroup remains buy-rated, with the other three rated hold.
Bank of America (BAC) ($12.56): Has a hold rating and traded to a multi-year high of $12.94 on March 19. The stock has a fair value at $13.12 and one-year price target at $12.85, which indicates limited upside. My semiannual value level is $9.01 with monthly and weekly pivots at $11.54 and $12.39 and annual risky level at $17.07.
Citigroup (C) ($45.23): Has a buy rating and traded to a multi-year high of $47.92 on March 11. The stock has a fair value at $65.17 and one-year price target at $48.25. My annual value level is $33.19 with monthly and weekly pivots at $45.30 and $45.72 and quarterly risky level at $56.11.
JP Morgan Chase (JPM) ($48.78): Has a hold rating and traded to a multi-year high of $51 on March 14. This lofty level put JPM back to levels not seen since setting a high of $53.25 pre-crisis in May 2007. The stock well is above its fair value at $42.33 and tested its one-year price target at $50.52. My annual value levels are $44.04 and $42.87 with semiannual and monthly pivots at $46.84 and $49.88 and weekly risky level at $50.83.
Wells Fargo (WFC) ($37.20): Has a hold rating and traded to a multi-year high of $38.20 on March 15. The stock is well above its fair value at $34.03 and nearly tested its one-year price target at $38.48. My annual value levels are $34.17 and $32.82 with monthly and weekly pivots at $35.06 and $37.19.
At the time of publication the author held no positions in any of the stocks mentioned.
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A southern California restaurant chain, Farmer Boys, was founded decades ago by five Cypriot immigrants who became citizens who used their farming upbringing on the island to a great use. Good breakfast, lunch and dinner specials....like Panera Bread, it's a pay at the counter deal, which is what Red Lobster and others may convert to.
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