What's next for Cyprus?

The fate of the tiny island nation, and indeed the future of the eurozone and the 2013 stock market rally, hangs in the balance this weekend.

By Anthony Mirhaydari Mar 22, 2013 1:50PM

Europe copyright CorbisThe situation in Cyprus is moving fast. First, a Plan A to tax deposit holders (mainly Russian wealth held offshore) was rejected by Nicosia because it would undermine the nation's finance-reliant economy. A Plan B to seek Russian assistance failed. A Plan C to raise money by raising the country's pension fund and pledge energy reserves was rejected by eurozone officials.

 

Now, we're on Plan D, which is essentially a more aggressive version of Plan A that would see wealthy Russians lose as much as 50% of their deposit wealth as the eurozone's requirement for depositor contribution (to a €17 billion bailout program) increased to €6.7 billion from €5.8 billion originally.

 

And to kick up the stakes, the European Central Bank has given Cyprus an ultimatum that could very well result in the country being forced to leave the euro. Here's what you need to know.

 

A few points of clarity are emerging as the Cypriot banking system, damaged by a slowing economy and the Greek debt restructuring, teeters on the edge of insolvency.

 

One, the European Central Bank has given the island country until Monday to find an alternative way to raise €5.8 billion toward a €17 billion bailout deal after the Cypriot parliament voted down a deposit levy scheme.

 

Two, Cyprus and the eurozone are preparing capital controls -- something normally seen in failed states -- to prevent bank runs when the country's banks reopen, maybe on Tuesday.

 

Three, Russia seems uninterested in offering further assistance (it already has an assistance loan outstanding to Cyprus), despite the fact most large, uninsured bank deposits in the country are held by Russians seeking the benefits of offshore banking.

 

Four, alternatives offered by leaders in Nicosia, such as nationalizing state pension assets and issuing bonds backed by offshore energy reserves -- aren't being supported by Berlin and Brussels. Moreover, Turkey says it will challenge Cyprus' claims on natural gas reserves if they are pledged as part of a bailout package -- adding another geopolitical element to the story.

 

And finally, the only plan that seems to have the support of eurozone officials will surely draw even stronger ire from the Russians: It would result in large (mostly offshore) depositors suffering losses of as much as 50% -- far beyond the 10% deposit tax that was originally proposed on large account holders.

 

This would happen as a part of a "good bank/bad bank" restructuring that would protect small, domestic depositors, with a deposit tax on top of it.

 

But again, it's unclear whether Cypriot politicians would support this idea, given their steadfast resistance to anything that could damage the country's image as an offshore financial center. Cyprus' economy is heavily dependent on its financial system, not unlike Iceland when it ran into trouble a few years ago.

 

Tensions are high. Protestors are in the streets. And we could very well be on the cusp of the first exit from the eurozone, an event that would shatter the illusion of irreversibility in the currency and immediately turn the market's attention toward possible exits by Greece, Spain, and Italy.

 

Indeed, during a conference call of the Eurogroup Working Group on Thursday, which consists of deputy finance ministers and treasury officials from the 17 eurozone officials, Cyprus decided not to attend. Officials noted that the country's absence was troubling and reflected wider confusion surrounding the situation.

 

 

Of course, the broader point here is that even if Cyprus gets a bailout and stays in the eurozone, much damage has already been done. European leaders have shown an appetite for deposit levies, which will weaken confidence in already vulnerable in places like Greece and Spain. And as Thursday's flash PMI data showed, Europe's new recession is deepening.

 

 

So things will get uglier before they get better, as leading areas like semiconductors, copper futures, and emerging market stocks seem to be warning. As a result, I continue to recommend positions like the ProShares UltraShort Europe (EPV) and a short against Spanish bank Santander (SAN) in my Edge Letter Sample Portfolio.

 

 

Disclosure: Anthony has recommended EPV to his clients.

 

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below. 
 


 

34Comments
Mar 22, 2013 2:26PM
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The smartest thing Cyprus needs to do is go bankrupt.

1. bankruptcy gets rid of the debt.

2. revalues the assets.

3. Gets rid of obsolete ideas and management.

4. Cyprus will have 3 or 4 years of hard times after which they will rebuild their country with new more common sense ideas. They may even change their form of government where it becomes a more direct democracy.

 

Socialism doesn't work, sorry about that.

Mar 22, 2013 2:43PM
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Looks like the writing is on the wall........ this would be a good test to see what would actually happen if a country exits the Eurozone.
Mar 22, 2013 3:34PM
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"Success is the sole earthly judge of right and wrong." -- Adolf Hitler.

 

Germany will accept confiscation of the accounts of old age pensioners and the savings accounts of all depositors in either large or small bills.

 

With friends like Germany why would Cyprus need enemies? The best thing Cyprus can do for itself is default. Declare bankruptcy. Start over. Arrest, prosecute and jail those responsible. Tell the Germans "Thanks" and politely show them, the Eurozone, the Troika, and the ECB the door.

 

Mar 22, 2013 3:47PM
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Others might need to be careful at pointing fingers at Cyprus. What makes others think that the rest of the Western World isn't in the same Boat but have yet to be fully exposed.
Mar 22, 2013 3:27PM
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Cyprus Banks prove without a shadow of a doubt that they are all criminal organizations. Out to rob and steal your hard earned money ! Continue to have faith and belief in your banks and financial institutions ! YOU ARE BEING LED LIKE SHEEP TO SLAUGHTER !
Mar 22, 2013 3:39PM
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Question.....if you were the Russians wouldn't you be pulling your money out NOW ?

By force, if you must ?

 

What would be to their advantage to leave it there ? Surely some other obscure country would love to hide it for them.............

Mar 22, 2013 4:07PM
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The economic central planners at the fed are making one last ditch all out effort to boost the economy by pumping up stock, housing, and commodity prices. In fact I think they are buying stocks. But for example, who's going to build a house with eight foot 2X4s at $3 each, when a few years back they cost $1.50 each. This time when all of their foolish skulduggery fails again, it might be curtains for the whole federal reserve scam.  
Mar 22, 2013 5:47PM
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Cyprus´case just stresses the inadequacy of the euro concept. All these countries need to disassemble the euro, operationally I think they will have to recreate their own currencies and set up an FX system in which an exchange rate vis-a-vis the euro will exist. Then the more troubled countries will be able to adjust their FX rates until the euro gets extinguished. In any case it will be a messy process.
Mar 22, 2013 6:41PM
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I see Cyprus as a very small potato which can cause a leverage of panic.  Default will occur much like Greece.  The banking system and governments in general cannot be trusted, even our own.  Hell even Oblama lies regularly, even Bush lied regularly, Congressmen and Senators pander and chase women, money and screw the Americans whenever possible.  Liberal progressives want Americans disarmed so we become sheeple.  Bernanke says things are brighter, he must be staring at a 100 watt incandescent bulb...his eyes are glazed.  The Federal Reserve will come to the aide of Cyprus, will print some money and flood the Cypriot banking system so they can pay the bond interest with funny US dollars, which by the way are becoming more worthless by the day.  Wall Street is content like a fat pig at the swill trough.

Mar 22, 2013 5:05PM
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We should keep in Mind...That much of the "so called" Money (large sums) are from Russians and maybe others ??....That is being held and hidden in  "tax shelter accounts"....Some of this money is from "illegal sources" in Russia along with the Russian Aristocracy, "avoiding taxes.."

 

Now who really has the "leverage" if the Russian Gov't says they will protect the Cypriots..?

Probably information, that the taxing goverment...Would love to have...

Mar 22, 2013 4:48PM
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Maybe there are some who think Bankruptcy, Is the Answer All to End All ??
Mar 22, 2013 5:14PM
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Nice way to close the week....Manipulators left pretty unhappy today, oh well....Lets get ready for the last week of the quarter, it will not be easy, better believe it...Scumbags will never ever give up...Have a great weekend all.
Mar 22, 2013 6:44PM
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Good thing some of these posts are for default on debt to me it doesn't matter. But your USA will be there in a couple years and pensions bailouts social security Medicaid and food stamp programs will be bankrupt. It's a planned reset and lead to mass social unrest(crisis) and the tight Marshal law(answer). But in the mean time they will bury the system into insolvency. Probably there now 200 trillion in debt and unfunded liability you could tax people and corporations 100% and not pay it off.
Mar 22, 2013 3:16PM
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Haven't we heard this before from this guy? Someday he will be right, when I do not know, but someday. Keep shorting the market Anthony and perhaps when it does go down, once and for all, you may actually recover some of the 10%-20% you have lost as the market has charged forward over the last several months. Remember, the trend is your friend. MSN really needs to kick you to the curb.

Mar 22, 2013 5:53PM
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Obviously people didn't see my post from two days ago on Anthony's article "Why we should fear Cypress".

 

Question is - Why do you listen to this doom and gloom drivel.

 

If I listened to all this crap I'd be broke and hiding under a rock!

 

I'll still make comments relative to Anthony's subject matter, but God forbid I take any of it to heart.

 

God Bless America!!!

Mar 22, 2013 6:13PM
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I peeked outta my box from under the bridge....It looked cold, thought I saw some snow or ice.?

Rocks are "hard" to hide under.. 

 

But I've still got my Laptop and am trading penny stocks.....wooooohoooo !!

 

Off to the soup kitchen....

 

 

Mar 22, 2013 3:10PM
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Thanks, Anthony, for all the money you have made me. You con the beef-witted lemmings that follow you into shorting and then I take their money when they have to cover. How awesome is that? We are quite a team, you and I.
Mar 22, 2013 6:03PM
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The Dow is up 78% since Obama took office.Thank me I voted for the man.
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