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Impact Imminent?

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    March 21, 2013

    Zero Hedge has the latest Cyprus update – There is no parliamentary support in Cyprus for any bail-in deal. Tyler Durden begs the question:


    Neither we, nor anyone else, has any idea what comes now.


    The folks at FTAlphaville have some thoughts on the state of play:


    A bank run spreading to Spain looks a non-starter in the short term.


    The risk of any wider bank run looks pretty small so far, with market reaction relatively benign.


    I’ve been following the Press coverage of Cyprus, the talking heads are saying that Cyprus is a manageable issue. Nothing to worry about at all.

    I’m going to disagree with FTA and the TV folks. The chances of a bank run have never been higher. Tyler’s right. We’re looking at a black hole.


    The “Other” scenario for Cyprus is a shell shocker. Forget the shareholders or the senior bond guys – they will end up with Dick’s hat band. Those Russians who were at risk of losing as much as 15% of their deposits – They get zip too. At best, they are getting an IOU. That IOU will have a value of 10 cents on the dollar.

    Those small depositors that were going to get hit for an unfair loss of 6% now face a vacuum. Their bank statements may not reflect a loss of principal, but they won’t be able to withdraw a dime from those accounts. The local banks will remain closed, when they do reopen those deposits will be converted to some new currency. It’s possible that the new currency will be the Turkish Lira.  You thought the poor folks in Cyprus were getting a bad deal on Monday? Wait till Friday before you pass judgement.

    What happens if Cyprus does a “drop out” of the EU? That result immediately makes a lie of Mario Draghi’s words that the Euro was Uber-Ales. This is precisely what Super Mario said “would never happen”.

    If Cyprus goes turtle and leaves the Euro, the credit spreads on peripherals will widen. This sets up a market “call” on the ECB. But remember, for Mario Draghi to give the market the “put” that it will demand, the governments of Spain and Italy will be forced to get down on their knees and beg to the gods in Brussels and Berlin for a helping hand. To do that means that they would have to have very harsh terms imposed on them. An IMF team would run the finances of the countries involved.

    Given that there is zero chance that Italy and Spain will do the necessary begging, the value of the promised Draghi “put” is now also zero.


    There is a chance that something can be done to stop what looks like a slide into an abyss. Those chances are now well below 50-50.  The markets/seers are calling for a soft landing, while at the same time that outcome is looking less and less likely. The markets seem poorly positioned for the events unfolding. And this story is running at hyper-speed. That’s a very bad combo. Seat belts on – Impact Imminent!

    Images: Flickr (licence attribution)

    About The Author – Bruce Krasting

    I worked on Wall Street for twenty five years. This blog is my take on the financial issues of the day. I was an FX trader during the early days of the ‘snake’ and the EMS. Derivatives on currencies were new then. I was part of that. That was with Citi. Later I worked for Drexel and got to understand a bit about balance sheet structure and corporate bonds from Mike Milken. I was involved with a Macro hedge fund later. That worked out all right, but it is not an easy road. There was one tough week and I thought, “Maybe I should do something else for a year or two.” That was fifteen years ago. I love the markets. How they weave together. For twenty five years I woke up thinking, “What am I going to do today to make some money in the market”. I don’t do that any longer. But I miss it.