Cyprus Applies for Bailout
It was already known last week that Cyprus would need a bailout as well and it has now officially become the fifth nation to apply for one. Once again a bank needs to be saved. Somehow, Fitch appears to have gotten wind of this as well, as it once again proved how timely and swiftly it can react to new developments on the credit front by downgrading Cyprus about five minutes before its bailout application was delivered in Brussels. Holders of Cypriot bonds be forewarned! Something might not be right down there!
„The Cypriot government has issued a statement confirming that it has officially made an EU bailout bid, citing heavy exposure to debt-stricken Greece. This makes it the fifth state within the currency union to ask for help.
The request comes just days before a deadline to recapitalize one of the country’s largest banks.
“The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spillover effects through its financial sector, due to its large exposure in the Greek economy,” the government's statement said.
Government spokesman Stefanos Stefanou wouldn't reveal how much Cyprus would ask for, saying the amount is subject to negotiations. The 27 EU leaders are meeting in Brussels on Thursday and Friday, where the subject will be discussed.
Analysts estimate the sum is likely be around €5 billion ($6.2 billion), but could be as high as €10 billion ($12.5 billion). It is a fraction of the bailouts given to other EU countries, with the latest sufferer Spain asking for as much as €100 billion ($125 billion) for its banks.
Earlier, US ratings agency Fitch downgraded Cyprus to "junk" status. The move was prompted by the amount of rescue money that would be needed to bail out its Greece-exposed banks. The ratings agency estimated that the country will need another €4 billion to recapitalize its banking sector.
What would bondholders ever do without Fitch?
Credit Market Charts Update – Is Slovenia the Next Bailout Candidate?
Below is our customary update of credit market charts, including the usual suspects: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different price scales in mind when assessing 4-in-1 charts). Where necessary we have provided a legend for the color coding below the charts. Prices are as of Monday's close.
Not surprisingly, CDS spreads and bond yields in the euro area and neighboring countries edged higher again on Monday. CDS on Greece reached a new post-PSI high of 12,145 basis points. The next default and/or bailout seems all but certain. Slovenia is meanwhile already waiting in the wings as the euro area's likely bailout candidate number six.
„Slovenia is seeking private investors to boost capital at its banks, including Nova Ljubljanska Banka d.d., and hopes to avoid turning to international lenders for a “last resort” bailout, Finance Minister Janez Sustersic said.
“We are working to avoid a bailout for Slovenian banks as this would be a bad signal at the moment — it’s a solution of last resort,” Sustersic told reporters in Luxembourg today on the side lines of the meeting of euro region finance ministers. “If possible — and I think it is possible — we would get private investors for that, partially now and the rest by the end of the year so that such aid won’t be necessary.”
Nova Ljubljanska Banka d.d., Slovenia’s biggest financial services company, needs 500 million euros ($627 million) to improve its capital ratio by the end of the month and would need “much more” cash to start lending to companies and support economic growth, Sustersic said earlier this month.“
At least that sounds comparatively cheap.
5 year CDS on Portugal, Italy, Greece and Spain – click chart for better resolution.
5 year CDS on France, Belgium, Ireland and Japan – click chart for better resolution.
5 year CDS on Bulgaria, Croatia, Hungary and Austria -Croatia, a casus corbis? – click chart for better resolution.
5 year CDS on Latvia, Lithuania, Slovenia and Slovakia; Slovenia is also battling with a less than solid banking system. Luckily the bailout application is regarded as a 'last resort' – click chart for better resolution.
5 year CDS on Romania, Poland, the Ukraine and Estonia – note that Estonia enjoys the second lowest sovereign CDS spread of the entire euro area right after Germany – click chart for better resolution.
5 year CDS on Germany (white) , the US (orange) and the Markit SovX index of CDS on 19 Western European sovereigns (yellow) – click chart for better resolution.
5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey – click chart for better resolution.
Three month, one year, three year and five year euro basis swaps – heading in the wrong direction again – click chart for better resolution.
Our proprietary unweighted index of 5 year CDS on the senior debt of eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – white line, compared to 5 year CDS on major US banks (Morgan Stanley – red line, Goldman Sachs – orange line, Citigroup – green line) as well as Credit Suisse – yellow line – click chart for better resolution.
10 year government bond yields of Italy, Greece, Portugal and Spain – the yields of the usual suspects are heading higher again – click chart for better resolution.
Austria's 10 year note yield (green), UK gilts yield (yellow), Ireland's 9 year note yield (white) and the price of the Greek 2 year note (orange line – prior to the PSI deal break this showed the yield) – click chart for better resolution.
5 year CDS on Australia's 'Big Four' banks, long term. This looks suspiciously like a continuation formation – click chart for better resolution.
Lastly, a chart we pinched from the Short Side of Long, that compares the Philly Fed index to the US stock market. As can be seen, negative divergences between the two tend to bode ill for stocks – click chart for better resolution.
Addendum: Finally, Some Good News from South America
After nationalizations in Argentina, the imposition of unreasonable mining taxes in Ecuador and growing resource nationalism in Bolivia and strikes in Chile, there is finally a piece of good news emanating from South America: Bolivia legalizes the growing of pot, and thereby pushes a knife deep into the senseless and brutal drug war's black heart. (link: http://www.reuters.com/article/2012/06/24/us-uruguay-marijuana-idUSBRE85N0HN20120624 )
"The leftist government announced plans last week to legalize the marijuana market as part of a drive to stop rising crime, arguing that the drug is less harmful than the black market where it currently trades.
The use of cannabis and other drugs is already legal in Uruguay, one of Latin America's safest countries and a trailblazer on liberal lawmaking. The reform being sent to Congress would legalize and regulate its sale and production.
Meeting the smoking needs of the nation of 3.3 million people will require annual production of about 29.8 tons, the government estimates, and the drug will be cultivated in a plantation of roughly 100 hectares (247 acres).
It is not yet clear whether the drug would be grown by the state or by private contractors under license.
Planting should begin in September if the law passes Congress swiftly as expected – despite some opposition from rightist lawmakers, a government source said. Harvesting would start six months later, said Julio Calzada, secretary general of the National Drugs Board.
"By regulating the marijuana market in the way we're proposing, we're going to undermine the development of trafficking of other drugs," Calzada told Reuters on Saturday.
Calzada said cannabis would carry a sales tax, the proceeds of which would fund rehabilitation programs for addicts. State-grown marijuana could also be used for medical purposes.
Pro-legalization groups welcomed the proposal by the government of President Jose Mujica, a former guerrilla fighter, but they are calling for it to allow personal cultivation too.
"As far as we're concerned, legalizing marijuana is an attack on the drugs trade, which is sustained by the policy of prohibition," said Martin Collazo from the Prolegal group.
And it's actually a leftist government doing that! Wonders will never cease. Of course the Great Commissar up North was none too pleased:
"U.S. President Barack Obama made clear to Latin American leaders at the Summit of the Americas in Cartagena in April that he opposes the legalization of drugs."
Tough titties, as they say. Some of them evidently weren't listening.
Addendum: Hinde Capital's 'Eyes Wide Shut', Part Two
Here is Hinde Capital's 'Eyes Wide Shut' report on the UK economy, part 2 for download (pdf)
Part One can be downloaded here.
Charts by: Bloomberg, The Short Side of Long
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