The Cyprus Disaster Zone Reopens

After having been sent on an involuntary two week long 'holiday', the stock market in Cyprus reopened on Tuesday. We were surprised to read that it actually declined less than 3% on that occasion, although shares in Hellenic Bank apparently tanked by 20%. Shares of Popular Bank and Bank of Cyprus remained suspended, so traders didn't have an opportunity to learn whether the strong technical support at zero would hold. Below is a rather terse statement on the market's reopening which seems to indicate that nothing special has happened. In fact, there is apparently so little to talk about in connection with the stock market, that it repeats that Cyprus has now been 'rescued', whatever that is supposed to mean these days:

“Cyprus General Index traded 2.4% lower at 99.67 on Tuesday, on its first trading day after trading was suspended for two weeks, as lawmakers negotiated bailout terms for the country. Trading in shares of Cyprus Popular Bank PCL and Bank of Cyprus PCL remained suspended amid measures to consolidate the two banks. Cypriot lawmakers agreed last week on a 10 billion euro ($12.9 billion) rescue package with international creditors, including a haircut on large bank deposits. Officials from Cyprus are expected to finalize the bailout conditions this week, with government spokesman Christos Stylianides expressing that he wants to negotiate easier terms, according to The Wall Street Journal. The international lenders have already softened the terms by giving the nation an extra year to meet budget targets, the newspaper said, citing a draft copy of the loan agreement.”


Well, if the market is down less than 3%, things are perhaps not as bad as advertised, right?

It struck us however that the General Index trades at only 99 points these days. Wasn't that index at a much higher level when last we looked? And so we looked again and this is what we found:








Cyprus general index

Meet the Cyprus General Index, or rather, what's left of it, via BigCharts – click for better resolution.


Now, that is actually what we would have expected the stock market index of the Roman Empire to have looked like shortly before the onset of the Dark Ages, if there had been a stock market back then.

In fact, it looks like the biggest stock market collapse in all of history as measured by an index. Our abacus confirms that the decline since the 2007 high now amounts to – hold on to your hat – 98.2%. Or putting it differently, anyone who bought the top has 1.8 euros left of every 100 euros he put in (provided he bought a 'well diversified' portfolio not overly concentrated in the biggest losers). And if he recently sold, then potentially 60% of that just got destroyed in a depositor haircut, so a possible worst case scenario is that he has now only 72 cents left.


Iceland Without the Fish

What can one say to that? What, short of an asteroid strike or a communist takeover could possibly happen to a country to make its stock market plunge by a historic 98.2%? Well, in this case, the EU evidently 'happened' to it. Shouldn't Cypriot politicians have thought twice before they agreed to the  recent bailout deal? Why not simply tell the euro-group to go to hell? In what way could that possibly have made things any worse?

Cyprus already suffers from depression conditions (obviously). These will now indeed get worse and with its reputation as an offshore financial center and tax haven in tatters, it really is, as Andrew Stuttaford once called the post Labor ruin of the UK, not much more than “Iceland without the fish”.

And without the geothermal power, we might add. There is also little chance of a tourism revival, as the euro has left prices in Cyprus at decidedly tourism-unfriendly levels and a currency adjustment is out of the question. No-one in his right mind wouldn't simply go to Turkey instead.

Some Cypriot politicians apparently have had it, not least because they have become subject to post 'haircut'/bailout investigations. The president still holds on by his fingernails; his family is rumored to have fled Cypriot banks prior to the 'haircut'. However, he has just lost his finance minister, the man who shuttled between Moscow and Brussels in recent weeks in a frantic search for a  palatable solution. At least he loosened capital controls as one of his final acts while in office.

“Cypriot Finance Minister Michael Sarris quit amid a probe into the island nation’s economic crisis, leaving the government eight days after helping it clinch an international bailout to stave off financial collapse.

Sarris told reporters in Nicosia today he was resigning because a government committee had been set up to investigate the country’s woes, including his time as chairman of Cyprus Popular Bank Pcl last year.”


Sarris said capital controls, adopted to avert a bank run after Cyprus agreed to impose the losses on deposits, should be lifted gradually to avoid destabilizing lenders. Cyprus eased capital controls on some transactions today, according to an e-mailed copy of the third amendment to a decree issued on March 29 by the Finance Ministry. The decree, which will apply for two days, allows financial transactions of up to 25,000 euros a day to be carried out without regulatory approval, compared with 5,000 euros previously, and payments of up to 9,000 euros a month to be made by check. The EU said it will continue to monitor the controls.”


(emphasis added)

As to the depositors fleeing from Cypriot banks in the days leading up to the haircut, we would note that it is not the case that they necessarily must have profited from 'insider information' as is apparently widely alleged. They may simply have followed the news and and guessed the likely outcome of the negotiations correctly. Here is an excerpt from a recent article in Der Spiegel:

“The "war of the lists," as it is been labeled by local media, is raging. The new list published by Cypriot and Greek news media includes 132 names of companies and individuals who withdrew a total of €700 million in the days before the bank lock-down. The list contains names of shipping and energy companies, legal practices and even state-run companies.

The transfers were all made in the first half of March, just in the crucial period before the March 15 Euro Group crisis meeting on Cyprus. The online edition of Greece's top-selling Sunday newspaper Proto Themaargues that "there are legitimate suspicions that some people had insider information about the decisions eventually reached by the euro zone."

One of the companies on the list belongs to relatives of Cypriot President Nicos Anastasiades. The company is said to have transferred millions of euros out of Cyprus to a bank account in London.”


(emphasis added)

Naturally, the president's relatives make for good suspects in this case. However, we would reiterate that many depositors may simply have come to the correct conclusions and decided to rather be safe than sorry. This is unfortunate for the remaining depositors, whose burden will increase commensurately, but everyone is free to be the one who panics first. In a fractionally reserved banking system, there are occasions when being the first to panic can be decidedly advantageous.

Below are a few Cyprus related data which we lifted from 'Der Spiegel'. Note here that many of the economic projections on which the bailout is based are probably completely useless, as many people will eventually simply emigrate from Cyprus rather than become permanent wards of a bankrupt state as the depression unfolds.



Cyprus data

The pre-bailout data of the country's public debt, financing needs and its banks' deposit base, via Der Spiegel – click for better resolution.




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