Cypress Exposes Cracks in Eurozone

by John M. Curtis
(310) 204-8700

Copyright March 19, 2013
All Rights Reserved.                                         

        Showing a closely connected world financial system, cash flow problems in the  Eurozone’s Mediterranean Island of Cypress rattled Wall Street today.  While Cyprus’ economy—attached at the hip to the Eurozone—has little connection to the U.S., it raises anxiety on Wall Street just recalling the 2008 financial collapse the brought down the venerable 158-year-old brand-name trading house, Lehman Brothers.  Lehman’s Sept 15, 2008 bankruptcy caused a run-on-the-bank, eventually spreading to most major financial institution in the U.S. and Europe.  When the dust settled in 2009, Ohmaha-based Wall Street Wizard Warren Buffett’s favorite bank stock—Wells Fargo—had dipped to around $8 a share.  Worried about the “contagion” effect from Europe, Walls Street got defensive and sold off, fearing that the same problems in Cyprus could once again roll up on American shores.

          What bothered Wall Street was not that Cyprus banks ran out of cash but that the Frankfurt-based European Central Bank would insist on depositors footing the bill.  German Chancellor Angel Merkel and her Finance Minister Wolfgang Schäuble insisted that Cypress depositors would have to pay a premium for the bailouts.  Markets were also rattled by U.S. banking regulators saying they were misled by JPMorgan when it came to the extensive of losses from its London trading desk known as the “Blue Whale.”  Based on a 300-page Senate report indicated that regulators “were incomplete, contained numerous inaccuracies, and misinformed investors, regulators [and investors] and the public,” said Sen. Carl Levin (D-Mich.), regarding losses at JPMorgan’s London trading office.  Taken together with new problems in the Cypruis, Wall Street sold-off, fearing a financial crisis could cross the Atlantic.

          Cypriot finance ministers met to help revise a plan demanded that depositors pay the ECB a 6%-10% bailout penalty.  Cyprus’ parliament votes tomorrow on the EU plan to charge a fee to depositors for getting an ECB financial rescue.  “There are worries about whether there will be a spillover from the Cyprus situation,” said Nick Stargen, chief investment officer at Cincinnati-based Fort Washington Investment advisors.  Fears of new Lehaman Bros. or Bear Stearns-like failures in Europe prompted most major U.S. stock averages to drop nearly a half-of-a-percent.    “Will authorities be able to convince markets that this proposal is only for this unique situations, for such a small country where the banking system is more of a tax shelter,” said Stargen.  Wrangling in the Eurozone over bailouts in Greece, Portugal, Spain, Italy and Ireland prompted the ECB to take emergency action.

             Europe’s fears over growing debt stem from the Weimer Republic [1919-1933] when hyperinflation ate up the value of the German Deutsch mark, leading to the rise of Adolf Hitler and the Third Reich.  Unlike the U.S. where there’s a common tax base, the Eurozone doesn’t pool tax revenues into a common kitty.  If the ECB prints more euros to bailout countries like Cyprus, they must pass the borrowing costs onto participating countries or member states  Charging Cypriot banking customers a bailout feed of between 6 to 10 percent hopes to prevent borrowing by the ECB.  Whatever happens in Cyprus, most investment advisers don’t see the EU putting a damper long-term on the U.S. stock market.   “Given what went on in the rest of the globe, it’s hung in there,” said Uri Landesman president of New York-based Platinum Partners, seeing the U.S. bull market continue through 2013.

         Unlike the U.S. Federal Reserve Board, the ECB hasn’t been willing to take on more debt to bailout Eurozone members.  Launched in 1999, the Eurozone promised unparalleled prosperity to member states, despite stark differences in manufacturing and exporting.  While hoping for greater trade, mobility among Eurozone countries and eventual growth, joining the euro prevented otherwise sovereign nations from printing their own currency.  It didn’t take long for the euro’s hoopla to end, leaving Europe’s less prosperous countries, like Greece, out of cash.  Much of the Eurozone’s sluggish growth has been attributed to reluctant Eurozone bailouts, prompting Germany to spread the debt around member states.  Despite having the Eurozone’s strongest export economy, Germany resents bailing out their less prosperous neighbors, spreading the debt to other Eurozone countires.

            Problems in Cyprus, while similar to Greece, raise the specter of more cash-flow problems with the Eurozone’s banking system.  “Will authorities be able to convince markets that this proposal is only for this unique situation, for such a small country where the banking system is more of a tax shelter?  If they can’t, that might cause new concerns about Europe’s banking system,” said Sargen.  Eurozone experts know that since the euros’s 1999 launch, only Germany—and possibly France, Belgium and the Netherlands—could handle the euro’s over valuation.  Most Euozone countries couldn’t trade with the euro without running out of cash.  Instead of determining fair-market-value of the euro, like China does for the yuan, currencies traders bid euros through the roof, causing the cash-flow crunch that left many Eurozone countries with too few euros to manage their economies.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.