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Cypress Exposes Cracks in Eurozone by John M. Curtis Copyright
March 19, 2013
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. |
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