The Black Swan of Cyprus

Nicholas Taleb wrote a book entitled “The Black Swan.” The title refers to the belief that black swans did not exist, that is until one was seen and that event changed our whole notion of the category of swans. Taleb went on to explain the criteria for a black swan event. It had to be a surprise and have a major impact. Then in hindsight the event would be rationalized as if could have been possible. If we reference this to the stock market we have a black swan event on Black Monday in October 1987 when the Dow Jones Average fell 502 points in one day. Another such event would be 9/11 that also drove the markets into a tailspin.

March 16, 2013

The tiny island of Cyprus needed a bailout of just 17 billion euros. Up to this point the EU countries of Greece, Spain and Portugal had all been bailed out after much wrangling, but in the end the bailouts were successful. Compared to Cyprus, the Greek bailout was 240 billion euros. No one dreamed that anything would go wrong and that Cyprus would receive its money.

But on March 16, a full-scale Black Swan event occurred. Secret meetings were being held in Brussels to discuss the terms of the Cypriot bailout. Chancellor Merkel’s finance minister, Wolfgang Schaeuble was given instructions that there was to be “no bailout.” The Cypriots must pay.

A plan was concocted whereby a levy would be placed on the savings accounts of depositors. Bank deposits are insured up to 100,000 euros. Those accounts would pay 3.75% of their savings. Uninsured depositors would pay 9.9%. Banks and the stock market were closed until the Cypriot Parliament would vote on the proposal on Tuesday March 19. The vote was negative and the proposal rejected.

Enter the Russians. Russian businessmen and citizens have 31 billion euros on deposit in Cypriot banks. They stand to lose a substantial sum from the bank levy. Vladmir Putin called the levy “unfair, unprofessional and dangerous.” Some believe that some of this money is from weapons trafficking and other illegal ventures. It seems that one unwritten goal of the Germans was to punish the Russian depositors.

Meanwhile, a UK plane loaded with cash is headed for Cyprus to pay British troops cut off from EU funds.

Wednesday March 20, 2013

The game of international poker continues. Austrian Finance Minister, Maria Fekter threatens to end financial support to Cypriot banks. Part of the hard-nosed position from Germany is to show German voters that the Merkel government stands firm against further bailouts. She is up for reelection this year.

Meanwhile, behind the scenes, Cypriot Finance Minister Michael Sarris and Energy Minister, George Lakkotypis, are in Russia trying to cut a deal for the needed money. A large find of natural gas was discovered off the coast of Cyprus. A probable deal would be that Russia provides the needed funds in exchange for rights to explore the natural gas field.

Even the Cypriot Church has joined in the fray. They hold a major interest in the Hellenic Bank and have offered all of their funds to support the Cypriot bailout.

Thursday March 21, 2013

The squeeze is on. The ECB said that it will extend emergency funding through March 25 and that it is up to the Cypriots to solve the problem. Rumors are rampant. One plan suggested by the Cypriots is to create a lending fund that could issue bonds backed by future oil and gas revenues. Meanwhile in Russia Sarris and Lakkotypis are trying to cut a deal that would give Cyprus the necessary funds in exchange for natural gas exploration rights. No matter what happens, the consensus is that when the banks open there will be a run on them, collapsing the Cypriot economy.

Meanwhile, in the background, (hush hush) Christine Le Grarde, head of the International Monetary Fund and key player in the Cypriot bank levy is being investigated back in France. Her home was raided for evidence that she conspired on behalf of former President Sarkozy. The man in question, Bernard Tapie, was accused of embezzling public funds. Lagarde referred the case to arbitration. Tapie was awarded 285 million euros.

Friday March 22, 2013

Russia says NO to Cypriot pleas for help. Russian finance minister, Anton Siluanov said: “The talks have ended as far as the Russian side is concerned.” The Cypriots have proposed a “solvency fund” that would bundle state assets including future gas revenues and nationalize pension funds as a way of plugging the financial dike. Merkel of Germany said this is unacceptable.

Behind the scenes. Vladmin Putin held talks with Jose Barroso, head of the European Commission on the Cyprus situation. Russian Prime Minister, Demitry Medevedev, said Russia could review its central bank reserve holdings of the euro. It is estimated that one quarter of Russia’s reserves are in euros.

Saturday March 23, 2013

Cypriot Parliament introduced bills the would:

  • Establish capital controls that would prevent capital from flight.
  • Seize 25% of the deposits from the largest depositors, those with over 100,000 euros.
  • Split the two largest banks, the Bank of Cyprus and Cyprus Popular Bank (Laiki) into good and bad banks. The good banks would hold deposits up to 100,000. The bad banks would have the remainder. It is estimated that 38 billion euros are in accounts over 100,000.
  • Set up a “solidarity fund” to handle state pensions.

A vote is scheduled for Monday March 25th.

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