Europe deteriorates

The Cyprus show continued overnight with on going talks with Russia:

Cyprus and Russia are discussing cooperation in the banking and energy sectors in addition to a loan, and any deal to solve the island’s debt crisis should also be in Moscow’s interests, the Cypriot finance minister said on Thursday.

“There’s a lot of teams now working on a number of issues. Banks, natural gas, are there opportunities (on which) we can base some cooperation and some support from Russia,” Finance Minister Michael Sarris told reporters in Moscow.

“We’ve asked for help clearly, but something that would make also economic sense for Russia.”

Sarris was holding a second day of talks with Russian officials after the Cypriot parliament on Tuesday threw out a proposal to tax bank deposits in return for a 10-billion-euro bailout from the European Union.

With banks on the Mediterranean island shut all week, the Cypriot government could be ready to put assets up as security for a 5 billion euro Russian loan that would avoid the levy on depositors, many of whom are Russian.

With those talks ongoing the Cypriot President has promised to deliver “Plan B” to parliament in the coming 24 hours:

President Nicos Anastasiades is to “present a Plan B package to party leaders tomorrow at the presidential palace,” state television reported Wednesday, after he chaired an emergency cabinet meeting called to weigh the alternative plan.

“A decision on a Cyprus rescue must be made on Thursday at the latest,” the official CNA news agency quoted Anastasiades as saying as he left the palace on Wednesday night.

Supposedly Plan B doesn’t include a bank levy,  but does include the restructuring and sale of the big banks. Reportedly it also includes a €4.2 billion transfer of pension-fund asset which to me sounds more like a paper shuffle than anything legitimate and is likely to be rejected by the Troika of being of genuine value. The deal will also include whatever Cyprus is trying to negotiate with the Russians which is obviously tied to natural gas reserves, but at this stage it is still just talk. The Church of Cyprus has also stated that it will contribute to a bailout fund with the sale of assets.

All up it doesn’t appear to be a particularly solid plan, and with Europe refusing to budge on its part the game of chicken is getting more serious by the hour.

I stated a couple of times this week that I expected action from the ECB to come shortly as they have a history of tightening the screws at times like these. They certainly didn’t disappoint on Cyprus:

21 March 2013 – Governing Council decision on Emergency Liquidity Assistance requested by the Central Bank of Cyprus

The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013.

Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks.

Call it blackmail or prudent collateral maintenance, it really doesn’t matter the outcome is the same. If there isn’t a deal by Monday the Cypriot banking system will have no access to the ECB discount window and that’s all folks.

Obviously more to come on this story.

In the meantime it was another round of Flash PMI data from the Eurozone overnight and, once again, it stank. The French PMI came in at a four year low and the forward looking data looks worse than ever. This very dour commentary from Markit Economics’ chief economist:

The latest Flash PMI data spell further bad news for the French economy, with the downturn in output accelerating to the sharpest in four years. Again it’s difficult to find any crumbs of comfort among the data, with new orders and backlogs both declining at sharper rates and employment cuts continuing. Moreover, future expectations in the service sector slumped to the lowest level since the peak of the financial crisis in late-2008, underlining the extent of companies’ worries over a persistently bleak economic climate

If you’ve been reading my posts for any length of time you shouldn’t be too surprised by that outcome. Germany was obviously better than France, but it was  a big miss on expectations and manufacturing output actually contracted as growth slowed rapidly in all sectors in March.

The overall Eurozone PMI was woeful with sharper contractions across all sectors and a rolling over of earlier improvements. Of note were the future looking business expectation and new orders readings which were down again:


Again from Markit:

The flash PMI data suggest that the Eurozone business environment deteriorated at a quickening rate in March. While the data are consistent with the pace of economic decline easing in the first quarter from the 0.6% contraction seen in the final quarter of last year – perhaps showing a 0.3% decline – the concern is that the downturn has gathered pace again.

Instead of the eurozone economy stabilising in the second quarter, as many – including the ECB – have been hoping to see, the downturn could therefore intensify in coming months.

The deteriorating situation in Cyprus also raises the prospect of business and consumer confidence falling further across the single currency area, and possibly dragging the PMI numbers down further in April.

France saw the steepest downturn in business activity since March 2009, rounding off the worst quarter for four years, while Germany looks set to have enjoyed reasonable if unspectacular growth. However, even Germany showed worrying signs of growth fading in March, driven by a return to contraction of its manufacturing sector.”

Back in January I had this to say about 2013 in Europe:

This year we will see renewed fiscal tightening in Spain, Portugal, Italy and France which is again likely to dampen growth. We also have major elections in both Italy and Germany which have the potential to change the political landscape, while the on-going question of what to do about Cyprus and further increases in unemployment creates the potential for “black cygnet” events.

So far so good.

March 2013 Euro Flash PMI

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  1. Yeah that PMI data out of France (in particular) and Germany was ugly.

    On Cyprus I think the game will continue over the weekend – that is the way the Cypriots and Russians in particular like to play these things (a race against the clock).

    There was a poll out of Bloomberg yesterday suggesting that about 2/3 of Cypriots would vote to leave the EU. It wouldnt affect the EU financial system wise, but could be a trigger for others to start asking the same question, and may well give weight to the Spanish in the event of them being pressured further the next time they need EU support (surely just a matter of time).

    At the moment the baseline position for Cyprus is that they get fried by the EU with depositors on Monday. This involves – given the circumstances in which it has come about – a considerable degree of economic pain. No matter what you can expect a large volume of deposits to walk out the door the first time they are opened.

    If they dont get a deal with the Russians (and dont look for Russia to play Santa Claus without a real good payoff – that is the way the Russians negotiate) then they have economic implosion. This involves a lot of economic pain.

    My guess is that the economic pain (of either type) may in fact become considerably easier for your average Cypriot if they depart the EU and bring back their own currency and devalue the bejeesus out of it.

    They would still have loads of expats owning houses in their midst and presumably using these for holidays. They become more attractive as a holiday destination once they arent in the Euro.

    There was also an interesting piece in FT last night about potential for Turkey to come to the party – noting that it could actually save Turkey a lot of money and go some way to bringing the estranged Greek Turk parts of the island closer

    • MsSolarFelineAU

      My guess is that the economic pain (of either type) may in fact become considerably easier for your average Cypriot if they depart the EU and bring back their own currency and devalue the bejeesus out of it.

      Great comment and I concur!

      I have posted previously here that the Euro should never have been instigated/created. Now we are seeing the result of the greatest transfer of wealth from “the little people” to the Elites.

    • Giordano Bruno

      The Greeks and Turks have a lot of animosity – but its an Idea worth exploring.

      My thoughts were always along the line of become a Russian protectorate, transfer the entire monetary system into Russian, and Russia gets the massive foot hold right smack bang in the middle of the Med – they’re already there anyway.

  2. If Crypus defaults out of the EU, what impact will that have on it’s borrowed money, who did it borrow from, won’t this trigger more problems through the EU ?

    Also, it may make more Russians and others pull money from the more unstable countries in the EU in fear that someone might try taking depositors money again.

    • MsSolarFelineAU

      Good questions.

      Also, it may make more Russians and others pull money from the more unstable countries in the EU in fear that someone might try taking depositors money again.

      Um…Australia “seems” to be stable….I typed “seems”! 😆

      Whatever, make funds for ourselves from this turmoil, is the only thing we can do.

  3. Cyprus ‘game of chicken’ and Cyprus threatening to leave might hold the bigger hand (irreversibility of Euro…)

    DE re the ELA – I’d read that for action to be implemented it required two thirds majority of the ECBs governing board and that some of the more ‘fragile’ country participants may not be inclined to support said action. Secondly, technically it was illegal to extend to banks that are non-solvent, a couple Cypriot banks surely? Not that this has prevented ELA extension to banks in Ireland, Greece etc. Also mention was made that whilst Cyprus was keen to retain position as an offshore banking centre, EU were ‘clandestinely’ preferred it not to be.

    Plans C & D include a combination of Russian involvement (gas, military presence etc) and announcement by the Archbishop that the Orthodox Church is willing to finance church assets to purchase govt bonds to assist.

  4. Need, fear and corruption could give Cypriot banks and gas to the Russian oligarchs.

    The people might have been better taking their 6% haircut and the austerity and being part of the EMU.

  5. All this talk going on between the Cypriot’s, ECB and Russia is a complete waste of time.

    There are billions of $EU worth of payment orders that have already been submitted and will be executed once the Cypriot banking system is reopened.

    In seconds, any liquidity provided to Cypriot banks by the ECB and IMF (plus more) will vanish and Cyprus will be back to where it started – except this time, no one will come to the aid of Cyprus.

    At the very least, it will be a good test of the measures put in place across the world to contain banking failure contagon.