I am supposed to write about emerging markets for this estimable media outlet, but feel entitled this week to expand my turf to Cyprus. If a government proposal to skim government-insured bank deposits, Cyprus’s first financial recovery plan, does not say emerging market
, it is hard to think what does.
Among other things, this week’s Cyprus crisis marks the apogee of an ongoing role reversal between developed and developing world. The “risky” developing countries (the bigger ones anyway) run budget surpluses, stack up savings, and pay their bills without a murmur. Meanwhile Europe has been convulsed by half a dozen different sovereign bailouts, the US plays multi-trillion-dollar chicken with debt default, and Japan launches an epic campaign of currency deflation. But that is a broad philosophical question beyond Cyprus’ scope.
In fact, almost anything in the financial world is beyond Cyprus’ scope, a point the wise investor will bear in mind. Modern global media and markets are designed to make mountains out of molehills (while of course ignoring more momentous events and trends). But the current mini-frenzy over Cyprus is something of a new frontier.
Take a breath for a moment and consider some numbers. The population of Cyprus minus its estranged Turkish-influenced north is about 900,000, roughly one-third the human mass of Brooklyn or 1/25th that of Shanghai. Its annual growth domestic product is (or was) about $23 billion, 1/12th the size of Greece’s. The total of deposits in its overstretched banks is around $88 billion; that compares to $1 trillion for JPMorgan Chase
(NYSE:JPM). The estimated sum for bailing out Cypriot banks is some euro 17 billion ($22 billion), roughly one-quarter of what Ireland required three years ago.
Cyprus’ crisis presents some interesting political questions: Should the European Union and International Monetary Fund pay even a little bit to protect the well-to-do Russians who are thought to hold about 35% of the system’s deposits? (That’s how it became a crisis in the first place.) Should the EU allow offshore financial havens – including Luxembourg, the UK Channel Islands, and Ireland itself as well as Cyprus – to keep operating under its moral umbrella and euro 100,000 deposit guarantee? But in financial terms, the whole thing is strictly peanuts.
Yet it has depressed stock prices way beyond its confines, meaning the alert investor can hunt for bargains that will theoretically bounce back once Cyprus blows over, most likely next week. Probably the best place to look is in European banks, which the market has marked down this week on the knee-jerk impression that the Cyprus mess somehow affects them.
“Contagion” fears often make sense in the financial sector, as September 2008 demonstrated so dramatically. Banks tend to finance each other, setting off legitimate systemic fears if one or two links in the chain grow weak. But not in tiny Cyprus’ case. The Cypriot banks are in fact the victims of contagion from their unofficial mother country, Greece, where they had heavy exposures to government bonds and interbank lending.
A vague theory of political contagion has been floating around this week. That is, if the EU was willing to solve Cypriot banks’ problems by expropriating depositors, it might consider similar drastic action if, say, Italian or Spanish banks hit the shoals. Traders have duly pummeled financials in those two countries. Shares in Spain’s Banco Bilbao Vizcaya Argentaria
(NYSE:BBVA) and Banco Santander
(NYSE:SAN) both shed more than 6% this week. Italy’s UniCredito
(BIT:UCG) is off nearly 4%. But the depositors’ “bail-in” solution was quickly shot down even for Cyprus, and seems quite farfetched for these big core eurozone countriese.
Financial titans in relatively healthy northern Europe have also been rocked by the perceived Cyprus tsunami. Doughty Deutsche Bank
(NYSE:DB) has fallen 5.8% as of this writing. French champion Societe Generale
(PINK:SCGLY) has given up 6.8%.
A word of caution: European bank stocks have been on a downward trend for the past two months. An iShares ETF that tracks the sector (PINK:DJXS) had an explosive 50% trough-to-peak run-up between July and January as investors concluded that the European Central Bank’s open funding spigots were going to keep the major players afloat. It has sagged by 5% over the past two months as Europe’s uninspiring economic reality sets in.
Still, the Cyprus “contagion” looks like an overreaction. Buy while the financial blood flows!
Cyprus: What Matters Now Is the Story Investors Choose to Believe
Et Tu, Cyprus? Investors Still Fear Ripple Effects of the Mini-Crisis
The Truth Behind Cyprus's Bank Catastrophe -- Cypriot Banks Are Really Greeks Banks in Disguise
No positions in stocks mentioned.
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