NEW$ & VIEW$ (19 MARCH 2013)


  • You can row back as hard as you like and try to spead the blame about but it’s a big stick to have handed out so casually or confusedly or unthinkingly or to keep Russia/ Russian business happy or to appease the German electorate… depending on how you want to judge it. (FT Alphaville’s David Keohane)
  • The Spaniards, Italians and Portuguese may not run to the banks today or tomorrow, but as soon as the crisis intensifies in a euro-zone country, the bank customers will remember Cyprus. They will withdraw their money and, by doing so, intensify the crisis. (German economist Peter Bofinger)

Cyprus Moves on Small Savers

Cyprus’s government is aiming to exempt smaller savers from a controversial bank deposit levy, according to draft legislation submitted to parliament.

Under the legislation, savers with less than €20,000 (about $26,000) in their bank accounts will pay no levy, while those between €20,000 and €100,000 will pay a 6.75% rate.

Bank accounts with more than €100,000 would be taxed at a 9.9% rate, the draft said.

But the FT writes that

There were also questions whether Cyprus could legally exempt any class of savers under the country’s tax treaties, senior officials said.

And that

Anton Siluanov, the Russian finance minister, said the decision to impose a levy had forced Moscow to reconsider easing terms of a €2.5bn loan to Cyprus that has kept the government afloat for the past two years. Brussels and Nicosia had been in talks with Moscow to extend the loan’s repayment schedule and lower its interest rate.

The big risk:

Cyprus Levy plan ‘bleak day for banking union’
Bailout plan blows hole in EU’s reform plans

The weekend decision to strip €5.8bn from the savings accounts of Cypriot banking customers has blown a hole in the EU’s ambitious reforms billed as the route out of the eurozone crisis, while potentially undermining a growing reliance at banks around the world on funding their operations with customer deposits.

“This is a totally crazy decision,” said one European bank chief. “This is the biggest policy mistake that the [European Central Bank] has subscribed to.” (…)

“We nailed our colours to the mast in Europe to say that [accounts] under €100,000 were protected,” said a senior official involved in financial reform. “Now there is a real risk of mixed messages.” (…)

“It is the abrogation of an explicit guarantee,” Tim Adams, managing director of the Institute of International Finance, the global banking lobby group, told the Financial Times. “This is an unsettling precedent. In future, I fear they will regret having done it.”

In a blunt note to clients on Monday, analysts at Morgan Stanley said the move “goes beyond expectations, raising concerns of a possible policy mistake”. (…)

Paul Donovan, senior economist at UBS, said in a podcast: “While Cyprus might be characterised as a special case, there have been so many special cases across the euro that political reassurances in this regard will not have much worth. Why would one risk holding a bank deposit in a banking system, even with insurance and guarantees, if one thinks the banking system is vulnerable?”

Positive spin?

Is Bitter Medicine for Cyprus a Cure for the Euro Zone?


(…) The deal marks a victory for the German approach to tackling the euro crisis. By breaking the final taboo and inflicting losses on depositors—even those with less than €100,000 who believed they were protected by a state guarantee—the euro zone has sent a powerful signal.

The message is that the burden of tackling unsustainable debts will fall on a country’s own creditors rather than be passed on to other members.

Of course, that is tough on those who must bear the losses. But the euro zone’s previous approach of trying to shield creditors from losses via endless bailouts was making the region’s debt problems worse. Meanwhile, the austerity needed to service those debts was crushing any hopes of a recovery. (…)

The risk is that the threat of private-sector debt restructurings will lead to contagion in the form of bank runs and the loss of market access for weak sovereigns and banks. But these risks may be overstated.

After all, the European Central Bank is now a credible backstop to solvent governments and sovereigns. Any contagion to insolvent borrowers should accelerate the process of debt restructurings, so that they are swiftly restored to a sustainable footing.(…)


Weekly chain store sales rose again (+1.4%) last week, the fifth consecutive weekly gain. The strong 2012 base keeps the Y/Y advance low, however.




Big Week for Housing Data  The National Association of Home Builders’ index, a measure of confidence, slips this month to 44 from 46 in February, as current sales index fell four points. But the details were more encouraging.

The report said the problem isn’t demand but the lack of buildable land, “along with rising costs for building materials and labor.”

Two charts FYI:


(CalculatedRisk)image(RBC Capital)

Homeowners Dig Out

Rising home values have lifted more borrowers out of the hole of owing more than their properties are worth, an encouraging sign for an economy still closely tied to the health of the housing market.

The number of “underwater” homeowners in the fourth quarter of 2012 declined by 1.7 million from a year earlier, meaning 1.7 million U.S. households have regained home equity, according to data released Tuesday by CoreLogic, a research company. Overall, the company said 21.5% of households with a mortgage were underwater at the end of 2012, down from 25.2% at the end of 2011.


India cuts interest rate to revive growth  Central bank lowers repo rate to 7.5%

Pointing up  U.K. Inflation Quickens to Fastest in Nine Months  U.K. inflation accelerated to the fastest pace in nine months in February and factory-gate prices increased twice as much as forecast as energy costs surged.

Consumer prices rose 2.8 percent from a year earlier, compared with 2.7 percent in January, the Office for National Statistics said in London today. Producer prices increased 0.8 percent in February from the previous month, the most since April 2011.

Higher energy bills and a weaker pound have fueled price pressures in recent months. (…)

Separate data today showed pipeline price pressures may be building in the economy. Input prices surged 3.2 percent in February from January, the most since March 2011. The increase was led by a 7.1 percent surge in crude-oil costs. From a year earlier, input prices were up 2.5 percent.



Stock Bulls Get a New Member

Morgan Stanley’s Adam Parker, who has been among the gloomiest of the major brokerage house stock strategists, planted his flag in the bullish camp.

Mr. Parker unveiled a year-end target of 1600 for the Standard & Poor’s 500-stock index, which would mean a 3.1% gain in the benchmark Sarcastic smile from Monday’s close of 1552.10 and a 12% advance for the S&P for the year. Behind the more upbeat forecasts, Mr. Parker said, are expectations among Morgan Stanley’s economists that the U.S. economy will pick up steam in the second half even as the Federal Reserve continues its easy money policies.

Mr. Parker’s sunnier outlook joined more optimistic forecasts also released Monday by Deutsche Bank’s David Bianco and Goldman Sachs Group Inc.’s David Kostin, both of whom lifted their S&P 500 price targets for the year. Another former bear, Meredith Whitney, founder and chief executive of Meredith Whitney Advisory Group, also has changed her tune on U.S. stocks.

“I have not been this constructive, this bullish on the U.S., on equities in my career,” she said in an interview on CNBC on Monday. Party smile(…)

“Given our economics team’s view of improving U.S. growth and ample liquidity still being provided by the Fed, it is hard to see what causes a major market correction,” Mr. Parker wrote in his “Spring Cleaning” note.

But in an interview, Mr. Parker said his call comes with some reservations. “We’ve been saying for some time that the market’s ahead of itself by any historical measure,” he said. (…) Confused smile

At Deutsche Bank, Mr. Bianco now expects the S&P 500 to hit 1625 this year, up from an earlier forecast of 1600. That would take the S&P up 14% for 2013. Mr. Kostin also raised his S&P 500 target to 1625, but from a previous goal of 1575. Both are now among the most bullish of the major bank strategists, who expect, on average, a rise to 1558 by the end of 2013, according to Birinyi Associates.

“We expect the S&P 500 to…boldly go where it has never gone before,” Mr. Bianco wrote in a note to clients. Messrs. Kostin and Bianco are expecting gains to be led by stronger earnings.

Mr. Kostin lifted his 2013 earnings forecast for the companies in the S&P 500 to $108 a share from $107.

He pointed to better-than-expected economic reports as providing a lift to earnings but added profit margins “will remain static.”

He tempered his bullish call, however, saying U.S. stocks “currently trade near fair value based on various metrics.” Confused smile

Goldman Sachs Upgrades Economic Forecast  Citing “solid” reports on employment, manufacturing and retail sales, Goldman Sachs says the U.S. has shown notable resilience amid higher taxes.

The company nudged up its near-term growth forecasts, seeing 2.9% this quarter and 2% next.


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