NEW$ & VIEW$ (20 MARCH 2013)

Cyprus. Tax on deposits. Eurozone construction drops. Strong U.S. employment, housing, trucking. Restaurants take the brunt. China weakness continues in March. Sentiment watch.

 

Cyprus Rejects Rescue Plan

Cyprus’s parliament rejected its government’s bailout deal with the euro zone without a single vote in its favor, a move that could hasten the potential collapse of its banks and send the tiny island nation hurtling out of the euro zone. (…)

What happens next isn’t clear. A senior European official said after the vote that the euro zone would continue to wait for a counterproposal from Nicosia, outlining how it would raise the €5.8 billion it needs in order to secure the €10 billion bailout it had agreed upon with the euro zone and the International Monetary Fund.

Apart from negotiating the rescue deal, the government has been working on a Plan B that would involve support for its banks from Russia, a longtime friend of the country and the largest source of foreign deposits in Cyprus’s banks. Cypriot officials were planning to offer Russia stakes in energy projects and banks, two officials familiar with the situation said. The Cypriot finance minister is due to meet with his Russian counterpart in Moscow on Wednesday.

JPMORGAN: Cyprus Could Still Default, And The Market Is Underestimating The Risks

(…) As White explains, this leaves Cyprus with no good options at this point. They still have three less-than-good options, but all are wrought with serious problems.

The first option is to remove the levy on insured depositors and shift the entire burden of it to uninsured depositors – those with over 100,000 euros in their accounts. However, in order to get to the total 5.8 billion euros, the levy on uninsured depositors would have to be hiked to 15.4 percent.

This is a problem, because a significant portion of those uninsured deposits come from moneyed Russian interests looking to use the Cypriot banking system as a tax haven.

“There is some possibility that Russia would respond to a larger haircut by refusing to roll its existing €2.5bn loan to Cyprus; meaning that this option would still leave a significant shortfall,” says White. “In such a scenario, either the haircut on uninsured deposits would need to be around 21.8%, or further Troika funding would need to be found.”

The second option, then, is to go straight back to the EU for additional support. However, given the ostensible reason that the EU asked Cyprus to chip in to the bailout so much to begin with – a looming German federal election in September – White says it’s unlikely that German politicians will be interested in any sort of “U-turn.” In fact, going back to the EU could make things worse if EU leaders manage to further complicate the situation.

The third option is to go with a more progressive levy. One proposal is to subject depositors with less than 100,000 euros in their accounts to a smaller levy – 3 percent from 6.75 percent – while making those with between 100,000 and 500,000 euros pay 10 percent, and those with more than 500,000 euros pay 15 percent.

This probably won’t do much to appease those offended by this idea of deposit expropriation, meaning a plan like this might not make it through parliament either. (…)

White writes there are also longer-term implications for the whole euro zone, though (emphasis added):

We do not expect short-term bank runs or direct contagion, Near-term impacts on bank equity have been relatively limited so far (mostly in the 4% range). However depositors will now be aware that they are effectively taking a significant credit risk when they leave funds in weak banks backed by weak sovereigns – and there is a good chance that rates may need to rise in the periphery to reflect this increased perceived risk (indeed, we believe this action hints at broad risks for anyone with capital in a fiscally stressed country). The long-term implication for bank funding in the periphery is not a positive one, in our opinion, and by implication, there could be impacts on the supply of credit. Effectively, this would appear to work directly against the objectives of Banking Union, which is designed to ensure that a Euro in a Cypriot bank can ultimately be treated in the same way as a Euro in a German bank.

NBF Financial has this other angle:

According to the most recent data, the country is home to the second largest shadow economy in the Euro zone. As today’s Hot Chart shows,
the equivalent of 26% of GDP is accounted by  “economic activities and the income derived thereof that circumvent or avoid government
regulation or taxation”. That compares to an OECD average of 16% (and 11.5% in Canada). Under these circumstances, there is nothing automatic in committing other countries’ taxpayer money for bailouts within the
monetary union.

image

Ninja  The idea of taxing deposits is spreading:

Hacienda confirma que pondrá un tipo “moderado” a los depósitos bancarios (El Pais)

The Minister of Finance and Public Administration, Cristobal Montoro, has advanced on Tuesday that the government will impose a type “moderate” tax on bank deposits to compensate communities that saw their tax autonomy canceled after the Executive created a state tax 0% rate. This tax on bank deposits, which has nothing to do with Cyprus, does not affect savers but requires credit institutions to pay for that capture deposits.

“The autonomous communities receive timely and therefore financially compensation shall implement a moderate rate in the state tax on bank deposits,” said the minister, adding that this kind “will not be much higher than 0%” .

Lightning  Euro-Zone Construction Output Falls Sharply

Output in the euro zone’s construction industry fell sharply in January, wiping out a modest improvement in December and adding to signs that the bloc is heading for another quarter of economic decline.

(…) construction output in the 17 nations that use the euro fell 1.4% in January from December, and 7.3% from the corresponding month a year earlier.

Tuesday’s figures showed construction output rising 3.0% from the previous month in Germany, but falling 4.0% in France.

BACK IN THE U.S.A.

 

Smile  Companies Open Up to Outsiders

A survey of large companies show that firms plan to increase hiring this year.

When asked about their hiring plans for the coming year, respondents said they plan to increase hiring in the U.S. by 17.5%, compared with 2012. In 2012, they said, they hired 8.6% fewer employees than in 2011. “This is the biggest upswing I’ve seen in ten years,” Crispin said.

Sun  Single-Family Homes Drive Housing Starts

Construction of single-family homes in the U.S. rose 0.5% in February to a rate of 618,000 units, a nearly five-year high. Overall housing starts increased 0.8%.

Overall housing starts rose 0.8% in February to a seasonally adjusted annual rate of 917,000, the Commerce Department said Tuesday. January’s figures were revised upward to a rate of 910,000.

Meanwhile, the number of new building permits, an indication of future construction, rose 4.6% to an annualized level of 946,000 in February, also the highest level since June 2008.

Raymond James housing analyst adds:

The annualized pace of single-family permit activity has shown consistent improvement since last March, and, based on our recent research, we believe order momentum and pricing power this spring are likely to exceed expectations. At this point of the up-cycle, land and labor availability remain key constraints on the pace of volume recovery; however, the major public builders are seeing a surprising level of pricing power as demand emerges.

ISI’s own homebuilders survey has kept rising in March, in contrast to NAHB which declined.

Smile  ATA Truck Tonnage Index Edged Higher In February

 

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index rose 0.6% in February after increasing 1% in January. (The 1% gain in January was revised down from a 2.4% increase ATA reported on February 19, 2013.) Tonnage has now increased for four straight months, which hasn’t happened since late 2011. Over the last four months, tonnage gained a total of 7.7%.

Compared with February 2012, the SA index was up a solid 4.2%, just below January’s 4.6% year-over-year gain. Year-to-date, compared with the same period in 2012, the tonnage index is up 4.4%. In 2012, tonnage increased 2.3% from 2011.

Surprised smile  Americans Cut Restaurant Spending as Taxes Bite

Sales at casual-dining establishments fell 5.4 percent last month, after declining 0.6 percent in January and 1.6 percent in December, according to the Knapp-Track Index of monthly restaurant sales. This was the first three months of consecutive declines in almost three years, with consumers caught in a “very emotional moment,” said Malcolm Knapp, a New York-based consultant who created the index and has monitored the industry since 1970. (…)

Although casual-dining sales took the biggest hit in February — down 4.9 percent — the weakness was broader, according to “channel checks” conducted by RBC. Fast-food fell 0.1 percent, the worst in two years; revenue growth at so-called fast-casual eateries, up 0.6 percent, was the lowest in three years, the data show.

U.K. Data Delivers Blow Ahead of Budget  Just hours ahead of the U.K. budget, Chancellor of the Exchequer George Osborne was dealt a blow as data showed unemployment rose for the first time in a year and average earnings growth fell to the lowest in over three years.

The Office for National Statistics Wednesday said the official, international measure of unemployment rose 7,000 in the three months to the end of January to total 2.52 million. That meant the unemployment rate held steady at 7.8% from the three months to December.

The last time unemployment increased was in the three months to January 2012. The ONS figures showed the increase was entirely due to a rise in unemployment among 18- to 24-year-olds, which reached a 17-month high.

imageAdding to the bad news, earnings growth fell, which means the squeeze on consumers’ pay packets tightened.

Average weekly earnings excluding bonuses—the measure which includes bonuses can cause steep fluctuations in monthly changes payments—rose 1.2% in the three months to January. That was the lowest increase since the three months to December 2009 and is down from a 1.3% rise between October and December last year.

Consumer price inflation stood at 2.7% in January and rose to a 10-month high of 2.8% in February. (Chart from Markit)

CHINA

CEBM Research’s mid month survey points to weakness

  • More than 64% of (steel industry) respondents thought actual sales were lower than their expectations, worse than the previous survey. Moreover, almost 30% of respondents were pessimistic toward the recovery of the steel market in the future and only 8% thought an improvement would come soon.
  • Most construction machinery dealers surveyed mentioned that sales in the first half of March declined significantly on Y/Y basis, while about 1/3 of respondents expect flat or growing sales in March. Overall, we believe that sales of excavators in March will decline about 15% to 20%, lower than our expectations.

That goes against the not very reliable Conference Board LEI for China which rose 1.3% in February with 5 of the 6 index components contributing positively.

The PBoC Banking Climate Index rose 0.7%  in Q1’13 with a 6.3% gain in the loan demand index.

SENTIMENT WATCH

Larry Fink: Cyprus Not an Issue, Sees 20% U.S. Stock Gain

Laurence D. Fink, chief executive officer of BlackRock Inc., the world’s largest asset manager, said Cyprus is not a major problem and U.S. equities will rise 20 percent this year as the economy rebounds. (…)

“Depending on the economic information that we receive, we can be in the beginning of a 5 percent correction or we’re going to be in a probably prolonged one- or two-month pause, which I don’t mind. But I would say by year-end equity markets are going to be much higher.”

 
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