Will Cyprus Be a Rubicon Moment?

I think that the Cyprus situation was a dominant one last week. I do not want to bother you with the same information you have already read somewhere else and which is probably not accurate because the situation is changing every minute. I would just like to make some brief comments. First of all, Cyprus has a small economy and the rescue package is something about € 16 billion, approximately € 3 billion less than last year’s loss of Bankia – the Spanish bank. It is nothing compared to Italy, Spain or other problematic countries. The fact is that investors do not trust small countries in trouble but still believe bigger players. But be aware of another fact.

The situation is the same and sometimes even worse in these bigger players’ homelands. Secondly, Cyprus has showed us a real political game; let´s look at Russian interests (gas, Cyprus as a Russian bank, potential military port), European interests (unity of the Eurozone, German election) or Britain’s interests, and consider the news that Cypriot politicians withdrew 4.5 billion of their money from the country once they knew about the taxing of deposits. The only sad moment of this game is the realization that politicians do not play with cards but with the fate of real people. Thirdly, Cyprus was considered a problem only partially. Do you remember a few months ago when German Finance Minister Schaube declared, probably because of the German election, that there was no systematic threat concerning Cyprus? We have to say that ECB and the Commission representatives have different and more informed opinions. They were well aware of how the system works. If any part of the chain breaks it could damage all other parts. The proposal to tax bank deposits is the moment when the chain could crash. People could realize now that their money is not safe in bank accounts anymore. And these questions are coming. Just as an example, the American Banking Association reminded Americans that there is absolutely nothing to worry about when it comes to the sanctity of US deposits, which are backed by the $25 billion in the FDIC insurance fund. Put into the perspective, it looks like this:

And from this point of view, as David Franklin said, Cyprus could be a Rubicon Moment. If people lose their confidence in the banking sector, it is the beginning of the end. Bank runs could break the whole fractional banking system or we could face a hyperinflation. Cyprus could be the beginning. Why? Not because of itself. Because we are facing bigger problems than Cyprus.

One of them is China. Last week Moody’s informed that China’s local-governments are facing greater risk of default, as regulators warn 20% of their loans are risky. And it is nothing unremarkable. The local governments owe approximately 9.1 trillion to 14.5 trillion Yuans, or 18 – 30% of China’s gross domestic product, according to a BNP Paribas SA report published in January.

Governor Kuroda – the Bank of Japan is prepared to do anything to end two decades of stagnation. “The BoJ must expand monetary stimulus both in terms of volume of assets it buys and type of assets it targets, and push down yields across the curve,” he said. Japan gross debt will reach 245 % of GDP according to the IMF this year and it seems to me that they plan to erase it by inflation.

Britain is closer to losing its triple “A” credit rating at Fitch Ratings. The reasons behind are the rising debt and weak performance of U.K. growth due to the EU slowdown. This could cause the downgrade of the rating by the end of April.

The radars of mainstream media are not focused on problems in the US right now but it is worth mentioning that the monetary committee of the FED will continue with its support of economic recovery and decided to continue purchasing mortgage-backed securities and longer-term Treasuries at a pace of $ 85 billion per month. Only one member of the committee was against the action, because she was afraid of something like long term inflation – the term which nobody understands or doesn´t want to understand. Ok. Simply put, the FED will continue the printing. Chairman Bernanke also speculated about his future, which need not be connected with the FED, and that he is not the only person who can manage the exit of $ 3 trillion FED´s balance sheet. Does it mean that he will quit the office? Who cares? What really matters is not who but how the FED will manage its balance sheet in the future and whether the US dollar keeps its confidence as the global currency. That is the question.