Small Cap Report (18 Mar) - Cyprus Bail-out, SAA, TRK, NGR, TNI, PEN

18th Mar '13 by Paul Scott

14 comments 25293 reads

Pre 8 a.m. comments

The big news this morning is not from any company results (which are scarce today), but with the latest Eurozone bail-out, of Cyprus, which has really put the cat amongst the pigeons. For the first time, conditions have been imposed on a Eurozone Government which involve them directly plundering all bank accounts of Cyprus banks by up to 10%.

This seems a terrible mistake to me. The entire global banking system has always relied on one key fact - that depositors funds are sacrosanct. So by plundering everyone's bank accounts in Cyprus to fund the country's bail-out, the Eurozone have now made it rational for everyone to withdraw their entire savings from all Cyprus banks, at the earliest possible opportunity.

The initial plan did not even respect the Eurozone's own depositor guarantee for small depositors. They seem to be trying to back-track on that element now, but the damage to confidence is surely already done?

It's not just Cyprus either. This must surely trigger a fresh series of bank runs in the weaker Eurozone countries such as Greece, Spain, Portugal and maybe even Italy (where I understand a small, sub 1% bank account levy was done in the past, so they have form). Market Futures indicate that today will see a nasty sell-off, with the FTSE 100 due to open about 125 points down (almost 2%), the Euro has fallen 1.3% against the dollar (hardly a catastrophe though), and Gold is up 0.8% to $1605.

My Twitter timeline (which I use almost exclusively for financial news & views) was buzzing yesterday, when it's usually very quiet on a Sunday, so this has really rattled a lot of investors. As one commented, the market has been looking for a reason to sell off, and the Cyprus bail-out is probably it. I agree with that.

Personally I won't be selling any of my shares, because they are all long-term value small caps, so I don't respond to events like this. However, I have hedged myself by opening a new long in Gold at $1,605. It seems to me that there is a big risk now of bank runs in the Eurozone periphery, and people seeking the safety of physical assets (especially Gold), after this destabilising move to plunder the bank accounts in Cyprus. People don't believe politicians and officials assurances any more, so them saying it is a…

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EssexPete

18th Mar '13

"Terrible mistake." Absolutely.

A dangerous precedent in my opinion. Watch now as bank deposits across the whole of the Eurozone decrease. It Makes me wonder if Europe isn't using Cyprus in the same way as our government uses change of policy ,"Leaks," to test public opinion prior to an official release?

Tolerate this, then you're children will be next.

I hope I'm wrong.

SevenPillars

Agree with you on Cyprus and the market reaction to this today, wrote a bit about it on my blog, http://sevenpillarstrading.blogspot.co.uk/. My theory is that Cyprus is a small enough country for this to be done to test the water.

If this savings tax gets through it is perhaps the most extreme precedent thus far that has been set. An extreme example of Cameron's "we are all in it together" mentality. Screwing those that had nothing to do with it is typical of the arrogance of these people.

Disgusting.

Edward Croft

Frankly, I find the whole thing astonishing. It's one thing having the financial repression of enforced negative real interest rates (CPI > interest rates) (which effectively does the same thing) but quite another to go into people's pockets and lift their spare change.

A culture of pickpocketing in Cyprus... who'd have thought it ?

emptyend

It's one thing having the financial repression of enforced negative real interest rates (CPI > interest rates) (which effectively does the same thing) but quite another to go into people's pockets and lift their spare change.

As you rightly point out, negative real interest rates do much the same thing - though perhaps in a less obvious way? UK savers have probably "paid" 3% pa for 5 years so far....so maybe 15%+?

Maybe one of the consequences will be to encourage people not to sit on mountains of cash but to do something more productive with it - so perhaps it may actually stimulate proper (ie economically useful) investment?

sai lang

I agree totally.

schober

it also demonstrates that the state ie the eu is not above the law

ps dont foprget this event

Franklin D. Roosevelt's Executive Order 6102 Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government.

http://www.libertyforlife.com/banking/us-roosevelt-gold-theft.htm

marben100

Whilst I deplore what has happened to ordinary savers - and the unintended consequences that may flow, it is worth knowing this to understand the situation:

Unlike most other European & UK banks, there was almost no senior debt/equity on the balance sheet that could be "haircut". Unless the ECB and IMF were willing to continue to support these banks, there were few other ways that they could survive.

The biggest mistake, as pointed out here, was the decision to hit ordinary savers:

Following an uproar over the weekend, the Cypriot government was rethinking its plans which risked being voted down in parliament. The latest idea doing the rounds is that insured savers will be hit with a 3 percent levy and those with more than 100,000 euros being charged somewhere between 10-15 percent. This is clearly an improvement on the original proposal. But why not exempt insured depositors entirely? The tax on the uninsured would then have to be 15 percent.

The Cypriot government didn’t want to do this, because the uninsured deposits are disproportionately foreign and it is worried that such a high tax would undermine its status as an offshore financial centre. Even if there is domestic political logic in cushioning Russian mafia at the expense of Cypriot widows, such a policy is bad for the rest of the euro zone.

ISTM that the blame rests largely with the Cypriot government, who didn't want to upset their Russian friends too much.

Mark

rhomboid1

I think the issue here is the murky accounts of most Cypriot banks and the many question marks over how effectively anti money laundering legislation was being enforced. If I were German I'd be deeply unhappy at bailing out flawed banks and through doing so protecting the interests of those illicit depositors.

As a separate issue surely savers should do some due diligence on their chosen bank, anyone in recent years depositing with Cypriot banks would have surely wondered why their deposit rates were much higher than the Cypriot branches of major international banks?

It would seem logical however to protect smaller savers absolutely and let the burden fall on larger account holders who one would expect to be more sophisticated/dodgy*

Cheers
*delete as appropriate

djpreston

Coming away from the Cyprus question back to TRK.

I know youve been (and evidently still are) very negative on TRK but the announcement is just another demonstration fo how important Allison see the TRK tech in terms of their future planning. They (PE backed remember and not known for throwing away cash) have now made major investments in terms of equity and licence payments (along with the big European Bus and Truck manufacturer and Tata). Tests have proven the efficiency savings and the groups all continue to work towards dev/deployment. Add on the Mkers and VCharge advances and strong finances, and I still belive that TRK is moving ever closer to commercial success. I guess that is the problem though, you either belive or you dont.

D

Beginner

Hi Paul
Could I also divert away from the dastardly deeds in Cyprus, and put in a small plea for Nature (LON:NGR). The company operates under two arms: one disposes of maritime waste in three European locations, while the other provides the CTUs. Each of the latter items costs around £1m, but I am unsure how much of that is profit. They seem to have great potential in treating oil-contaninted water. The MoD recently deployed one in Afgahnistan. The waste branch had a real problem in 2010 (?) when the Gibralatar facility suffered a fatal explosion. This caused a collapse in the share price and impacted on profit (I feel very callous writing that). Prior to this the company was progressing very well, and the legalclaims seem now to be sorted. In short I think this may perhaps be worthy of consideration as a recovery share. I hold some, bought a couple of months back. (And thank you for the continued excellent info and analysis).

I think the issue here is the murky accounts of most Cypriot banks and the many question marks over how effectively anti money laundering legislation was being enforced. .....It would seem logical however to protect smaller savers absolutely and let the burden fall on larger account holders who one would expect to be more sophisticated/dodgy*

There are signs in the FT that more appropriate targets are being hit......

Russia on Monday blasted a proposed €5.8bn levy on Cypriot bank deposits by the EU........

EU leaders also apparently failed to consult with Russia before announcing the Cyprus rescue plan, scheduled to be voted on by the island’s parliament on Tuesday.

Cyprus has long been an offshore financial centre for Russian corporations and individuals, who are estimated to hold up €20bn-€25bn in deposits on the island – one-third of the total. Accordingly, they would stand to lose almost 10 per cent of this money, according to the terms of the bailout announced on Saturday.

Russian president Vladimir Putin told a meeting of officials on Monday that such a tax on deposits would be “unfair, unprofessional and dangerous”, according to comments by his spokesman..............
While Russians own billions in Cyprus deposits, the island is far more important to the Russian economy as a conduit for financial flows – Russian money goes to Cyprus, where it gets advantageous tax treatment, and then back into Russia.

I'm curious re Putin's complaining, given the apparent tax-efficient laundering that is reported......

One of the central problems that many countries face is tax avoidance by the (extremely) rich. Things that make life more difficult for tax avoiders might perhaps be welcomed? Obviously the original proposal was also hitting the innocent "little man" (though there are some not so innocent "litle men" too who may have "retired" a life in Cyprus instead of the more traditional Marbella)......but running out of hiding places for squirrelling away illicit dosh in whatever quantities is probably a good thing.

I heard a pragmatic Cypriot on a radio phone in today, who had €500k on deposit and was therefore looking at losing €50k+........"lets be clear", he said*, "not everyone paid their taxes, so in the big picture it is isn't as unfair as it may look"

*That is the gist - not verbatim

Paul - you may get your wish on Trinity Mirror (LON:TNI) quicker than you'd have expected ! 80p already.

19th Mar '13

The Alphaville boys are on form this morning re Cyprus:

PM How come a russian ambassador is speaking up for Russian tax-dodgers?

BE That's a good question, really.

BE Because they have a certain power over him?

BE Though best not speculate on that. I was told off yesterday for casually alluding to Cyprus being a money laundry.

PM Were you?

BE Yeah. I should have clarified that it's also a tax haven, a regulatory shield and a law enforcement black hole.

LOL :-)

Just following up on my TRK post. Nice to see that its now up 50% since close on Friday (before the announcement).

Small Cap Report (18 Mar) - Cyprus bail-out, SAA, TRK, NGR, TNI, PEN

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Paul Scott

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