squaremilecity

The situation in Cyprus which an investor might try to assess this morning is not quite as dire as the one seen 24 hours ago; at least on the surface.

The vote on that vexatious tax on deposits did not take place on Monday as originally planned but has been delayed till Tuesday at 1600 GMT.

Also, banks in Cyprus will now not re-open until Thursday, not Tuesday as first mooted.

A Eurogroup meeting concluded yesterday with the view that small depositors should be treated differently from large depositors.

This bolsters the treaty principle that deposits under EUR100k be guaranteed.

However the work-around which protagonists have adopted to achieve this involves a 15.6% levy for savers of above EUR100k (versus the original plan of taxing deposits under EUR100k at 6.75% and those above EUR100k at 9.9%).

The evasive action by the main players also appears to include some tacit devolving of responsibility, with the reaffirmation of Cyprus having the prerogative to decide how it raises the mooted EUR5.8bn through any alternative proposal, so long as it does indeed raise that sum.

Down the line this sleight of emphasis by the EU with respect to responsibility might prove useful for saving face.

It’s important to note that the EU appears to be attempting to subtly re-frame the focus of the debate, albeit a little late. This is because whilst the market is calmer on the surface, so far Tuesday, it is still clearly positioned to take account of the risk of potential contagion [which might lead to potential bank runs elsewhere in Europe, let alone in Cyprus
when the banks re-open] and in the event of an escalation of Cyprus’s crises and/or knock-on events, the EU’s battered reputation will probably be back on the line, which in turn might increase the risk of market volatility.

Of course, the chances of the amended proposals being passed in the Cypriot parliament, remain just as sketchyas before the amendments, due to the thin majority of the ruling coalition, with no party enjoying an absolute majority and three parties having stated outright that they will not support the tax.

No Threat from Russia

The good news for both Cyprus and the EU, is that whilst, the Russians
are angry, those very large depositors whose adroitness can be described as ‘light’ at best, don’t have a legal leg to stand on.

Russian deposit holders might be responsible for an estimated one-half of the funds with Cypriot banks, according data from IHS Global and of course, they can’t all in fact be sketchy.

Either way, the country can be expected to maintain pointed rhetoric in the near term over any form of taxation on deposits–President Putin on Monday described the proposals as “unfair, unprofessional, and dangerous.”

However, whilst the size of the complete effect of the proposed taxation of deposits would be major for Cyprus, it can be deemed as minor for Russia.

It appears unlikely that Russia will engage in more than rhetoric in terms of ‘retaliation’ and will probably pay little more than lip service in support of any Russian chancers who opt for the litigious gambit.

TSM

Two basic cut-out-and-keep-perspectives

Taken near Dead Horse Point and Canyonlands National Park, Utah; source http://www.marketplace.org/topics/economy/us-headed-fiscal-cliff  [Creative Commons]

The glass-half-full version:

Negotiations succeed in securing a temporary extension of expiring tax provisions and spending cuts.

This is the ‘kicking-the-cliff-down-the-road-for-a-few-months’ scenario.

In that world, a short-term debt ceiling increase will have to be agreed, to get the economy to the Spring, when the real work of a deal on fiscal policy would begin.

This would require that the economy be definitively in recovery mode [arguable, but go with it for now please] and despite the prospect of market uncertainty, balance of risks to US growth projections for 2013 would be tilted upside.

Extreme outcomes feared by many today in a worst-case scenario Cliff would thus be moderated to a reasonable extent, at least. [But even in this brighter world, the Cliff doesn't disappear; it's just delayed for the medium term.]

The bear version:

Election results for The House of Representatives and [one third of] the Senate show that the balance of power in Washington DC post-election looks suspiciously like it did before.

The government is still regarded as divided in this world. In fact, arguably, the new House and new Senate are more polarized than before – in this more negative view, with fewer moderates all round; more right-wing right-wingers and more left-wing left-wingers.

In that world, fiscal cliff negotiations become another grown-up game of chicken, basically, in the same way the debt ceiling negotiations did.

House Republicans would probably oppose any kind of tax increase – but many commentators expect them to eventually agree to an end of the ‘payroll tax’ break.

It’s the ‘Bush tax’ cuts which would probably cause the most fireworks.

Republicans would not agree to those ending easily, if at all, even if automatic spending cuts are likely to be delayed until 2014 and maybe beyond.

All this might unsettle financial markets in November and December and put downward pressure on US Treasury yields, even if some sort of fudge is the likeliest eventual outcome as various final deadlines [late in the Spring] loom.