Tuesday, March 26, 2013

Cyprus Moment Is Over
Don’t worry, there will always be something to worry about. Yesterday, I reflected on how well the bull market has weathered numerous Apocalypse Now crises over the past four years. Many of them actually seem to be abating, forcing apocalyptic market pundits to postpone the predicted end of their endgame scenarios. Most recently, I anticipated that the Cyprus Moment wouldn’t turn into Europe’s Lehman Moment. Sure enough, the Cyprus problem was resolved over the weekend.

But it didn’t take very many moments yesterday for the initial rally in stock prices to be reversed by really stupid comments from a top European official. Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times that when failing banks need to be bailed out, euro zone officials would force the bank's shareholders, bondholders, and uninsured depositors to contribute to their recapitalization. He also said that Cyprus was a template for handling the region's other debt-challenged countries. Financial shares were among yesterday’s losers, especially in France and Italy.

Mr. Dijsselbloem, who is also the Dutch finance minister, said, “Taking away the risk from the financial sector and taking it on to the public shoulders is not the right approach.” That makes a great deal of sense, in theory. In practice, his reckless comments could easily upset the relative market calm that he said allowed his group to force private investors and depositors to pay for the bailout of two large Cypriot banks.

ECB President Mario Draghi deserves all of the credit for calming Europe’s markets with his pledge to do whatever it takes to defend the euro at the end of July last year. He did it again just yesterday when the ECB gave Cypriot banks access to its Emergency Liquidity Assistance (ELA) facility. By Monday afternoon, Dijsselbloem attempted to retract his earlier remarks as he issued a statement: “Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.”
(Based on an excerpt from YRI Morning Briefing)

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