Maybe people thought it was too small to matter, or just that it didn’t fit in the famous PIIGS acronym, but Cyprus has stayed very much on the periphery of investor consciousness during the euro crisis. Until now of course.
Sic Pig is the best I can do to bring Cyprus into the acronym (or rather the best wordsmith.org can do), but it hasn’t needed anyone’s help to bring it front and centre into the crisis.
The ‘bail-out’ (in inverted commas because it so obviously doesn’t avert either pain or disaster) of Cyprus’s two biggest banks will be funded in part by a raid on deposits over the 100,000 euro mark. And in case people weren’t paying attention, Euro Group president Jeroen Dijsselbloem has emphasised that the deal will be used as a template for future crises in the region.
Running for the hills
So, a quick question – don’t worry it’s an easy one – if you had more than 100,000 euros in a Spanish bank account, would you (a) leave it there, or (b) grab it and run for the hills (probably Swiss ones)?
Here’s another easy question: if you take a bankrupt economy, give it just enough money to keep it ticking along, but rip out about 10%-20% of its GDP, will it (a) return to growth and stability or (b) suffer great hardship and pretty soon need more money?
(If you’re struggling with that one, then here’s a hint: take a look at the recent experience in Greece.)
Jeremy Warner has written a stinging critique of the deal in the UK’s Daily Telegraph and it’s well worth a read.
‘A fundamental principle of monetary union – that the currency is worth the same, wherever it is held and whoever holds it – has been shattered,’ he explains.
‘The possibility of capital controls to prevent deposit flight when the banks reopen only further clouds the picture. Free movement of capital is another basic principle of monetary union which the euro zone seems casually prepared to disregard. This is not a proper currency.’
Suspension of democracy
Perhaps most worrying of all is the suspension of democracy. We’ve already seen ‘technocratic’ governments shoehorned into Italy and Greece, and it’s no accident that the Cyprus deal has been structured so it doesn’t need to be ratified by parliament.
The euro experiment has become like watching a train wreck. It is so obviously heading for disaster, but powerful forces are driving it there and there appears to be no way of stopping them.
The drivers are using the frightening prospect of a derailment to keep the train on track, but at the end of the line is a brick wall. All we can hope is that money is all people lose when the inevitable happens.
Yet financial markets appear curiously ambivalent to it all. Maybe investors are taking the view that after years of crisis the world has been able to ring fence Europe’s problems and a euro collapse won’t cause another global financial crisis. But it may just be that investors are tired of worrying about it.
One way or another, it looks like a good moment to check your exposure to Europe and the financial sector.
If you want to be invested in equities (and over the long term they have proved the best place to be despite any number of crises), it might be best to focus on quality companies, which add value for their customers and offer durable competitive advantages, generating plenty of cash and carrying minimal debt. There’s a bunch of them on our buy list at Intelligent Investor Share Advisor.