Monday, March 18th, 2013

The Island of Love

In Greek mythology, Cyprus was the home of Aphrodite, the goddess of love. Today love is in short supply on the island, a bit like cash. Whatever your opinion concerning the legality or necessity of the emergency wealth tax, it feels as though another milestone has been passed on the road to the final banking crisis in Southern Europe. The authorities intend their actions to have the opposite effect, but have failed to take investor reactions adequately into account.

What is the point of large depositors risking their money in a banking system supported by a weak sovereign, if even the small depositors get savaged. If the basis of taxation is the location of the deposit, rather than residency or domicile, the rational response is to remove all spare liquidity from any country where there are the smallest doubts. Cue more capital flight to Germany, Switzerland and the UK.

Without in any way claiming that we predicted the events in Cyprus, it is interesting to look at what our sector model has been saying about eurozone banks. As late as the middle of January, the finance group (including insurance) was ranked number one and had a significant overweight. As of last Friday, before the news from Cyprus, it was ranked five (out of ten) which prompted us to cut our recommendation to neutral. Unless something truly surprising happens during the rest of the week, our proprietary lead indicators suggest that that the eurozone sector will continue to decline in both rank and weight when we next run the numbers.

By contrast the finance sector remains number one in the US sector model, number two in the UK, and number two in the Pan-European model – thanks partly to the solidity of the Swiss and Scandinavian banks. This is a crisis made in the Eurozone, made worse by poor policy responses. It’s hard to love people who take your money, and it’s not rational to allow them a second chance.

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