It’s just after 4 PM on the East Coast of the United States and the markets are now closed. Unfortunately this is the second day that the situation in Cyprus has affected the worldwide markets.
All of Europe closed lower and in the United States we actually started off with a good trading day. We had good economic reports concerning the housing markets and it looked like a good trading day until around 12 noon when the Dow dropped about 70 points, based on news from Cyprus.
The news from Cyprus has taken on a life of its own with a minute-by-minute, blow-by-blow account of what’s happening. I will attempt as best I can to retrace what has occurred and how we got here. First, let’s talk about what we know. Cyprus unfortunately has the reputation of being the money laundering capital of the world. Their assets and deposits far exceed the nation’s GDP. Cyprus had invested in Greek bonds (sound familiar?) because MF Global did the same thing, lured by the promise of higher interest rates. If Cyprus could not receive some of form of bailout, then they would have defaulted on their own government debt come June. In my own subjective opinion; Cyprus also gave birth to a new form of trading called binary options. At one time, the only place you could trade binary options was with a firm that had a presence in Cyprus. The idea behind binary options is simple; there are only two decisions involved: long or short. There is no real skill involved as with other forms of trading. When binary options first came into being, there were numerous reports of identity thief in the United States. Identity thief is a huge issue here. Much of this has since changed. The Nadex exchange is operational in the US and more and more firms are considering binary options. But the point is I think the Euro Zone and IMF considered this when they made their decision to do the bailout.
Over the weekend the Euro Zone and IMF decided to give Cyprus a 10 Billion Euro bailout but demanded 5.8 Billion Euros as a levy for doing so. Let’s think about this: you’re going to give me 10 Billion Euros but I have to come up 5.8 Billion Euros to show liquidity. Doesn’t sound like a good deal to me. The original idea was that anyone who had less than 100,000 Euros in a Cypriot bank would pay 6.75% as a levy. Anyone who had 100,000 or more pays 9.9%. The Cypriot government knew that this would not be well received by ordinary citizens who had nothing to do with any of this and decided to exempt anyone who had less than 20,000 Euros in a bank account. The problem is that when all is said and done they would be 300 million short of the 5.8 Billion demanded by the Euro Zone and IMF. Now the Cypriot government has rejected the levy because it is seen as “unjust.†They could have considered that over the weekend, don’t you think?
Then there was a rumor that Finance Minister Sarris resigned but then didn’t resign. What is known (at this point) is that the banks in Cyprus have taken an extended “bank holiday†until Thursday. I guess that applies to their stock market as well because that’s shut down until Thursday too. A few minutes before 4 PM EST there was a rumor that the ECB was going to provide full liquidity to Cyprus and ironically enough the Dow closed 4 points higher. I guess after two days of losses the Smart Money aka the Institutionals decided that the Dow wasn’t going to close lower today. Time will tell how this all works out, so stay tuned.
