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Hedge Fund Monthly
 
Cyprus: The World’s Biggest “Poker Game”
Harvinder Sian and Michael Michaelides
RBS
March 2013
 

UPDATE: Click here for the latest update to this article on the Cyprus situation

Introduction

The deal to effectively haircut Cypriot deposits is an unprecedented move in the Euro crisis and highlights the limits of solidarity and the raw economics that somebody has to pay. It is also the most dangerous gambit that EMU leaders have made to date.

  • What did they do? Hit depositors.
  • Why did they do it? Politics, economics, and because they think they can get away with it.
  • Cyprus needs to vote on this and any delay of opening the banks on Tuesday is more risk-off.
  • Short term market reaction: Risk-off. The situation is fluid but watch politics, Cyprus bank runs risk, weak periphery banks impact and rating agencies. Worst case scenario? EMU exit talk. The Best case scenario? Germany is correct and the ECB bridges the time to when this is clear.
  • Big picture: This is toxic and a policy error.
  • Long bunds, sell the euro, sell periphery, Spain could underperform
  • Italy, but nobody in the periphery wins.

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