James Saft

By James Saft

(Reuters) – One clear winner from Cyprus’S imposition of capital controls is the U.S. dollar, which stands to benefit from public and private flows after another round of damage to the euro’s reserve currency status.

The euro fell to its lowest against the U.S. dollar in four months on Wednesday, falling below $1.28 after Cyprus moved to limit the flow of money out of the country in the aftermath of a bank bailout which singed foreign bank lenders and depositors alike. The dollar was just below its 52 week high against a trade-weighted basket of currencies, indicating that its strength was broad-based.

Following a bailout package that includes a substantial hit to uninsured deposits, many of them Russian, Cyprus imposed a limit of 300 euros per day on account withdrawals and set a limit of 5000 euros per month on credit and debit cards used abroad.

This should surprise absolutely no-one. Whacking depositors was probably the right thing to do, but it is a policy with substantial costs, and not just to Cyprus.

The introduction of capital controls actually will mark the effective debut of a new currency, the “Cyprus euro.” As a euro held in Cyprus is no longer a unit of value with free movement, it will no longer be worth as much as a euro held in France or under a mattress in Moscow.

March 27 (Reuters) – One clear winner from Cyprus’S
imposition of capital controls is the U.S. dollar, which stands
to benefit from public and private flows after another round of
damage to the euro’s reserve currency status.

The euro fell to its lowest against the U.S. dollar in four
months on Wednesday, falling below $1.28 after Cyprus moved to
limit the flow of money out of the country in the aftermath of a
bank bailout which singed foreign bank lenders and depositors
alike. The dollar was just below its 52 week high against a
trade-weighted basket of currencies, indicating that its
strength was broad-based.

Following a bailout package that includes a substantial hit
to uninsured deposits, many of them Russian, Cyprus imposed a
limit of 300 euros per day on account withdrawals and set a
limit of 5000 euros per month on credit and debit cards used
abroad.

March 25 (Reuters) – Moral hazard may not be quite dead in
Europe but it has a bad, hacking cough.

A new, tougher policy on banking bailouts, made flesh in
Cyprus and enunciated by Dutch Finance Minister Jeroen
Dijsselbloem, will shrink Europe’s arguably overly-large banking
system and, ultimately, may put unbearable pressure on the
currency union.

Actually the policy, allowing holders of bonds and uninsured
depositors in insolvent banks to actually lose money, is not so
much new as a return to following the rules of capital
structure, with equities taking the first loss and uninsured
deposits the last to suffer.

By James Saft

(Reuters) – Even if you have zero exposure to the euro, the sad tale of Cyprus teaches investors about important old and new realities.

This tutorial comes compliments of the tiny euro zone island off the coast of Greece, which has been a favored haven for billions of euros from mostly Russian investors but is now facing a financial meltdown.

First, there is still no free lunch. High-reward, low-risk investment products aren’t.

March 21 (Reuters) – Even if you have zero exposure to the
euro, the sad tale of Cyprus teaches investors about important
old and new realities.

This tutorial comes compliments of the tiny euro zone island
off the coast of Greece, which has been a favored haven for
billions of euros from mostly Russian investors but is now
facing a financial meltdown.

First, there is still no free lunch. High-reward, low-risk
investment products aren’t.

March 20 (Reuters) – Cry ‘Bubble!’ and let slip the dogs of
subprime.

Britain on Wednesday unveiled a new budget including 130
billion pounds of mortgage guarantees which will enable patsies,
er, hardworking home-buyers, to buy properties worth as much as
600,000 pounds ($900,000) with as little as 5 percent down.

And no, thank you for asking, Chancellor of the Exchequer
George Osborne did not just wake up after six years in a
medically induced coma.

March 19 (Reuters) – Unfair and a bungle it may be, but the
plan to levy bank deposits in Cyprus does have its virtues.

This is especially true if the proposed 5.8-billion-euro
levy is re-worked to shelter smaller depositors, allowing more
of the burden to fall on the huge number of large offshore
depositors, many of them from Russia.

The levy is a good thing for Cyprus in two ways: it helps to
protect future taxpayers; and it will tend to shrink the
island’s grossly distended financial services industry. It will
drive a stake through the heart of the idea that it is sensible
for an economy within the euro area to have a banking system
seven times the size of its GDP and will hopefully lead to the
withering away of its offshore banking industry.

March 14 (Reuters) – The gusher of new money that has fed
the growth of the global asset management industry for a
generation has slowed to a trickle, making the next few years
make-or-break for many firms.

Growth in new money flows will slow to less than 1 percent
annually for each of the next five years, according to a study
by industry consultants Casey Quirk, as against 6 or 7 percent
in the good old days before the crisis.

That is sure to put pressure on many existing firms, many of
which owe their institutional framework to a time when a simple
focus on traditional products aimed at baby boomer savers was
enough to ensure success.

March 13 (Reuters) – The 27-year-olds making the mistakes
change but the flaws in the incentives and risk models at the
heart of the global financial system remain basically unchanged.

Calling them ‘mistakes’ is charitable, as they are actually
systematic and predictable exploitation of loopholes by
employees without sufficient skin in the very risky game they
are playing.

Here is the game, as it was played in 2008 and as it is
being played now: work for a financial firm, sell insurance
against an event the probability of which, while rare, is
underestimated by your firms’ models. Sit back, collect the
premiums, appear to be “beating the market”, and be paid
accordingly. If the rare event does happen, and it likely will
before your firm has been fully compensated, off you go with
your pay, leaving investors and regulators to clean up the mess.

By James Saft

(Reuters) – Equity markets, especially in the U.S., are being held aloft by two historical anomalies – quantitative easing and high corporate profits – either of which could start to go away in 2013.

Friday’s surprisingly good update on the state of the U.S. job market raised the chances that soon the Federal Reserve will be more actively – and publicly – mulling how and when it will slow or end its purchases of assets.

At the same time, U.S. corporate profits are at vertiginous levels and climbing, arguing at the very least for caution about their future path.