A push by the so-called Troika (a tripartite committee led by the European Commission, European Central Bank, and International Monetary Fund) to impose a deposit tax on Cyprus-based bank accounts was flatly rejected this week. As the Cyprus government, EU, ECB and IMF try to find a compromise before Monday, the rest of the world is watching closely, even if market action this week does not portray a high level of concern. Still, the Troika’s original proposal should give investors in European senior debt some cause for concern, according to Fran Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs, who also believes that the entire process does not bode well for future bank resolutions in Europe’s larger peripheral economies.
“Cyprus has built up its status as a tax haven and its banking system is now close to seven times the size of the country’s GDP. Given that scale, I see no option for the government by itself to bail out the banks,” said Rodilosso. “It certainly seems as though Cyprus is a test case for some new approaches within Europe to keep the costs of bailing out banks away from the taxpayers in other countries, namely Germany. That the very banks in question in Cyprus were largely damaged by the Greek restructuring seems to have had minimal impact on the equation.”
“Upon announcement of the original package, there were legitimate questions of fairness voiced by several different constituencies,” Rodilosso added. “I do not think, however, that Europe would have been pushing for a tax on depositors were the deposits in Cypriot banks primarily those of its own citizens. That is why I and so many others take the skeptical view that the Troika considered Cyprus to be small enough that any resulting volatility in both the markets and among the island’s citizens would not cause wider contagion. So far that assumption has held -- the Cyprus crisis has been relatively contained. From a longer-term perspective, this past week, in my view, it paints a bleak picture about the strength of the Troika’s anti-crisis formula.”
“The news around Cyprus did appear to cause modest widening of spreads on senior and subordinated bank debt across Europe, with more substantial widening in the periphery,” continued Rodilosso. “While the original Cyprus plan imposed losses on subordinated holders, it also attempted to set a new precedent in ‘bailing in’ depositors. In my opinion, the latest plan is likely to still impose a significant haircut on large deposits. It can be argued that with its small amount of debt outstanding the Cyprus banking system is a special case and that depositors or the official sector, government therefore bears a relatively greater burden (and the official sector almost never does). But the plan reveals that in the eyes of the Troika, in a given situation, nothing is sacred. If deposits are not sacred then one must assume that under the right set of circumstances senior debt would not be sacred either.”
Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. Among the Market Vectors ETFs under his watch areInvestment Grade Floating Rate ETF (NYSE Arca: FLTR), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), LatAm Aggregate Bond ETF (NYSE Arca: BONO), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM), International High Yield Bond ETF (NYSE Arca: IHY), and Renminbi Bond ETF (NYSE Arca: CHLC). As of December 31, 2012, the total assets for these ETFs amounted to approximately $1.4 billion.
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Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. This is not a recommendation to buy or sell any security nor is it intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $27.6 billion in assets under management, making it the fifth largest ETP family in the U.S. and eighth largest worldwide as of December 31, 2012.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and managed approximately $36.6 billion in investor assets as of December 31, 2012.
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