I’ve always been fairly decent at geography, so Sunday evening when headlines were buzzing with news of Cyprus, I turned to the globe for some frame of reference.
The first Mediterranean island I looked at turned out to be Sicily, the second was Crete. I finally found Cyprus a little east of where I thought it was. My point? Why was an obscure island nation off the coast of Turkey impacting financial markets around the world, taking markets in Asia and Europe down by roughly 2 percent?
The answer is, “it shouldn’t," and by the time U.S. markets opened on Monday investors had regained some level of composure.
There is a common saying in the investment world that markets hate nothing more than uncertainty. Well this is almost true; in reality markets hate one thing even more than uncertainty: a run on the bank, and the Cyprus headline involved a bonafide banking panic.
During all the financial turmoil of the last five years, the Lehman collapse, the U.S. subprime credit crisis and the European sovereign debt mess, the bank depositor has remained a sacred and protected financial player.
All modern banking systems have some sort of depositor insurance (FDIC here in the U.S.) and during all the bailouts and bond restructurings around the world only one nation, Iceland, allowed decisions impacting bank depositors to occur. Those decisions in Iceland caused the economy to crumble and currency to collapse.
So when news came out Sunday night indicating the European Union was negotiating a plan with Cyprus – an EU member which uses the Euro as its currency – to confiscate a percentage of depositor funds held in Cypriot banks in order to “stabilize” the nation’s banking system, stock markets had a sobering response.
Thankfully, and wisely, investors in the U.S. took the news in stride. Cyprus is a tiny economy with an outsized and oddly situated banking system. The problem there, due largely to Cypriot exposure to bad Greek government bonds, really is largely inconsequential here in the U.S.
This doesn’t mean, however, there is nothing interesting to see here. Later in the week the drama increased when Russia stepped into the situation offering an alternative plan to the one being promoted by the European Union and IMF.
Russia and China, both still considered emerging economies, have emerged as instrumental players and a source of rescue for weaker and heavily indebted developed economies.
Both nations are cash rich for different reasons, and both nations have ambitious agendas to increase their influence on the world economic stage and their control of natural resources around the globe.
Ultimately, I won’t be adjusting my investment strategy due to Cyprus, but I will be watching this spectacle unfold for clues to the possible world economic stage of tomorrow.