Situation Update

Contagion fears in the Med are spreading as Greek GGB (Bonds) have fallen 7%, this is the entire year's gains wiped out on the fear of contagion from Cyprus.

Senior German officials have come out and doused the fire with gasoline saying they have no idea if there will be a vote in Cyprus, the problems lie with Cyprus and without some rescue program in place, Cypriot banks face liquidity shortages and (according to the German official), won't be able to open. We've already heard that without the bailout the 2 largest banks on the island would fail as of their opening today (which has been pushed back-BANK HOLIDAY-See I told Ya! I'm just kidding about the victory lap, not the bank holiday).

Then the German Finance Minister himself, Schaeuble, came out and said Cypress had the wrong business model and he "Feels sorry for the Cypriot people", this prodding of course will not go over well as Cypriots tore the German flag from the German Embassy yesterday.

A volley was returned by the former head of the Cypriot Central Bank in comments to Bloomberg,

"What we have seen in the last few days is a very serious blunder by the European governments that are essentially blackmailing the government of Cyprus to confiscate the money that belongs rightfully to the depositors in the banking system in Cyprus." He then concludes quite clearly, "It is not clear how this can affect in a positive manner the European project going forward." 

He actually went further...

Next the Cyprus Finance Minister resigned this morning, the president has said he will not accept his resignation... I'm sure Germany has a Goldmanite pal who is a Cypriot citizen with all of his money in Swiss accounts who would be more than happy to fill the position.

What has really dumped water on the market is the news that parliament in Cyprus WILL VOTE on the plan, but the only votes that were yes, were from the president's ruling party and they will abstain from the vote so it sounds like there won't be a single vote in favor of the package-WAY TO GO EU FIN-MINS, another job WELL DONE! Can this vote be anything other than poking a stick in Merkel's eye?

After all of this, Spanish, Italian and Portuguese bonds are moving to their wides as there's more contagion fear. Spanish and Italian Equity indices are down 3-4% on the week so far.

As mentioned yesterday as part of the Flight to safety trade, Swiss 2 year rates are even more negative than yesterday, people are willing to accept negative returns just to find some safety.

Currencies are getting very interesting, please recall the carry trade and up to 200:1 leverage when I post on FX.