Vail Daily column: Global events impact our valley
March 22, 2013
You may have heard some buzz in the news this week about another banking crisis in Cyprus. What you may not know is the impact this tiny island nation with only about 1.3 million people was having on mortgage rates here in happy valley.
As there is no real industry there the Cypriots have developed favorable banking and tax laws to lure bank deposits, and have succeeded spectacularly in luring tens of billions from the Russians and others looking for an offshore banking haven.
The banks in Cyprus vested their assets heavily in Greek bonds. As Cyprus is part of the European Economic Union the banks depositors are insured (or until this week, thought they were insured) by the European Central Banks deposit insurance program up to $100,000 Euros (about $77,000).
Greek bonds are now basically junk bonds, and as a result the Cypriot Banks have had to write down the value on their balance sheets, making the banks nearly insolvent. This has necessitated a plea for help from the country to the European countries to bail out its banking system, to the tune of about $13 billion (which in the world of bank bailouts is chump change really).
But bankers, being bankers, are always worried about the return of their money so they posed that a condition of the bailout would require Cyprus to tax existing bank deposits from 3 to 10 percent to raise part of the cash. The levy would increase with the balance of the account, and would apply to insured as well as uninsured accounts. The fact that this trashes the credibility of the concept of insured deposits covered by the European Central Banks seemingly escaped the bankers as insignificant, but did not escape the rest of the world.
Needless to say this demand was hardly popular, and set a chilling policy precedent that even accounts that were insured against loss could be subject to loss. To stop a run on the banks they were closed and remain closed until at least next week. The Cypriot government voted to refuse to allow the levy but so far the EU is digging its heels in that it’s their way or the highway. The Cypriots are afraid if they allow this that there will be a massive exodus of foreign deposits the minute the banks reopen which will cause more of a calamity.
As stock markets hate uncertainty this has roiled the markets and caused some significant losses on the worlds exchanges. But investors behaved as they usually do and fled to the security of U.S. T-Bills, which caused mortgage rates to improve slightly this week, but it may be short lived if this crisis is resolved then markets may rebound and rates will rise again. I’ve had several local homeowner though who are benefiting handsomely from this situation that locked their loans this week.
There is an interesting twist to how Cyprus may solve their problems, and some think it may be why they were backed into this corner when other European countries have received more favorable terms on their bailouts. And like much of Cyprus’s history, it is about others wanting what is there.
In this case, there have recently been enormous discoveries of natural gas off the coast of Cyprus, and we are talking about trillions of cubic feet in waters that are generally calm and easy to drill in.
To date the Cypriots have not decided how to go about developing this vast national treasure, but its value for such a small country is truly enormous. But one thing of note is there are no local companies in this country that are capable of bringing this amount of gas to the surface. Europe has limited supplies of natural gas, and the ready demand would be immediate and the supply could run for decades.
There had been no end of interested parties interested in pitching in and develop these fields, including Russia and about every European and U.S. energy company, but the Cypriots were taking their time to cut the best deal.
There is some speculation that the European Central Bankers would like to see Cyprus make a quick decision and start awarding some contracts to get the cash flowing to not only the people of Cyprus but to their chosen business partners as well and the cheap gas to all of Europe.
Certainly the pressure of an unprecedented tax on every bank account in the country would put enormous pressure on the government to find an alternative. Curiously, the Cyprian energy secretary happened to be in Moscow this week and there is speculation that if the Russians were to come to the rescue with a loan they would be granted generous concessions to develop the gas fields.
That idea troubles Western Europe as they would then be heavily dependent on Russian natural gas and paying billions to a country they tolerate but don’t really like. If Russia wanted to mess with the European economy they could just shut off the gas tap, or threaten to.
And while all this maneuvering is going on half a planet away, mortgage rates for the rest of us will rise or fall on its outcome. One wonders why Exxon or other large oil companies aren’t stepping in and getting in the bank bailout business just to get access to these gas fields.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and can be reached at 970-748-0342. He welcomes mortgage related inquiries from local readers.