Heaven bless the Island of Cyprus and our noble general Othello

Mint – Bill Blain’s Morning Porridge  - March 22 2013

Apologies for not publishing this sooner, but I was working hard on other assignments that dictated they be given priority: Brian Bollen

Very short porridge this morning. I was doing a block on CNBC this morning – which was mainly about Cyprus. Yep… the news wires do love to focus on the shlock-horror stuff! Which is something of a shame as Cyprus is really such a small part of the global situation – a pimple of the posterior of the Euro, as I described it this morning. Stuff like Italy election part two in prospect, or new BOJ chief or Fed comments driving growth prospects should be much more of the moment.

But,

Cyprus is caught in a poker match it just can’t win. It’s holding a worthless mixed hand, while Germany’s four cards include five Aces! Unless it delivers a workable package, the country will fold on Tuesday. Germany is taking the bet contagion to rest of Europe will be limited. They are probably right. The damage to bank confidence has been done. Heads Germany wins and don’t have to bailout Cyprus, tails Cyprus loses and is forced to do what Europe tells them to do.

So… some mix of bad bank and €100k+ depositor losses in in prospect. Unhappy Russians. (Perhaps not.. Putin may be very happy to see offshore capital spanked!) The unity/salvation fund idea is pants. (Note to Cypriots: Salvation infers you are not going to purgatory/hell...you might still be dead!) The Russians already folded from the game and walked away, correctly judging Cyprus assets (including future gas) ain't worth much.

I got a couple of calls while I was on air (thanks guys!!!) asking about a “Trade of the Day” I propped on CNBC: Sell Cyprus, buy Short Greece.

The trade here is quite simple – the risk Germany walks away from Cyprus over the weekend are very real. It’s entirely up to the Cypriots to come up with a plan that meets German expectations. The risk is clearly to the downside for Cyprus. Yet, Cyprus bonds are still fairly strongly bid on fact the bonds are international law and many well know bolshy distressed funds are holding the bonds. The likelihood that any losses on these bonds will be strongly contested by holders perhaps makes the bonds more attractive than they should be.

On the other hand, Greek short-dated bonds look undervalued. Greece may still be a basket case, but it’s a basket case the Europeans have invested too much time and effort to let go. And we are finally seeing signs the economy has bottomed. We’d recommend things like Hellenic Railways, OTE or any of the foreign law bonds. Even the bailout GGB bonds have value.

Happy to talk to anyone about these ideas..

So with the prospect of a wet, windy, cold miserable weekend keeping me off the water, what else to do except watch the Cyprus debacle unfold?  Students of Shakespeare will remember Othello didn’t end well for any of the participants…

Have a great weekend..

Bill Blain

0207 786 3877

[email protected]

[email protected]