If it’s Tuesday it must be another European crisis that captures the worlds’ attention resulting in breathless commentary on our favorite financial channels.
By now we all know the scenario. A small country with an economy smaller than Shreveport, Louisiana is broke in this case shockingly because its banks are broke. Those banks are totally opaque, seven times larger than the country’s total GDP and well known to be a home for money laundering in this case not from drug dealers but numerous Russian constituencies, the mafia, government official and oligarchs. Depositors small and very large who thought their deposits in banks were safe were suddenly faced with a haircut to partially fund a bailout. Not surprisingly in retrospect this caused chaos and fury from those depositors whether Cypriot or Russian. Questions on how this “policy” might spread to southern European banks who are also challenged — albeit for different reasons — immediately became the larger concern. Will Cyprus become the first country to exit the Euro, a Cypxit? Does it represent a possible Archduke Ferdinand event for the Euro?
If this proves anything, Europe is far from finally solving its many, many problems. To a large degree the world has been largely complacent since Mario Draghi declared the intention of the ECB to do whatever it takes to keep the Euro intact, the so-called Draghi put. Since his announcement last July, we have seen the Euro Stoxx 50 Volatility Index below 20 consistently particularly since mid-November. This afternoon as I write, the V2X is down slightly more than -12% to 18.9.
If anything, investors must be aware and expect volatility and be ready to embrace change. It’s also about time the world sees continued resolution to the many and larger issues in Europe.