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Mark's Market Blog

3-24-13: The EU is broken.

By Mark Lawrence

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It appears a deal is in place for Cyprus; in other news Fed Ex and Oracle missed on earnings. I have no idea how the markets will react to this. I don't believe this crisis is over, it's just been reduced to smoldering for a few weeks. I expect Cyprus will flare up again.


S&P 500 September 17 2012 to March 15 2013

A recent poll found that two-thirds of Cypriots favored their country’s exit from the euro zone and a strengthening of relations with Russia. There appears to be a deal: accounts under 100,000 euros will be untouched, the larger accounts will be frozen for the foreseeable future and that money used to settle bank debts. The second largest bank, Laiki, will be split into a "good bank," which will be merged with the Bank of Cyprus, and a "bad bank," which will use large deposits to settle bad debts. Large accounts will take a hit of 25% to 40% to 100%, depending on who you believe. Perhaps large accounts at the Bank of Cyprus will take a 25% hit; large accounts at Laiki bank look likely to me to take a hit much closed to 100%. Of the 147 banking crises since 1970 tracked by the IMF, none inflicted losses on all depositors, irrespective of the amounts they held and the banks they were with. This is a first for modern banking, since WWII.

There are now strict capital controls in place in Cyprus. Want to vacation there? Bring cash - your checks and visa are no good. Spend your cash - you're not allowed to take it back out. Don't run out of cash until you're boarding the airplane, or you won't eat. There are now effectively two Euros: those in Europe, and those stuck in Cyprus. The EU is supposedly based on four freedoms: free movement of goods, free movement of services, free movement of capital and free movement of people. That's over. Capital can't move out of Cyprus, so goods can't move into Cyprus and people can't leave unless they already have money outside the country.

Will it work? I can't see how. It seems obvious to me Cyprus is still headed for a banking collapse - this deal just isolates the worst of the damage to Cypriots and Russian mobsters. Cyprus also seems headed for an economic collapse, worse than Greece's. And the next time there's a crisis in Italy or Spain, you can expect there to also be runs on the banks. I'm not at all sure this deal is legal under the EU constitution; I am clear this deal only buys time, only for mainland Europe, and not very much of that. And here's a chilling thought: the EU just basically stole several billion Euros from Russian mobsters. How do you think they will respond?

Science: Lockheed has announced they are working on a prototype desalinization filter made from graphene, and magical form of carbon. They say their preliminary results are that they can speed up the process of turning sea water into fresh water by a large factor, and reduce the price dramatically. If they succeed, this is a huge game changer for China and India which are desperate for fresh water. With this technology perhaps the world can get to 10 billion people before we crash.

Health: Frogs and Alligators live in really scummy places, get cut up, but don't die of infections. This is because frog skin and alligator blood contain very powerful antibiotics. It's recently been found that the antibiotics in alligator blood can kill several strains of bacteria which are resistant to other known antibiotics including the widely feared MRSA, and they can also kill the AIDS virus. We desperately need a new kind of antibiotics, as too many bacteria have become resistant to our current stuff. Alligators may have an answer for us.

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