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US Investment Giant Casts Nervous Eye On Eurozone; Says No Greek, Cypriot Exposure

Tom Burroughes

20 March 2013

Janus, the US-based investment house, has said it does not have any exposure to Greece or Cyprus as it commented on the financial and political storm now engulfing Cyprus over its banking crisis.

Wahid Chammas, Janus European equity strategy managing director, said in a note that his firm’s “positioning in other peripheral countries is quite defensive”, as he reflected on the drama in Cyprus that has hit the euro and related financial markets.

“Where we own banks, they are franchises that are dominant and where income is largely generated outside of the peripheral countries. We believe risk will re-price in Europe, which should further accentuate the positives of stock selection,” Chammas said.

Yesterday, Cypriot lawmakers voted overwhelmingly against a proposed levy on bank deposits as a condition for a European bailout. The vote has raised fears the crisis could spread.

The Cyprus government had proposed a levy on deposits which, after a meeting of euro area finance ministers at the weekend, was set at 6.7 per cent for deposits up to €100,000 (about $130,000) and 9.99 per cent thereafter. This proposal over-rides the Cypriot government’s deposit guarantee scheme of up to €100,000. The levy was required by various European finance ministries and the European Central Bank, which reportedly wanted international depositors, such as Russians, to take some share of the burden with eurozone taxpayers. The levy idea, however, has raised the spectre of similar moves in other countries where bank bailouts take place.

The views from Janus, meanwhile, add to those of other asset managers, such as Fidelity Worldwide Investment, that have argued that the Cypriot move has fatally undermined the jurisdiction's prospects as a financial centre.

One of the largest US-listed investment houses, Janus has a total of $155.6 billion of assets under management (as of 31 December 2012).

Chammas said that when looking at the MSCI European index of equities, less than 46 per cent of revenues came from the continent – with many European-headquartered companies earning revenues outside the region.

“To that end, we believe European stocks offer an incredibly compelling risk/reward, even though the economy and policy makers appear willing to enter unchartered territory.  The gap between winners and losers in Europe shall only widen, in our view,” he said.

“The annual GDP of Cyprus represents less than a day's activity for the rest of the eurozone, but the outcome of this tiny economy has major implications for the eurozone and ultimately for global growth. In a process in the hands of politicians and policy makers, actions matter more than words. So despite claims that Cyprus is a one-off situation, the attack on deposits means there is a risk of contagion to the rest of Europe,” he said.

Not without precedent

Although some reports on the Cypriot move treat it as breaking new ground, Chammas argued that the move, while rare, was not without precedent.

“Facing the choice of a tax on depositors or the failure of two major financial institutions, the Cypriot government chose what it saw as a lesser evil. Originally Europe proposed a larger deposit tax or the threat of letting the banking system fail, which would have been chaotic,” he said.

“Depositors around Europe but in especially vulnerable Greece, Spain, Portugal and Italy may worry about the safety of their savings. While depositors in Cyprus might receive an interest in either a bank or even future gas royalties in exchange for the deposit tax, it probably is small comfort to the loss of current cash on supposedly insured deposits. Euro officials will be under pressure to explain why this seizure of assets -through a clever loophole of taxation - won't occur in other countries. Given the proximity and cultural ties and the struggling fiscal situation there, contagion to Greece is especially worrisome. Saving a bank by spooking depositors seems to be a tenuous solution,” he said.

Chammas concluded by arguing that the Cyprus economy is likely to be “impaired for a long time”.

“In four years, its 60 to 90 trillion cubic feet of gas reserves may buoy its economy, but until then, the hike in taxes on interest income, capital gains and corporate income will surely create a reversal of foreign investment. Bank runs are to be expected. The European Central Bank remains committed to extending support programmes to keep the banks afloat, but the impact of deposit outflows will surely ravage that economy,” he said.

Even if investors dismiss Cyprus' situation as too small to matter, the precedent can be troubling. In the past we have argued that Greece's enduring membership in the euro wasn't about that country but about the important line in the sand that prevented bank runs in larger, more economically significant countries. Cyprus is smaller but has some of the same symbolic importance. A fiasco there may also pressure the painful austerity plans in the larger countries.

“The slowdown there may impact support for austerity plans and ultimately for membership in the European monetary union. The recent Italian elections, with another round coming soon, serve to some extent as a referendum on austerity,” Chammas added.