Euro Crisis is Larger than Cyprus


Last year, Europe was worried about Greece, Italy, and Spain - not Cyprus. Just 20 short months ago, the three largest banks in Cyprus were give a pass by the EBA and ECB's so-called "stress test." But all of that was wrong.

In case you missed it, Cyprus is now the fifth euro area country to be pushed into bailout land. Banks in Cyprus are closed until next week while they try to figure out a rescue package for banks. The banking crisis (EUFN - News) was ignited by an international bailout package that would have taxed depositors to finance the bailout. Although the Cypriot Parliament rejected the plan, they have yet to come upon with a viable alternative.

Eight months ago, Spain (EWP - News), Italy (EWI - News) and Greece were the major credit default concern - not Cyprus. Is this the rogue wave that will - once and for all - lead to the euro's demise?

Cyprus - an Island of Calm

The Republic of Cyprus is an island country located in the Mediterranean Sea, just east of Greece. Cyprus is also one of the European Union's (EU) 27 sovereign member states (still in good standing, last time we checked), and a uses the euro currency. What about its people?

Wikipedia says:

"Cypriots are among the most prosperous people in the Mediterranean region, with GDP per capita reaching $30,000. Their standard of living is reflected in the country's "very high" Human Development Index and Cyprus is ranked 23rd in the world in terms of the Quality-of-life Index."

Put another way, Cyprus is not an emerging market like Greece (GREK - News).

Unfortunately, Cyprus is heavily indebted with a debt-to-GDP ratio of 127%. And although its economic output is miniscule compared to France, Italy, and Germany, the significance of Cyprus cannot be understated.

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Propaganda Everywhere 

The misinformation about the severity of the eurozone crisis and its scope continues. Right after Cypriot banks got a clean bill of health in 2011, the Cyprus Finance Ministry issued this misleading statement: "The measures which the banks are taking or planning to take will further increase solvency." He was wrong.

Just this week, Fitch Ratings re-affirmed the EU's long-term credit rating to "AAA." The timing of Fitch's announcement is eerily suspicious in nature. Why would Fitch issue such a statement now? Is it to instill confidence in Europe's rather shaky credit market? Or is it because Fitch really believes everything is great?

Oddly, out of the same mouthpiece, Fitch acknowledges:

"Outstanding EU loans have increased significantly since 2008, up to 55.7bn at end-2012. This is mostly attributable to the EFSM program, under which 48.5bn total loans to Ireland and Portugal were approved."

You decide whether to believe that metrics like this are worthy of AAA investment grade status.

The euro's clues

We cannot overstate the importance of ignoring the rhetoric and misinformation coming out of Europe and its PR handlers. Had investors just watched the price action in the euro, it would've told them everything they need to know - and more.

On Feb. 10, via our Technical Forecast we wrote:

"The Euro continues to sell off and has now pierced its monthly pivot. A break of the blue uptrend channel support trendline would likely provide a high probability sell setup as the uptrend since the November lows ends. This past week price also caused the RSI momentum indicator to fall below its uptrend line, a confirming signal that the trend is at a minimum stalled out, but more likely, changing. Given the prevailing bullish sentiment and commitment of speculators to a continued rally in the Euro, from a sentiment standpoint, the odds are indeed better for sellers of the Euro here versus buyers."

Since early February, the ProShares Ultrashort Euro ETF (EUO - News) has gained more than 11% while the Euro Currency Shares (FXE - News) has sunk and stunk -7.5%. Despite the bullish propaganda coming out of Europe, being short the euro was the right side of the trade because that's what technicals were confirming.

Moral of the Story

The ECB has now stated it will extend liquidity to Cyprus. (Monetary liquidity, not Kool-Aid) And so it is, the roots for the next financial crisis have been firmly planted with more of the same old hat.

Don't let the today's fascination with Cyprus cause you to miss the bigger picture. As our euro trade clearly illustrates, high probability trades still abound, while we patiently wait for other mega investment themes to play out.

The ETF Profit Strategy Newsletter identifies key support levels in the euro and other major ETF categories. It's a fact that no major rally begins without a break above resistance and no meltdown starts without a break below support.

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