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Cyprus Hits Hedge Funds with Long Euro Position Off Guard

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Cyprus Hits Hedge Funds with Long Euro Position Off Guard

Cyprus was the fifth nation in EU to seek rescue from the Torika in an attempt to save itself from a burgeoning debt crisis. However, the €10 billion that were set to reach the country as part of its bailout plan were delayed when Cypriot parliament postponed the vote on the bailout terms. The conditions for the rescue money came with a catch, which required even the ordinary depositors in Cypriot banks to pay an additional tax. These taxes were proposed in order to raise €5.8 billion for the bailout package. The terms of the plan have been severely criticized not only within the country but also by Russian government.

Russia is one of the biggest investors in Cyprus and consequently Cypriot banks owe a major chunk of their deposits to Russia, Moody’s Investors Service estimates that the Russian funds amount to $31 billion. Vladimir Putin called the terms of the bailout, unfair, unprofessional and dangerous.  The Russian stock market was consequently the most severely shaken on concerns of the added tax included in the bailout plan. The Euro also fell the most since last year, dipping to $1.2882 in Asia, was down 1 percent in US and finished the day flat in Europe. Russia’s Micex Index was down as much as 2.5 percent (highest since September 2012) but closed the day almost flat. Another victim of the current crisis, US and European hedge funds.

Before the Cyprus crisis unravelled in EU, the markets were hit once before when elections in Italy took an unexpected turn, and Hedge fund selling of the euro increased. Hedge funds are still buying sterling, Canadian dollar and Australian dollar while selling the euro. About 40 percent of CAD selling was reduced by the end of January. However, it appears that many hedge funds did not sell out in time as the chart below demonstrates.

CFTC Forex Positions

As the debt crisis flared up after the Italian elections many hedge funds started to short or at least sell long Euro positions; this ties into our previous post on dollar positioning against other currencies. Official accounts bought US Treasuries worth $47.4 billion, the largest official purchase since 2008. The USD strength was driven partly by these inflows, BAML notes in its analysis of currency flows until the week ending on March 15.

There is strong likelihood that the terms of Cyprus bailout will be amended as the country’s government has the right to do so. For now, the Euro is more endangered due to the uncertainty in Italy, rather than what might happen in Cyprus. It remains to be seen who won or lost money on their currency bets.

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