A push by the so-called Troika (a tripartite committee led by the European Commission, European Central Bank, and International Monetary Fund) to impose a deposit tax on Cyprus-based bank accounts was flatly rejected this week. As the Cyprus government, EU, ECB and IMF try to find a compromise before Monday, the rest of the world is watching closely, even if market action this week does not portray a high level of concern. Still, the Troika’s original proposal should give investors in European senior debt some cause for concern, according to Fran Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs, who also believes that the entire process does not bode well for future bank resolutions in Europe’s larger peripheral economies.
“Cyprus has built up its status as a tax haven and its banking system is now close to seven times the size of the country’s GDP. Given that scale, I see no option for the government by itself to bail out the banks,” said Rodilosso. “It certainly seems as though Cyprus is a test case for some new approaches within Europe to keep the costs of bailing out banks away from the taxpayers in other countries, namely Germany. That the very banks in question in Cyprus were largely damaged by the Greek restructuring seems to have had minimal impact on the equation.”
“Upon announcement of the original package, there were legitimate questions of fairness voiced by several different constituencies,” Rodilosso added. “I do not think, however, that Europe would have been pushing for a tax on depositors were the deposits in Cypriot banks primarily those of its own citizens. That is why I and so many others take the skeptical view that the Troika considered Cyprus to be small enough that any resulting volatility in both the markets and among the island’s citizens would not cause wider contagion. So far that assumption has held -- the Cyprus crisis has been relatively contained. From a longer-term perspective, this past week, in my view, it paints a bleak picture about the strength of the Troika’s anti-crisis formula.”
“The news around Cyprus did appear to cause modest widening of spreads on senior and subordinated bank debt across Europe, with more substantial widening in the periphery,” continued Rodilosso. “While the original Cyprus plan imposed losses on subordinated holders, it also attempted to set a new precedent in ‘bailing in’ depositors. In my opinion, the latest plan is likely to still impose a significant haircut on large deposits. It can be argued that with its small amount of debt outstanding the Cyprus banking system is a special case and that depositors or the official sector, government therefore bears a relatively greater burden (and the official sector almost never does). But the plan reveals that in the eyes of the Troika, in a given situation, nothing is sacred. If deposits are not sacred then one must assume that under the right set of circumstances senior debt would not be sacred either.”
Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. Among the Market Vectors ETFs under his watch areInvestment Grade Floating Rate ETF (NYSE Arca: FLTR), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), LatAm Aggregate Bond ETF (NYSE Arca: BONO), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM), International High Yield Bond ETF (NYSE Arca: IHY), and Renminbi Bond ETF (NYSE Arca: CHLC). As of December 31, 2012, the total assets for these ETFs amounted to approximately $1.4 billion.
Van Eck Associates Corporation does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions.
Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. This is not a recommendation to buy or sell any security nor is it intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $27.6 billion in assets under management, making it the fifth largest ETP family in the U.S. and eighth largest worldwide as of December 31, 2012.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and managed approximately $36.6 billion in investor assets as of December 31, 2012.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.
The Funds may be subject to credit risk, interest rate risk and a greater risk of loss of income and principal than those holding higher rated securities. As the Funds may invest in securities denominated in foreign currencies and some of the income received by the Funds may be in foreign currency, changes in currency exchange rates may negatively impact the Funds’ returns. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability. Investors should be willing to accept a high degree of volatility and the potential of significant loss. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. For a more complete description of these and other risks, please refer to the Funds’ prospectus and summary prospectus.
The “net asset value” (NAV) of an ETF is determined at the close of each business day, and represents the dollar value of one share of the ETF; it is calculated by taking the total assets of an ETF subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as an ETF's intraday trading value. Investors should not expect to buy or sell shares at NAV. Total returns are based upon closing “market price” (price) of the ETF on the dates listed.
Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called “creation units” and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 888.MKT.VCTR or visit vaneck.com/etf. Please read the prospectus and summary prospectus carefully before investing.
Van Eck Securities Corporation, Distributor
335 Madison Avenue, New York, NY 10017
Mike MacMillan/Chris Sullivan, 212-473-4442
Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes.
Markets are closed on certain holidays. Stock Market Holiday List
By accessing this page, you agree to the following
Press Release Service provided by PRConnect.
Stock quotes supplied by Telekurs USA
Postage Rates Bots go here