- Cyprus has negotiated a rescue package - on unprecedented terms.
- Most controversial is a hair-cut on deposits, also on accounts smaller than EUR100k.
- EUR is weaker, Asian stock markets are down and safe havens are in demand.
- Focus today will be on the expected vote in Cyprus's parliament.
Cyprus has been offered a EUR10bn rescue package
but on unprecedented terms – the most controversial being a one-off levy on resident and non-resident depositors (including wealthy Russians). Read more in Flash Comment: Cyprus deal is a dangerous game.
Cyprus, and in particular its banks, needs a rescue package as a result of the financial crisis and developments in Greece. An initial assessment of Cyprus’s finances revealed a shortfall of about EUR17.5bn, with EUR10bn of that just for its two biggest banks. However, a bailout of this size would leave debt-to-GDP at unsustainable levels so Cyprus has been requested to ‘mobilise internal resources’.
According to the Wall Street Journal, the ECB more or less threatened to send Cyprus’s two biggest banks into liquidation if a deal was not reached, so pressure is on Cyprus to pass a deal in parliament.
Markets have not responded well to the eurogroup decision: the euro is sold off (EUR/USD is down 1.4% to below 1.29), Asian equity markets are down (the Nikkei index more than 2%), and safe havens have rallied (the 10-year Treasury yield is testing 1.9%).
Several unanswered questions are likely to sustain market stress for now: (i) Will parliament approve an agreement and can banks reopen as planned on Tuesday?, (ii) Can an agreement be reached with Russia regarding its EUR2.5bn loan?, (iii) How will depositors react in other European countries and not least Greece? and (iv) Can European officials convince investors that Cyprus is a unique case (as was Greece)?
What is positive for financial markets, however, is that this shock is today and not 10 months ago. The ECB’s OMT programme is in place, global economic data have improved and both the Federal Reserve and Bank of Japan are supporting risk markets by printing money on a large scale.
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