Chances of eurozone break-up virtually nil, says DailyFX’s Spivak
The likelihood of any Eurozone member state exiting the currency bloc remains virtually nil. This applies to Cyprus no less than it does to a far larger country, such as Spain for example, because the critical concern is that of precedent for the region rather than any individual member state per se.
The overall EU and the Euro area within it have always placed political expediency ahead of economics, which frankly explains the accelerated inclusion of many now-problematic southern European states into monetary union. Creating a baseline case for how the unraveling of the many institutional connections now binding Eurozone states together is an unthinkable scenario for European lawmakers given the tremendous political capital that has been expended to bring the region to where it is today.
Simply put, regional actors see the geopolitical advantages of a united Europe as too great to allow economics to get in the way, and it would take a truly existential crisis to change that.
Much has been made of the flare-up in Cyprus, but in structural terms the danger posed by the country going forward seems far less ominous than hysterical headlines would have one believe. Most critically, secured depositors were left unscathed – thereby maintaining the integrity of the EU deposit guarantee – while capital controls prevented a bank run that threatened to spook capital out of financial institutions in larger member states with similarly sickly lenders (notably Spain).
This allows time for unsecured depositors in those larger member states to shift capital slowly such that they are protected from a Cyprus-like scenario in the event that banks in their part of the Eurozone become problematic. After all, they of all people are least interested in seeing a bank run (and thereby averse to sparking one), fearing that disorderly capital flight might leave them behind.
From traders’ perspective, this means that the potential for Cyprus to leak instability elsewhere has been effectively contained (at least for now). That clears the way for the return of fundamentals as the driving force behind investment decisions, with deepening recession and its implications for ECB monetary policy of particular importance.
While the central bank has held back from accommodation for now, de-escalation on the sovereign risk front is likely to reduce risk premiums bank into bond yields and improve policy transmission, giving Mario Draghi and company the opening they need. If the ECB does ease, that seems likely to be supportive for regional shares as well as currencies geared to Eurozone growth (SEK, NOK) against the Euro, which ought to come under pressure if the central bank bears down on borrowing costs.