Currency opportunity spotted amid the Cyprus carnage by IronFX’s Gittler
Marshall Gittler, head of Global FX Strategy at IronFX sees opportunity in the challenges now facing Cyprus and its bank depositors.
The decision has proved rather controversial, with many pundits upset that insured depositors have been included in what is being labelled a tax but is really more of a debt-for-equity swap.
We agree that the solution was not perfect from Cyprus’ point of view, but it followed the “Golden Rule”: he who has the gold makes the rules. The Northern countries insisted that depositors had to be included in any solution and the government apparently wanted to keep the level of payment on large-lot depositors low enough so as not to destroy the banking industry.
While it’s easy to play Monday morning finance minister, the decision here was not between a perfect solution and this imperfect one, but rather between a catastrophic disorderly bankruptcy and a painful but controlled resolution of the crisis. If the president had rejected the proposal, the ECB would have terminated aid to two distressed banks and they would have just collapsed. This would’ve saddled the government with a bill of around €30bn to compensate deposit holders, which the government could not pay. In that case, the banking system probably would have collapsed and all the depositors, including the small ones, would’ve wound up losing much, much more money than they did – maybe 100% bail-in! Not to mention the knock-on effect on the economy and potentially an exit from the euro, with catastrophic effects on Europe.
By doing it this way though the solution keeps Cyprus’ debt/GDP down to a manageable level of 93% of GDP, not far off the EU average of 90% of GDP, and will allow the economy to grow. It wins IMF backing and probably Russian backing as well. In that respect Cyprus is spared the drip, drip, drip of program after program that other countries have suffered from. “One and done,” you might say. The country secures the jobs in the banking sector and avoids a new recession.
EUR/USD has moved lower today on fears that the bail-in of insured depositors will start bank runs in Spain and Italy. I doubt that – everyone realizes that the Cyprus banking model, with one-third of its deposits from overseas, is unique among the troubled peripheral countries. So I would say that if anything this is a buying opportunity – except it looks like the market may have already realized that, as it’s bounced off its lows.
The key point to watch is the Cyprus government’s vote on the matter. While some of the representatives have said they won’t vote for the package, the experience with other countries, like Greece and Spain, or the US, has been that once lawmakers look over the precipice, their willingness to jump declines notably and they take the necessary steps no matter how unpopular they are. That could be the trigger for further EUR/USD strength and a rebound back above 1.3000.