Cyprus effect: EU trumpets deal, but trust is broken
Equity markets rallied the morning after a midnight announcement in Brussels to deal with imminent bankruptcy and default of Eurozone member Cyprus, but the initial relief soon gave way to deeper misgivings expressed across Europe and beyond by investors and managers.
The euphoria of Cyprus’ 11th hour restructuring deal, which protected deposits below €100,000 but inflicted a haircut of approximately 40% on those above as a “good bank and bad bank” set up takes place, didn’t last long into European trading. “Initial reaction lifted EURUSD to 1.3050 in Asian trade, but most activity in our session traded on a 1.29 handle,” noted traders at BMO Capital Markets, adding that Moody’s expressions of concern over French banks added to the” soft undertones”.
Asset classes that benefitted immediately were German bunds, the US dollar and Gold, which has been lifted from what analysts only a week ago was calling a cyclical downturn.
Jeroen Dijsselbloem, head of the Eurogroup of finance ministers, said after the deal: “We’ve put an end to the uncertainty that affected Cyprus and the euro area over the last few days.”
But asset managers said his relief might be premature.
What should have been a small problem for the Euro bloc (although not for Cyprus itself) escalated due to perceived mishandling over the course of a week into a major political and financial threat. At one point the VIX index of volatility leapt 32% in two days.
Critics said EU policymakers seemed routinely in crisis, holding midnight meetings against close deadlines, which created the impression of ad hoc responses, or “strategy on the hoof”.
“The whole affair has highlighted the difficulties of making decisions in the Eurozone and the impediments to a true single market, for example in banking supervision,” said Marshall Gittler, Head of Global FX Strategy at IronFX. “As usual, the decision came around midnight on a Sunday (0:40 AM Brussels time), a familiar pattern now. Is that anyway to run an economy?” Said Dan Morris, Global Strategist at J.P. Morgan Asset Management. “Cyprus’ problems will be resolved, but it was an unnecessary crisis; the agreement should ensure the longer-term impact on markets is minimal.”
Analysts at Alpari Research said Cyprus has avoiding becoming the first country to default on its debt and exit the eurozone, but ” even with capital controls being put in place, a gradual run on the banks is inevitable, unless the country can guarantee that no further levies will be applied.
“The only problem here is that it can’t.” Like the “deal” for Greece, managers believe that creditors will be back, and that suggests either another levy, or debt forgiveness. “Greece’s situation was described as unique,” said one commentator.
“And now Cyprus is said to be special. I suppose Italy will be called exceptional. We can’t believe the politicians anymore.”
Eurogroup statements that it effectively addressed either Cyprus’ debt level or what was billed as a threat by a “bankster” offshore hub dominated by Russian oligarchs, have been met with scepticism.
Noted Stephen Pope, author of the market commentary Spotlight Ideas: “…The penalty on accounts that hold over €100,000 has made absolutely no distinction between domestic accounts, or foreign held accounts. So where is the drive to stamp out money laundering?” He added that legitimate local and international corporates will also be hit by the proposed measures.
A comment on Twitter, where breaking news and comment far outpaced other media, read : “Why the sudden focus on money-laundering? They’ve watched it grow over years and haven’t done anything about it before.” Other said the initial proposal to raid bank deposit accounts, as well as the subsequent inclusion of pension fund reserves in the “bail-in”, had “crossed a Rubicon” of public trust which would not be quickly or easily repaired.