By Jason Gaywood, director at HiFX
For a third time in the last 12 months, we have all witnessed another weekend of poker faces across the Eurozone as those with all the cards once again took on the bluffers with nothing in their hand. This time however, the dealer didn’t blink.
One thing is for sure, this deal is a disaster for Cyprus. For a decade, the Cypriot government has courted ultra-high net worth Russian oligarchs as the offshore tax haven of choice. The breaking up of Cyprus Popular Bank and the imposition of a 40% levy on savings in excess of €100,000 held at the Bank of Cyprus will abruptly end this and lead to an overnight drop in Cypriot GDP of about 10%.
This alone would cripple any economy but couple it with the capital controls that will need to be imposed and the genuine lack of an alternative way of boosting output in such a tiny economy and one can quickly see that President Nicos Anastasiades’ administration is in jeopardy and is unlikely to survive. Civil unrest, strike action and investors diving for the exit will be followed by decades of imposed austerity.
In this instance, an exit from the EU and the Single Currency would surely have been the lesser of two evils.
But what for the rest of the Eurozone? Is this nothing more than an itch on the elephant’s skin? Well, unfortunately not. Averting an unruly exit by Cyprus will be lauded in Brussels as a good result in the short-term — another shining example of how to prop up the weak Southern States. However, the galacticly short-sighted and vitriolic move by German ministers led by Wolfgang Schauble to impose a direct levy on investors in Cypriot Banks is a game changer for the whole of the EU.
Previous sanctions have targeted bond-holders or shareholders of banks — not savers. Granted, in the end, smaller [largely domestic] investors were protected but ask yourselves what you would do now if you had a savings account in say Greece or Spain.
Directly penalising, or even the perception of the possibility of penalising savers is likely to lead to the wholesale withdrawal of funds from investment accounts across Europe, adding to the already difficult task European Banks have in attracting ‘real money’ into the system. Bluntly, cash is the life blood of any financial system and the lack of it is what is causing all the problems EU Member States are failing to tackle on a daily basis.
Once again, the can has simply been kicked down the road. The Cypriots needed a €10 billion injection and would have sold their souls to the devil (or Russia) in order to secure it. In the end, the EU/ECB/IMF troika granted it in order to prevent a Cypriot default and exit causing a domino effect as the Greeks, Spaniards and the Irish questioned the terms of their respective bailouts.
Take a step back though and nothing has been solved by all the late night meetings and flights from Nicosia to Moscow and Brussels. Cyprus may just be able to raise €5.8billion by destroying what is left of their banking infrastructure but what will they do next time, and there will be a next time, they need a cash injection? With the family silver already sold and all the bridges burnt, it would appear that full scale default has simply been deferred rather than averted.
This underlying concern is underlined this morning by both the currency markets and European equities where the Euro and the various bourses, after an initial bounce, have simply settled at the levels they were trading at midway through last week. At the time of writing EURUSD was steady at 1.3000 and EURGBP at 85.5p. Further out, the outlook for the Euro remains decidedly tenuous.