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18 Mar 2013
Forex Flash: Asian sentiment dominated by Cyprus news - BTMU
FXstreet.com (Barcelona) - Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ notes that the Asian session has been dominated by the shock decision by the EU forcing Cyprus to implement an effective haircut on deposits in Cyprus in order to raise EUR 5.8bn which will be augmented by a EUR 10bn aid package from the euro-zone.
He feels that this is not ´technically´ a haircut on depositors as part of a bail-out programme, as depositors as supposedly covered under Cyprus´s deposit protection scheme. He writes, “So instead a tax of 6.75% has been implemented on all deposits under EUR 100k and 9.9% on all deposits over that amount. According to the FT this morning, the German and the Finns led the charge of insisting that deposits take a loss given the fact that the banking sector was effectively insolvent and that the ECB was about to pull liquidity support for the second largest bank Laiki – which would have collapsed the entire banking sector and left Cyprus with a EUR 30bn bill to reimburse deposits under the 100k threshold – EUR 30bn Cyprus doesn’t have.”
In the end he notes that it was the IMF that has insisted for some weeks that depositors would have to play a role in financing and Germany wanted a deal that included IMF support. He notes that of course the response in Asian trading has been predictable, with equities down between 1-2% while the euro is lower across the board (EUR/JPY down over 2%). Halpenny comments that the fears of contagion are understandable on a day when another threshold has been crossed which risks undermining confidence across the entire euro-zone banking sector.
He finishes by writing. “Are any deposit protection schemes credible in reality? This step taken by the EU places real doubt in savers’ trust of its banks. We suspect that current favourable market conditions mean the markets may weather this decision for now and view it as an outcome only agreed given Cyprus’ small size and the severity of debts in its banking sector, but a big risk has been taken that raises uncertainties going forward.”
He feels that this is not ´technically´ a haircut on depositors as part of a bail-out programme, as depositors as supposedly covered under Cyprus´s deposit protection scheme. He writes, “So instead a tax of 6.75% has been implemented on all deposits under EUR 100k and 9.9% on all deposits over that amount. According to the FT this morning, the German and the Finns led the charge of insisting that deposits take a loss given the fact that the banking sector was effectively insolvent and that the ECB was about to pull liquidity support for the second largest bank Laiki – which would have collapsed the entire banking sector and left Cyprus with a EUR 30bn bill to reimburse deposits under the 100k threshold – EUR 30bn Cyprus doesn’t have.”
In the end he notes that it was the IMF that has insisted for some weeks that depositors would have to play a role in financing and Germany wanted a deal that included IMF support. He notes that of course the response in Asian trading has been predictable, with equities down between 1-2% while the euro is lower across the board (EUR/JPY down over 2%). Halpenny comments that the fears of contagion are understandable on a day when another threshold has been crossed which risks undermining confidence across the entire euro-zone banking sector.
He finishes by writing. “Are any deposit protection schemes credible in reality? This step taken by the EU places real doubt in savers’ trust of its banks. We suspect that current favourable market conditions mean the markets may weather this decision for now and view it as an outcome only agreed given Cyprus’ small size and the severity of debts in its banking sector, but a big risk has been taken that raises uncertainties going forward.”