Cyprus Bailout

Not so much ‘good news and bad news’ for Cyprus this morning, rather ‘bad news and worse news’. Whilst on the face of it the 10 billion euro bailout, agreed by the Troika late last night to help save the fledging Cypriot economy, has helped reduce uncertainty within the Euro Zone as evidenced by market reaction earlier this morning in Asia and also across Europe today, it has come at a cost, a very high cost which will undoubtedly throw Cyprus into the inevitable recession that it already faced.

The lesser of two evils was essentially what was agreed last night as the dreaded levy that depositors of Cypriot banks had feared, was enforced upon the agreement and will form a crucial part of the bailout. Depositors with over €100,000.00 will now face a mandatory ‘tax’ of around 30% on their holdings, something that will likely do very little to halt a run on the countries banks this week. However, when the only other alternative is to leave the Euro Zone, there appeared to be no other option, especially when a potential return to the Cypriot Pound would likely result in over a 30% decrease in the value of any funds currently held within Cyprus.

Despite the bailout, the outlook remains very bleak for Cyprus who will now inevitably face a prolonged recession. As a result of the bailout it would also seem inevitable that anyone still holding funds in Cyprus will remove them and any future depositors will now be non-existent – effectively killing Cyprus’s role as somewhat of an off shore financial centre. Similarly, despite the positive reaction in Europe this morning there will now be concerns regarding deposits held within other European countries at risk of requiring future bailouts i.e. Spain and Italy.

The Pound closed up against the Euro at 1.1809 and down against the US Dollar at 1.5170. The Euro is down against the US Dollar at 1.2850.

Mark Webster