Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 19th of March.
The investors in general may be forgiven for thinking that what’s going on in Cyprus need not bother them. After all, it’s a small island nation whose GDP is equal to 0.5 percent of the eurozone. But what happens in Cyprus could actually matter not just to the rest of Europe, but to the rest of the world.
To begin with, some of Cypriot banks, like many of their counterparts on both sides of the Atlantic, have gone bankrupt. Nicosia approached the EU for a bailout, the same way Greece, Ireland, Portugal and others in Europe have. The European Union approved a bailout, insisting Cypriot bank depositors pay a part of the bill, an unprecedented condition that has never been imposed since the financial crisis began in 2008.
But it is better than the alternative: closure of major banks and immediate bankruptcy for the national government. Depositors would lose a lot more under such a scenario and business would go belly-up. Add to that a few thousand job losses.
Under the current plan, accounts under EUR 100,000 will have 6.75 percent of the funds seized. Accounts over EUR 100,000 will have 9.9 percent seized. And then the IMF and the eurozone’s emergency lending facility will inject EUR 10 billion to help the country’s banks stay afloat.
Banking system regulators took great pains to do everything to protect bank depositors since the Great Depression wiped out a large chunk of world banks. But due to the recent decision on Cyprus, the perception that depositors need not withdraw money out of threatened banks because they’ll be protected has been shattered. Depositors of bailed-out banks in Greece and Ireland didn’t lose their money after all.
And that’s what matter since the rules of the game has changed suddenly now. Depositors of weak banks across Europe have a reason to feel threatened. In the new era of bank bailouts, depositors may lose some of their money. That may drive them to withdraw their money out of their banks. And if some of them haul their money of their banks, weak banks will become insolvent overnight. And then they will go running to their governments and eurozone for help.
The EU may decide to seize the deposits of more bank depositors. That could be the recipe for disaster as Europe may witness an old-fashioned bank run, bringing the present crisis to a head.
How much would it cost to bail out all the weak banks of Europe? Surely more than what the emergency bailout funds have on hand. And more than what the IMF has on its balance sheet. Unfortunately, that will be the equivalent of a heart-attack for Europe.
That would not be good news for the UK. Or the US or China.
Or any other economy that sells goods to Europe.
So better watch out for what’s going on in Cyprus. It’s much more important than you had ever thought.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1654
GBP/US$ – 1.5092
GBP/CHF – 1.4302
GBP/CAN$ – 1.5441
GBP/AUS$ – 1.4556
GBP/ZAR – 13.8752
GBP/JPY – 144.12
GBP/HKD – 11.7082
GBP/NZD – 1.8314
GBP/SEK – 9.7261
EUR: The single-currency had a bad start yesterday, tumbling to a three-month low against the US dollar as markets became wary of the controversial one-time tax on private bank deposits in Cyprus, before stabilising in the afternoon. The euro sell off was triggered by news that Cyprus must raise EUR 5.8 billion through taxing deposits in order to secure the EUR 10 billion bailout it requires. Yesterday’s parliamentary vote on the proposed levy was delayed until today with the country’s banks closed till Thursday. The ECB has last night eased the terms of the levy for depositors with less than EUR 100,000 in deposits, but stated the revenue target remains the same. The single currency sank to a low of $1.2880 before recovering to $1.2954, almost one percent down on the day. The fear of contagion is evident in the market with the possibility of a run on the Cypriot banks looming large once they open for business on Thursday, creating another funding crisis for the island nation. Also the bank deposit levy has sparked fears that eurozone’s bigger economies like Spain and Italy may follow suit. We have the German ZEW Economic Sentiment reading due for today, but expect it to play a secondary role to any developments coming out of Cyprus.
USD: It was a rather eventless day for the US dollar yesterday with little being released in the way of influential data, resulting in the dollar’s performance getting influenced by developments overseas. The GBP/USD cross consolidated around the 1.510 level with the sterling benefitting from safe haven flows out of the euro. The ICE dollar index, which measures the US unit’s strength against a basket of six global currencies, rose by 0.5 percent to 82.645. We have the US monthly building permit data due for release today with investors expecting them to show marginal improvements. However, positioning ahead of tomorrow’s FOMC meeting and the ongoing debacle in Cyprus are expected to dominate price action for today.The GBP/USD pair is trading around 1.5130.
Have a great day!
