Sunday 18 February 2018

Euro begins to steady following early Cyprus bailout shock

A group of demonstrators hold an anti-bailout rally outside the parliament in Nicosia today. Photo: Reuters
A group of demonstrators hold an anti-bailout rally outside the parliament in Nicosia today. Photo: Reuters

Marc Jones

THE euro zone's decision to part-fund a bailout of Cyprus by taxing bank deposits drove down shares, the euro and the bonds of its troubled sovereign debtors.

Hopes that the tactic will not be used elsewhere later

helped to contain financial market losses.

    The bloc struck a deal on Saturday to hand Cyprus rescue

loans worth 10 billion euros ($13 billion), but defied warnings

- including from the European Central Bank - and imposed a levy

that would cost those with cash in the island's banks between

6.75 and 9.9 percent of their money.

    Parliament in Cyprus put off a vote on the measure - which

has shaken depositors' confidence in banks across the continent

- until Tuesday, and with public anger at the deal widespread

the government said it was looking to reduce the losses for

small savers.

    The deal staved off a default which would have undermined

the promise that last year's Greek debt writedown was a one-off,

but the move to hit depositors takes the euro zone crisis into

unprecedented territory.

    The initial response of investors was unambiguous. European

shares followed Asian indexes to lurch lower, the euro fell to a

new three-month low, while safe-haven assets such as gold and

German government bonds jumped.

    Italian and Spanish bond yields both jumped sharply,

reflecting fears about the weakness of these two euro zone

economies and the size of their debt burdens.

    European shares had steadied at losses of around 0.6 percent

by 1300 GMT, having at one point been down as much as 1.4

percent. Wall Street opened lower but selling was limited.

    Euro zone bank shares bore the brunt of the sell-off

on fears the decision could spark bank runs in other troubled

countries. They were down 3.6 percent ahead of the U.S. restart

and the cost of insuring the debt of even high-quality European

banks against default also rose sharply.

    "If I were a saver, certainly in Spain or maybe Italy, I

think I'd be looking askance at these measures and think this

could yet happen to me," Peter Dixon, global financial economist

at Commerzbank said.

    It was the worst session for European equities since last

month's inconclusive Italian elections. London's FTSE 100

, Frankfurt's DAX and Paris's CAC-40

were down 0.6, 1 and 1.2 percent respectively, leaving MSCI's

global share index down 0.8 percent.




    However, some in the markets were drawing support from a

view that the safety measures put in place at the European

Central Bank should contain the fallout.   

    Besides, this week three of the world's biggest central

banks are expected to signal they plan to keep monetary policy

loose for the foreseeable future.

    "Clearly this (Cyprus deal) is a negative development for

European assets but in the terms of contagion we think it is

quite limited," said Guillermo Felices, head euro asset

allocation at Barclays in London.

    "There are tools - such as the ECB's OMT (bond buying

programme) and the option of more 3-year LTROs (ECB loans to

banks) that can provide liquidity if needed - that the market

will feel comfortable about when assessing the longer-term


    Other analysts said shares are trading at historically lofty

levels - and therefore ripe for a pullback. Efforts by

policymakers to revise the Cyprus plan to spare small savers

from losses also supported the market.        

    The euro staged a slight recovery after dropping to a

new three-month low of $1.2882 in Asian trading. It was down 1

percent overall on the day but was flat for the European session

at $1.2950.

    The dollar itself, which investors often head for

when tensions in Europe rise, gained 0.5 percent.

    "Euro zone politicians will be at pains today to manage down

the danger of contagion to other markets. The euro will find a

little bit of support from that but markets will remain

jittery," said Jane Foley, senior currency strategist at




    The euro zone's bond market has been the main lightening rod

of its troubles over the last three-years.

    While Italian and Spanish bond

yields jumped, the widespread anxiety drove up German government

bonds, the traditional favourite of risk-adverse

European investors, and indiscriminately pushed up the cost of

insuring against a sovereign default in the euro zone's southern


    In commodity markets, U.S. crude and Brent oil both tumbled,

with Brent futures $1.70 a barrel lower at $108.16 and

U.S. oil declined $1.10 to $92.35.   

    Gold, another safe-haven asset, meanwhile, saw its

biggest jump in a month as it rose to $1,608.30, its highest

level since late February.

    "With what is going on in Cyprus right now, investors are

looking for some hedges and gold is benefiting from that, but it

is questionable how long it will last," Credit Suisse commodity

analyst Karim Cherif said.

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