Business World

Tuesday 16 January 2018

Euro and European shares fall on risk of Cyprus plan failure

THE euro, European shares and oil fell for a second day on Tuesday, with investors unsettled by the risk of failure for a bailout deal aimed at saving Cyprus from default and its banks from collapse.

A government spokesman said Cyprus's parliament was likely to reject plans agreed by euro zone officials over the weekend to part-fund a €10bn rescue of the island by seizing between 6.75pc and 9.9pc of deposits in Cypriot banks.

"All eyes will remain on Cyprus. Lots of uncertainty persists, and most pressingly you don't seem to have a majority

in the parliament even if you do a partial redesign of the deposit levy," said Tobias Blattner at Daiwa Securities.

"Marketwise, if you fail to pass the bill it would be catastrophic to a certain extent because, in theory, at that moment you would be looking at a default, and you are just not sure what would happen then."

Euro zone ministers have urged Cyprus to let smaller savers escape the levy, but if its parliament cannot agree, it would put the bailout in jeopardy and raise the risk of default.

A draft bill drawn up by the government in an attempt to quell some of the public anger at the deal included plans to

impose the levy only on savings above €20,000 rather than on all funds as originally set out.

The euro was down 0.1pc at $1.2946, near a three-month low, and European shares were down 0.4pc by mid-morning as they extended Monday's measured sell-off.

It also overshadowed a pick-up in German sentiment data from the ZEW economic think-tank, though the figures also came with a warning that Cyprus and the political stalemate in Italy had raised the risk of the crisis worsening again.

Downbeat car data also weighed on sentiment as figures from the Association of European Car Manufacturers showed sales fell more than 10pc last month, having hit a 17-year low in January.

This year is shaping up to be another tough slog for manufacturers across Europe, as consumers and firms in recessionary economies postpone big ticket purchases.

London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were down 0.2, 0.4 and 0.8pc, respectively, by 1130 GMT, while the concerns surrounding Cyprus meant safe-haven German government bonds were again in demand.

The plan to seize deposits in Cyprus has shredded confidence in the €100,000 guarantee on savings offered across the European Union and raised fears of bank runs in other debt-strained countries if savers there worry it could happen to them.

The Bund future built gains steadily through the morning before the solid ZEW data tempered some of the demand to leave it up 30 ticks on the day at 144.24.

"We are just waiting for another headline out of Cyprus," one trader said, adding that buying Bunds "is the only trade to have on".

It's quite serious. It's got bigger implications. I think there is (a risk) of some cross-border contamination," he added.



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