Cyprus Chaos

Cyprus Chaos

I wanted to give investors a quick review of the Cyprus situation. As noted in the weekly review I had speculated that things in Cyprus might in fact begin to heat up and low and behold that is exactly what has happened. I am sure you have all read different headlines about the situation but lets just take a quick look and see what exactly is going on.

Over the weekend it became clear that Cyprus was in need of a €10bn bailout, the euro- area finance ministers conducted an emergency meeting to try and hammer out a deal to support the Cyprus economy. The deal deal sought to raise €5.8bn by selling government assets, raising corporate taxes and drawing funds from Cyprus bank accounts in exchange for €10bn in external aid.

Under the plan, deposits of  less than €100k would be subject to a proposed 3% tax, deposits between €100-€150k would be subject to a €10% tax and deposits in excess of €150k would be subject to a 12% tax. Although Cyprus only accounts for .25% of euro-zone GDP, fear of contagion has caused markets to act in a defensive manner. Investors are not really too concerned what happens in Cyprus itself, they are reacting to the ‘What if factor’, what if this spread to other euro-zone countries such as Spain, Italy, Greece even Ireland.

The banks in Cyprus have been closed until Thursday to prevent a ‘Bank Run’, if no deal is reached before then we could expect to see this delayed until Friday or maybe even some day next week.

Last night the situation took a turn for the worst as Lawmakers in Cyprus rejected the proposed bailout deal. Protesters cheered outside parliament building as lawmakers voted against the proposal by 36 votes to none in favour of rejecting the deal. They are cheering now and I don’t blame them, but this does not send a good message back to the eurozone finance ministers. The big question now is whether the ECB consider the situation untenable? If it does, it has the ability to refuse the provision of further liquidity to Cyprus. To date the ECB has continued to remain optimistic about the ability to hammer out a deal, and prevent contagion across the eurozone.

We will continue to see this dilemma play out for the coming days, and in all likelihood some form of deal will inevitably be hammered out. For investors the longer this draws out the more of an impact it will have across financial markets, we have seen the euro currency come under increased pressure and until a deal is reached this will continue. I would keep an eye on the developments throughout the course of the next few days and watch defensive assets such as government bonds and gold as investors may look to move money out of equity markets.