– Deposit levy on Cyprus banks weighed on EUR
The bombshell news over the weekend was the bailout of Cyprus. The international lenders agreed to a EUR10bn bailout but with an unprecedented upfront one-off stability levy — 9.9% tax on bank deposits above EUR 100k and 6.75% on all other deposits, with effect from Tuesday — on both resident and non-resident depositors amounting to EUR 5.8bn. The impact of deposit levy on Cyprus bank is negative for risk sentiment and the EUR as it risks bank runs and large withdrawal of foreign money (bank deposits in Cyprus is about 380% of GDP, with about 37% of the deposits held by foreigners). In addition, although Cyprus only represents 0.2% of the Eurozone economy, this levy could have implications extended to other EU periphery countries’ banking system. EURUSD gapped down and traded to a low of 1.2864 while EURJPY opened 200 points lower. The bailout will be voted on by the Cypriot parliament today with sources stating that levies could be soften (talks of levy being skewed higher for deposits above EUR100k with lower levy for smaller deposits) or the alternative is for an exit out of the Eurozone. Other terms of the bailout include reducing the country’s debt/GDP ratio to 100% by 2020 and nominal tax rate could be increased by 2.5% to 12.5%. Russia will likely help finance the program by extending a EUR 2.5bn loan by 5 years to 2021 with lower interest rate. EUR is to stay vulnerable to headlines relating to Cyprus bailout while the currency will also be sensitive to Italian headlines as talks over forming a government continue. So far, there has been little ground for optimism as Beppe Grillo’s alliance has shown little interest in supporting a Pierluigi Bersani government, while Mr. Bersani himself has not been enthusiastic about a grand coalition with Silvio Berlusconi. That said, the trademark of Italian politics is unpredictability, so we expect more surprises ahead. The key will be to watch Italian bond yields and its spread with German bonds given the spread has been a good predicator of EURUSD (see chart).
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BNP Paribas