Analysts warn bailout could spark end of euro

 
Tim Wallace
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THE EU’S latest bailout plan will increase uncertainty in Cyprus and fails to solve the country’s long-term problems, analysts warned yesterday, fearing the decision to raid savings will undermine confidence and could even spark a break up of the Eurozone as a whole.

The proposals to force depositors and junior bondholders to take a haircut, as well as diluting shareholders, comes as part of a plan to reduce Cyprus’ government debt to around 100 per cent of GDP by 2020.

But the plan also has negative consequences that could outweigh the gains, analysts warned.

“This is a major, major game changer and the fallout will be with us for a long time to come,” said Saxo Bank’s Lars Seier Christiensen.

“I believe it could be the beginning of the end for the Eurozone as this is an unbelievable blow to the already challenged trust that might be left among investors. Talk about a possible own goal.”

And analysts at BTIG Research warned this will have negative implications for banks across all peripheral Eurozone economies.

“The parties involved – the EU and IMF in particular – have in essence shown no concern about bank runs caused by the potential hit to depositors,” noted Dan Greenhaus.

“Since Cypriot debt, like its peripheral brethren, has done quite well of late, the implication here is clear; for investors around the world, peripheral government debt may be a better place to park your money than the peripheral banking sector.”

Meanwhile Berenberg Bank’s Holger Schmieding hopes promises from the European Central Bank that they could buy Spanish bonds in future should be enough to stop the damage spreading too far.

“With the unprecedented haircut on Cypriot bank deposits we are in uncharted territory again, especially as Italy does not have a regular government that could negotiate the conditions for an ESM (European Stability Mechanism) credit line and hence potential ECB support if need be,” he said. But “judging by market action in the last few weeks and thanks to the ECB’s safety net, we think that contagion from Cyprus will be fairly limited. Still, the tail risk that the special tax on bank deposits could backfire is not zero.”

CYPRUS CRISIS: TIMELINE
MARCH 2011
Standard and Poor’s cuts Cyprus’s long-term sovereign rating to A- from A, citing concerns over its exposure to the planned Greek debt restructuring

11 JULY 2011
An explosion at the island’s naval base kills 13 people and knocks out its main power plant, causing daily blackouts during the crucial tourist season

27 JULY 2011
Credit rating agencies Moody’s downgrades Cyprus’s government bond ratings two notches to Baa1 from A2

SEPTEMBER 2011
Russia agrees to loan Cyprus €2.5bn to help cover the cost of its deficit and refinance maturing debt

FEBRUARY 2012
Cypriot banks lose more than €4bn in Greece’s debt restructuring, part of the second bailout agreement struck with the EU and IMF

JUNE 2012
Fitch cuts Cyprus’s sovereign rating to junk status

25 JUNE 2012
Cyprus officially asks the Eurogroup for help to help recapitalise its banks

24 NOVEMBER 2012
Cyprus says it has reached a bailout agreement “in principle” with international lenders

FEBRUARY 2013
Democratic Rally conservative candidate Nicos Anastasiades becomes president after beating Akel Communist party candidate Stavros Malas

16 MARCH 2013
Eurozone finance ministers agree a €10bn (£8.7bn) bailout package for Cyprus

TODAY
Parliament will vote on the bank deposit levy, as finance minister Michael Sarris flies to Moscow to try to negotiate an extension to Russian loans