THERE’S something about the latest Eurozone bailout that has got investors rather nervous, and this has played out sharply in the reactions of the financial markets. There’s been a distinct lack of enthusiasm towards what’s happened in Cyprus. In particular, investors are fearful of the sort of precedent it sets for the rest of the Eurozone, which is still embroiled in a sovereign debt crisis that simply will not go away.
By placing capital controls on Cypriot bank accounts, and by preventing access to them for days on end, a mockery is being made both of the capitalist system and of European monetary union. There’s little question that we are likely to see some very long queues forming outside Cyprus’s banks come Thursday, if banks open at all ahead of the weekend. Depositors will inevitably scramble to get hold of cash that they had once thought safe from light-fingered politicians.
I suppose those poor depositors who are going to be hit by a so-called “tax” on their cash should count themselves lucky when compared to the even poorer souls who lost everything during the banking crisis of 2008. Back then, huge amounts of money were wiped out, and many people’s life savings disappeared in a flash. It was certainly far worse than the write-downs being implemented in Cyprus, not that this makes the situation any better. What it does mean, however, is that anyone who has a substantial balance in a bank account in another Eurozone member state is likely to want to take their funds out and place them somewhere perceived to be safer.
But one thing does remains certain. There is still firm political and central bank willpower to make the Eurozone limp on. European leaders remain largely unwavering in the face of this year’s events – both the Italian elections and now Cyprus. When European Central Bank president Mario Draghi said back in the summer of last year that he will do whatever it takes to save the euro, he certainly meant it. But it’s also true that European leaders will serve ultimatums to those countries that might look like faltering from their path of reform. This means that it is going to take more to split up the Eurozone than the threat of another bailout.
The euro saga looks like it will roll on and on, with other nations highly likely to come under the spotlight. It will certainly be interesting to see how things pan out. There are a number of important events on the Eurozone calendar this year. And one of the biggest in political terms – German elections in September – have the potential to be the next catalyst of volatility. If German voters start to believe that their tax money is being squandered on profligate countries that do not adhere to their sort of fiscal discipline, chancellor Angela Merkel might find her chances of re-election are far slimmer than they are today.
Angus Campbell is head of market analysis at Capital Spreads. You can follow him on Twitter @AngusCapSpreads
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