Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The almost zombie like daily creep up in markets is being stalled tonight by news out of tiny Cyprus this weekend. Ironically the amounts being discussed are tiny – 10B euros of rescue funds which in the global finance picture is a gnat. But the euro zone is trying to install some form of “discipline” rather than hand out money left and right, and it has some people trying to extrapolate what happens in Cyprus to a whole host of dominos.
We’ll see what the reaction is after the knee jerk move down – futures have been down in the 1% range upon re-opening tonight.
- The euro zone took the unprecedented step of taking a bite out of depositors’ accounts in Cypriot banks to help pay for its bailout of the island’s financial system, a high-risk decision that could erode savers’ confidence across the currency bloc and add to popular anger over its handling of the crisis.
- The decision to raise €5.8 billion ($7.6 billion) from taxes on depositors—including individuals with small amounts in their accounts—risks a political backlash for the newly elected center-right government on the Mediterranean island and a wider political fallout for the euro-zone leaders who are guiding the bloc’s crisis strategy.
- A tax on depositors—6.75% on all deposits up to €100,000, and 9.9% above that level—was the only way out for the bloc’s finance ministers after Germany, the euro zone’s biggest economy, and the International Monetary Fund insisted that financial aid to Cyprus should be limited to €10 billion.
- With the money due to have been withdrawn electronically from bank accounts over the weekend, politicians in Nicosia were discussing how they might adjust the levy to make it appear fairer. Monday is a public holiday on the island, when banks are closed, but European officials said contingency plans were being put in place to calm any turmoil in the country’s financial system when the banks eventually reopened.
- European officials on Sunday emphasized that the levy was a one-time tax for Cyprus—based on the huge size of its banking system compared to the relatively puny size of the country’s economy—and wouldn’t be replicated elsewhere in the currency union. But the deal sends a signal to the rest of the euro zone that the bloc’s richer nations are increasingly reluctant to transfer the costs of insolvent banks and governments onto the shoulders of their own taxpayers.
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