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Fundamental Morning Wrap: Cyprus - So the Eurozone crisis isn´t over afterall

FXstreet.com (Barcelona) - This morning´s institutional research, understandably, has a Mediterranean feel to it today. The unprecedented measures attached to the prospective Cypriot banking bailout have given rise to fears of contagion risk spreading across an still vulnerable Eurozone.

EUR

Marc Chandler of BBH notes that Cyprus becomes the fifth Eurozone country to receive assistance. He emphasises that the general condition of the country is key as it shapes the aide package and represents a significant evolution of the European crisis, with the German Bundestag taking a more central role in developments. While Cyprus is a tiny country, its domestic economy is as large as Ireland´s and its exposure to Greece was the tipping point. Further, its relationship with Russia, who uses the island as a questionable tax haven, has come into focus. It is believed that over half of the deposits in the nation are Russian non residents. Chandler feels that the levy on Cypriot deposit holders was effected by the nations potential to develop into a natural gas exporter and a future key financial center.

Derek Halpenny of BTMU notes that the ECB was keen for the Cypriot government to rush through a vote before markets opened last night, but they eventually got postponed, with negotiations taking place in tweeting the tax rate levels for deposits under 100k. He adds that should a vote be unsuccessful, it could result in the collapse of the Cypriot banking system and ahead, he foresees innumerable legal challenges ahead. Finally, he asks the a question which looks to have been overlooked widely, “Is Russia on board?” Danske Bank analysts note that the banking sector there needs a rescue package as a result of the financial crisis and Greek developments. They flag that it has been claimed that the ECB had pressured the government to pass a deal in parliament or allow its banking system to go into liquidation.

Carsten Brzeski of ING notes that this latest bailout shows that the Eurozone crisis is far from resolved and capital flight may resume with renewed fragmentation in the financial markets. However, he adds, “We (still) think that the ECB’s “OMT threat” is still powerful enough to contain the turmoil, some spread widening on the European bond markets seems likely with core markets benefiting from flight to quality.” Rabobank analysts feel that the potential for contagion from Cyprus will be key on the markets radar today and their European Rates Strategists now more confident that Cyprus will turn out to be an accelerant for crisis tensions re-emerging. Gareth Berry and Geoffrey Yu of UBS write, “Moody’s chimed in on this point overnight noting that the weekend decision is a credit negative for depositors across Europe. The Financial Times editorial went further still describing the agreement as a “rank violation of the spirit of deposit insurance”

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