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Fundamental Morning Wrap: EZ U-Turn as initial Cyprus plans head for U-Bend?

FXstreet.com (Barcelona) - This morning´s institutional research again has a Cypriot focus, as analysts consider the evolving debacle and the many different potential outcomes. A consensus view looks to be forming that the initial decision was at best "misguided" and now a policy u-turn may be in the making, which would protect smaller depositors and preserve the sanctity of the Eurozone wide deposit protection scheme, which has been so critically undermined.


Geoffrey Yu and Gareth Berry notes that the Cypriot Government is currently redesigning how losses will be distributed amongst depositors in Cypriot banks, so that small depositors shoulder less of the burden or perhaps escape completely. This point is supported by Jim Reid of Deutsche Bank who feels that the news was more of a short term macro shock, but needs to be monitored over the medium term. He adds, “Late yesterday evening, the Eurogroup issued a statement saying that the Cyprus government will introduce “more progressivity in the one-off levy” and reaffirmed the importance of “fully guaranteeing deposits below EUR100,000”.” He also notes that there are reports that President Anastasiades called European Economic and Monetary Affairs Commissioner Olli Rehn on Monday night to inform him that there might not be enough parliamentary support for the levy.

Danske Bank analysts note that the market reaction to the the market reaction to the highly unorthodox and in their view also dangerous EU/IMF bailout of Cyprus has been surprisingly limited. They write, “The fear obviously has been (and still is) that the controversial proposal for a deposit tax on all bank deposits in Cyprus would trigger a bank run not only in Cyprus but also unnerve depositors in other troubled Eurozone countries. That luckily has not happened and it hence seems that the general perception among depositors in other countries and investors is that Cyprus is a ‘special case’ and that the likelihood of a similar deposit tax in other countries is very small.” Derek Halpenny of BTMU comments, “The longer the indecision lasts, the greater the risk that we see a more notable drop in EUR/USD as fears increase over a bank collapse or departure of Cyprus from the euro-zone. We assume sense will prevail.”

EU Jan Construction Output w.d.a (YoY): -7.3%; -1.4% (MoM)

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