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Forex Flash: Cypriot focus but price shows disconnect - BBH

FXstreet.com (Barcelona) - Brown Brothers Harriman analysts note that while the focus has squarely been on Cyprus, price action shows a disconnect.

They note that the Euro has remained resilient, though lagging behind the recovery of sterling and the dollar bloc. Additionally, they add that Spanish and Italian bond yields fell last week and continue to slip today. They write, “Although there are many who see Cyprus as trumping OMT, leading the disintegration of the monetary union, the global asset managers are not panicking by any stretch. There is a sense of urgency, but not of emergency.”

Further, they add that the deal with Cyprus appears to avoid the worst of the potential contagios in three important respects. Firstly, they add that the sanctity of small depositors was ultimately protected, but the willingness of Cypriot officials to sacrifice their own people will be remembered. Secondly, they note that the traditional seniority of claims has been restored. Equity and bond investors, which had been protected under the initial proposal at the expense of insured and uninsured depositors, will now be "bailed-in." Finally, they comment that while uninsured deposit and others may see assets frozen initially, “the more extensive capital controls that would have potentially led to treating the euros in Cyprus differently from euros elsewhere in the euro zone, have been averted.”

Initial reports are commenting that it may be several weeks for the Cyprus plan to be formally approved and the country may not get its first aid tranche until early May. They write, “Questions of democratic legitimacy will be raised by the fact that the package was shaped in such a way as to make it unnecessary for approval from the Cypriot parliament, which had the courage to block the president's previous Troika-endorsed plan.” In addition, the team suspect that the restructuring of the Cyprus economy away from its role as a financial center will be more expensive and a more prolonged process that currently anticipated. They write, “This warns that additional assistance is likely to be necessary.”

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