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Forex Flash: Investor unease over structure of Cyprus agreement lingers - BTMU

FXstreet.com (Barcelona) - Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that investor unease over the Cyprus agreement was reinforced yesterday following comments from Eurogroup head Dijsselbloem stating that the rescue programme agreed for Cyprus represents a new template for resolving euro-zone banking problems.

Junior and senior bank bondholders were wiped out for the first time while large deposit holders over EUR100k also had to take a substantial haircut as part of the “bail in”. Dijisselbloem also hoped that they should now “aim at a situation where we will never need to even consider direct recapitalisation” through the ESM should the private sector now be bailed in. Hardman adds that the comments have served to also erode investor confidence that the Eurozone authorities will be able to put in place an effective banking union to help preserve financial stability in the Eurozone and euro ahead.

He notes that Dijsselbloem has since attempted to backtrack on those comments by emphasizing the “very unique” case of Cyprus helping to dampen investor unease that they could trigger a broader loss of confidence in eurozone assets. He finishes by writing, “The government’s decision to impose capital controls in an attempt to stem capital flight from Cyprus when the banks re-open on Thursday is also undermining investor confidence in the euro, although they are planned to be “very temporary” and “will gradually be relaxed”. Overall we continue to expect that the near-term disruption from Cyprus will prove only modest.”

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