Magazine article Global Finance

Cyprus Fallout Weighs on Euro

Magazine article Global Finance

Cyprus Fallout Weighs on Euro

Article excerpt

The euro slumped to a four-month low in the aftermath of the bailout of Cyprus, as market participants worried about the implications for other countries on the periphery of the eurozone. Although Cyprus is a unique case in many ways, the resolution to the crisis suggests some changes in how future cases will be handled, analysts say.

Spillover effects on other countries, as reflected in bond yields, were more limited than in previous episodes of turmoil, reflecting the relatively small scale of Cyprus's problem, according to the Institute of International Finance (IIF) in Washington. "That said, however, Cyprus came closest of any country to date to leaving the euro in a disorderly fashion," the global association of financial institutions said in a report.

"In our view, investors would be well advised to see the outcome of Cyprus both as a reflection of how future stresses will be handled (support sovereign creditors, haircut bank creditors) and a reminder that efforts to shift the liabilities associated with legacy bad bank assets in both Spain and Ireland onto the ESM [European Stability Mechanism] balance sheet are unlikely to be successful," the IIF says. This new approach is likely to put funding stresses on banks in weaker economies-especially Portugal, Spain and Italy-it adds.

VULNERABLE NATIONS

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, notes:"The fallout from Cyprus, including the perceptions of increased vulnerability of other EMU (European Monetary Union] members, such as Slovenia, and the unresolved Italian political situation, dragged the euro down to new four-month lows."

The euro came close to retracing its rally sparked by European Central Bank (ECB) president Mario Draghi's comments in late July 2012, when he promised to do "whatever it takes" to preserve the euro. "There is some sense that Cyprus may be a turning point," Chandler says. …

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