Cyprus has reached an agreement with its lenders just before its Tuesday deadline, making it the fifth country to get a bailout since the debt crisis began in 2009!
Cypriot president Nicos Anastasiades worked his butt off over the weekend to negotiate a deal with European Union officials in Brussels and save his country from bankruptcy. And it seems his efforts have paid off!
Anastasiades was able to arrange a deal that involves shutting down the country’s second largest bank, Laiki Bank, in exchange for a 10 billion EUR bailout.
Save the small fish, gut the big fish
Under the proposal, the “small fish” will be protected from incurring losses, as deposits below 100,000 EUR are insured and will merely be transferred to the Bank of Cyprus, the nation’s largest bank.
But the “big fish” got the short end of the stick as they’re set to shoulder huge losses. According to the bailout plan, deposits above 100,000 EUR (which are uninsured and aren’t guaranteed) will be frozen and used to settle debts, much to the dismay of Russian companies, which have an estimated $31 billion invested in Cyprus.
Not an easy choice for Cyprus
While it did save the country from defaulting on its debts, the decision to bend to the Troika’s demands wasn’t easy for Cyprus leaders to make as the people of Cyprus have been protesting bailout talks. But as the EU’s economic affairs chief Olli Rehn said, the country didn’t really have many options. It was stuck between a rock and a hard place, and it only had “hard choices left.”
Some believe that this new deal is even worse than the one-time levy on all bank deposits that the Eurogroup proposed (but Cyprus had rejected) last week. Under the old proposal, the wealthy would’ve only been hit with a 9.9% levy. With the new plans, they’re set to take on much bigger losses, with early estimates saying it will reach billions.
Talk about crisis averted! Had the Cypriot government not struck a deal before the deadline, the ECB would not provide Cypriot banks with access to emergency liquidity measures. This would have crippled the banking sector and most likely led to Cyrpus being booted out of the euro zone!
In fact, analysts and consumers alike were preparing for the worst. Market players began positioning themselves weeks ago in the event that we see a strong sell-off had Cyprus been unable to negotiate for a bailout. Meanwhile, citizens were lining up at ATMs all over the country, withdrawing funds just in case banks go belly up. Banks responded by lowering the daily withdrawal limit from 260 EUR to just 100 EUR in order to avoid potential bank runs.
So far, the deal seems to have had a positive effect on the euro.
EUR/USD began the week gapping lower, as traders continued to drop their euro holdings. However, the gap was quickly filled, and we saw the euro rally even higher once news came out that Cyprus struck a deal.
The question is whether or not this can continue and how smooth the execution of the deal will be. For now though, it seems that EUR/USD may have bottomed out, and we may not see it trade below 1.2900 for the time being.