The Pound to Euro exchange rate (GBP/EUR) is around a cent higher at 1.1760 and the Euro to US Dollar exchange rate (EUR/USD) is -0.3 cents down at 1.2911. Concerns that Cyprus could be forced to leave the Eurozone were exacerbated yesterday as the European Central Bank told Cypriot leaders that they have until Monday to form a new bailout deal or the ECB will pull the plug on the liquidity measures that are propping up Cyprus’ banking sector.
The ECB issued this ominous statement:
“The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013. Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks.”
The announcement turned up the heat on Cypriot governors who must now raise the €5.8 billion, that is necessary to clinch the bailout package, without raiding the deposits of its savers. It is thought that the ECB made this decision partly out of protection for itself, as further ELA payments could cost the bank billions if Cyprus were to eventually collapse.
Later on this morning Politicians in Cyprus will vote on a raft of new legislature that they believe will help to raise the necessary funds. They hope to cut €2.5 billion from the target by restructuring the country’s second largest bank, Laiki. The restructuring process is likely to involve moving the bank’s ‘good assets’ to the Bank of Cyprus, and creating a ‘bad bank’ for accounts that are not insured. Under this prospective scenario, people with savings under €100,000 would be protected from losses, but those with larger deposits – which are not protected by law – could face much harsher haircuts than were previously planned.
Indeed, the Eurogroup reiterated the importance that all deposits below €100,000 should be protected: “The Eurogroup reaffirms the importance of fully guaranteeing deposits below €100,000 in the EU”. However, it has been postulated that larger savings could be hit by substantial losses – up to 40%.
It is also likely that capital controls will be imposed to prevent large amounts of money leaving the country, either physically or via electronic transfer. The €800 daily cashpoint limit has already been reduced to €260 and panic is growing; the banking restructure will still leave the Cypriot government with a deficit of €2.3 billion.
Demand for the Euro has deteriorated as contagion fears have escalated. If Cyprus is unable to agree upon a suitable bailout package then the subsequent banking sector catastrophe will all-but-certainly lead to the island nation becoming the first member state to be ejected from the Eurozone. This could create a knock-on effect for similarly crisis-hit countries – Greece, Spain, Portugal – who may wish to break free from the shackles of EU/IMF-imposed austerity measures and reclaim sovereignty. This devastating scenario carries the potential for a profound shift in the make-up of the Eurozone, and bodes very badly for the single currency. The danger of this happening will become much clearer later on today, if not by Monday.
The Euro was also hit by a bout of soft PMI readings that showed Composite Output slide from 47.9 to 46.5 in March. The Pound was boosted by strong UK Retail Sales and an unexpectedly low UK Public Borrowing Figure for February. The Pound to Euro exchange rate (GBP/EUR) struck a monthly high of 1.1778 and the Euro to US Dollar exchange rate (EUR/USD) touched a 4-month low of 1.2880.
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