Euro Sinks, Japanese Yen Soars on Cyprus Bank Levy Proposal

The Euro dropped against all of its counterparts while the Japanese Yen outperformed as details of Cyprus’ EU bailout deal emerged.

Talking Points

Euro Broadly Sold After Cyprus Unveils Bank Levy as Part of Bailout
Japanese Yen Soars as Eurozone Bank Run Fears Spark Risk Aversion
Spotlight on Cyprus Parliament as EU Rescue Terms are Put to a Vote

The Euro is down against all of its major counterparts as financial markets digest the terms of a bailout deal for Cyprus emerged over the weekend. The proposal ties a €10 billion international rescue package from the so-called “troika” (EU/ECB/IMF) to a levy on Cyprus banks’ deposits. Holdings of up to €100,000 for both residents and non-residents are to be taxed at 6.7 percent tax while those above that threshold are to pay out 9.9 percent. The news is producing widespread risk aversion, with haven flows buying the Japanese Yen and US Dollar.

While Cyprus is a relatively small economy – comprising just 0.2 percent of overall Eurozone GDP – the level of worry evident across the markets likely reflects fears of the precedent that EU officials are setting. As with Greece, investors are transposing what is happening now Cyprus to what a similar course of action might look like were to be implemented in a country like Spain, where a sickly banking sector is likewise at the center of the country’s malaise.

The worst-case scenario is a bank a run across the Eurozone as depositors scramble to move their capital out the region to avoid being caught in a Cyprus-like scenario. This potentially carries the risk of a regional credit crunch, which could raise questions about the solvency of some weaker lenders. If some of those were to topple, a global crisis akin to the fall of Lehman Brothers would not be out of the question.

S&P 500 index futures are pointing sharply lower, hinting sentiment is likely to remain under pressure as Wall Street joins the fray. The spotlight now turns to Cyprus’ Parliament, which is due to vote on the levy at 14:00 GMT. The economic data docket is relatively quiet, with January’s Eurozone Trade Balance figures amounting to the only noteworthy item on the docket.

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