Cyprus "Uncharted Territory" Sets Sell-Side Scrambling

While offering up some 'hope' that the unprecedented tax on Cypriot deposits will not spark "massive" contagion (due to the ECB's "promise"), it appears from this summary of sell-side opinion on this weekend's European developments that the sell-side is starting to panic... it would appear the European credit markets, that have been so skittish in recent weeks (especially the financials), had it right all along? whocouldanode? It seems, as the head of the European Parliament's Economic and Monetary Affairs Committee, no less, said: "The lesson here is that the EU's single-market rules will be flouted when the Eurozone, ECB, and IMF say so."

Via Bloomberg,

Holger Schmieding, chief economist at Berenberg Bank:

  • Optimistic this will not spark “massive” contagion thanks to ECB promise that it will do all it takes to keep reform countries in the euro
  • The risk that this “could backfire is not zero”
  • We are in “unchartered territory again”

Charles Diebel, head of market strategy at Lloyds Banking Group Plc:

  • Given that the agreement was announced after banks in Cyprus had closed for the weekend the chance of capital flight is “unlikely” as it’s already too late
  • The tax will “increase nervousness” and pressure peripherals at least in the short term
  • Could pressure the euro

Alberto Gallo, head of European macro credit research at Royal Bank of Scotland Group Plc:

  • Cyprus a special case with bank assets of EU125b over 7x the size of the economy
  • Unique also as Cypriot banks have only EU2b of bonds outstanding, making bondholder bail-in ineffective
  • Possible that some small periphery banks may suffer deposit outflow to larger firms

Annalisa Piazza, a fixed-income analyst at Newedge Group:

  • This will spread “some panic” across the euro area periphery which could result in capital outflows
  • Will have impact on concern that similar measures could be applied elsewhere
  • Some weakening of the euro cannot be ruled out



And from an 'insider' - Sharon Bowles, head of the European Parliament’s Economic and Monetary Affairs Committee, said:

  • Levy on deposits agreed under Cyprus bailout deal means circumventing EU deposit guarantee laws
  • “It robs smaller investors of the protection they were promised,”
  • The lesson here is that the EU’s single market rules will be flouted when the Eurozone, ECB and IMF say so,”