With 36 members of parliament voting against the controversial bailout deal, and 19 politicians abstaining, Cyprus rejected the terms of the hugely unpopular financial aid package that would have seen depositors face a tax levy on their savings.
The decision was met with applause on the streets of Cyprus’ capital city Nicosia, and also gained the support of the Greek government – who know what it is like to have unpopular measures forced upon them to remain inside the currency bloc. However, with Cyprus now threatened by the prospect of a banking system collapse, the future of the 17-nation bloc has once again been thrown into confusion.
The heightened sense of uncertainty and enhanced threat of contagion caused the Euro to US Dollar exchange rate to shrink to a 4-month low of 1.2844. In response to the news the Euro also declined by -0.5 cents against the Pound, -1.1 cents against the Japanese Yen, -0.65 cents against the Australian Dollar, -0.5 cents against the Canadian Dollar, and -0.8 cents against the New Zealand Dollar.
With the nation mired in uncertainty banks are due to re-open on Thursday, however because another bank holiday is already scheduled next Monday there is growing speculation that the doors will remain locked until Tuesday to prevent cash leaving the country. Indeed, many cash machines have already been exhausted of bank notes, and the RAF has decided to send a plane to Cyprus with €1 million on board “as a contingency measure to provide military personnel and their families emergency loans”.
The main concern for financial markets is that Cyprus could exit the Euro if it does not receive the funds necessary to shore-up its tumbling banking system. Although the island nation only accounts for 0.2% of the Eurozone’s total growth output, the bigger issue is that of contagion spreading to other struggling member states.
First of all, banking sectors in Italy, Spain, or Greece could come under pressure as jittery citizens withdraw funds to avoid suffering losses if a similar law is proposed in their country. And secondly, and perhaps more importantly in light of the bailout rejection, confidence in the currency bloc could be undermined forever. David Folkerts-Landau of Deutschebank A.G said: “If a single country leaves the Eurozone it sets a precedent. No one will ever again believe that a country will not leave the Eurozone”.
It is impossible to tell how far the 17-nation bloc could unravel if it loses one of its member states, but with Unemployment soaring across southern Europe, political instability in Italy, unpopular austerity in Athens, and rising sovereign bond yields in Spain; the possibility of a return to crisis mode is a significant threat.
In an attempt to calm investors, German Finance Minister Wolfgang Schauble said: “We’ve taken adequate precautions to ensure that today’s decision in Cyprus will have no negative effect on the rest of the Eurozone”.
Eurogroup President Jeroen Dijsselbloem pledged his support to Cyprus: “I confirm that the Eurogroup stands ready to assist Cyprus in its reform efforts”.
And the European Central Bank vowed not to pull the plug on Cyprus’ banking sector just yet: “The ECB reaffirms its commitment to provide liquidity as needed within the existing rules”.
Despite the efforts of European leaders to quash contagion fears, the Euro has plummeted since it was announced that Cypriot politicians were going to reject the bailout. It is entirely possible that we have only seen the tip of the iceberg, in terms of faltering investor confidence, and the possibility for further declines in the Euro exchange rate remains strong over the next few days.
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