Publishing the details of Cyprus bailout plan last week led to an increase at the financial markets risk premium.
The increase seems to be fueled by Europe’s financial ministers decision that a substantial portion of the bailout plan will include a onetime tax on deposits at Cypriot banks.
We stress that the taxation program of the Cypriot public was not in itself the cause of the “Risk off” atmosphere, but rather the fear that European leaders have had enough – and from now on a substantial portion of the bailout burden will be imposed on the private entities, and not just on governments – similarly to what happened in Greece.
The change of attitude increased the fear of a run on the banks scenario in peripheral countries, where the option of a bailout is still feasible (such as Italy and Spain).
Nevertheless, Cyprus’s parliament rejected the taxation decision outright.
On Saturday, Cyprus financial minister announced that his country is working on an alternative proposal, which will include taxing only on deposits larger than €100 K and a set of reforms at the Cypriot banking system.
Authorities in Europe demand that Cyprus recruits €5.8 billion, by taxing deposits or any other way, prior to approving the €10 billion bailout plan.
Furthermore, the ECB announced last weekend that the bank will cease to supply Cypriot banks their needed liquidity this evening (Monday), if by then the Cypriot authorities won’t reach an agreement with European leaders regarding the bailout plan’s conditions.
More in Europe, the majority of economic data published last week were disappointing, indicating the continued recession in European economy.
For the second consecutive month, there was a drop at the Composite Purchasing Managers’ Index during March (primal estimate).
The index dropped to a level of 46.5, versus 47.9 in February, and an expected 48.2.
In Germany, the IFO Business Security Survey showed a surprising drop during March.
We note that the surveys were conducted prior to the worsening in Cyprus.
To conclude recent events at the European economy, we note that this week the S&P rating firm warned about the socially explosive situation at the Eurozone.
One analyst noted that the rating firm identifies a high risk of Spain, Italy, Portugal and France unable to carry through necessary fiscal reforms, as the unemployed citizens are less keen to bear austerity measures.
The analyst noted that:
“the high unemployment in Spain, Italy and France is socially explosive” and that “there has to be a social consensus for saving measures. High unemployment … does not help”.
A concluding premise held that residents of Spain and Portugal presented an ability to sustain austerity, but “this cannot continue forever”.