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Cyprus rejection sends EU back to the drawing board

OVER THE WEEKEND the news broke that eurozone finance ministers had agreed a €10Bn (£92bn) bailout for Cyprus – but with conditions attached. Cyprus had to raise some money on its own.

Many ideas were bounced around and it was suggested that the best method of raising funds quickly was to impose an immediate tax on all deposits held. This was overwhelmingly rejected by the Cypriot parliament on Tuesday and failed to receive a single MP’s backing. This sent ministers back to the drawing board in search of a plan B.

The impact of this situation is much more significant than it appears – notwithstanding the controversial one-off tax raid on local and expatriates bank savings accounts. The precedent is set. If any EU nation comes “cap in hand” for a bailout from the European Central Bank (ECB), they will met with strict terms and conditions.

What does this mean for the euro?

Italy and Spain are still in economic trouble. Their borrowing costs may have stabilized last year with the announcement of the European Stability Mechanism, but this stability is now under threat again. If the borrowing costs get too high, they will need help from the ECB. But will they get slapped with the same obligations as Cyprus? If so, it would be a much bigger issue compared to the Cypriot situation. This has spooked the market and the euro has fallen from its two year high against the pound. Investors are watching closely to see what deal is struck in Cyprus as an indicator for future euro stability.

Rising inflation, weak growth, upcoming German elections and an overvalued euro are all starting to weigh heavily on the eurozone economy once again. The charts show that the GBP/EUR rate has now bounced off a five year strong support level. Has the euro seen its highs? In the short term, I think so.

Torrie Callander is a corporate dealer at Global Reach Partners

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