ANZ Morning Brief: Cyprus rejects levy proposal

CYPRUS REJECTS LEVY PROPOSAL: Overnight, the focus remained on the Cypriot deposit levy/bailout issue.  In latest news the vote of ‘Plan B’ has just failed. Overnight the Cyprian parliament debated a ‘Plan B’ as they rejected the current governing party’s request to postpone the vote and ‘Plan A’ was a show stopper. ‘Plan B’  was  only slightly modified from the first cut as it exempted  the first €20k of deposits paying a levy, and applied  a 6.75% levy on deposits between €20k and €100k, and 9.9% on those above 100k.

The new plan did not quite stack up though as the Governor of the Cypriot Central Bank, Panicos Demetriades, said that such a plan would only raise about €5.5bn, €300mn short of the Eurogroup’s demands.  Demetriades also warned that if the levy was passed and the domestic banks reopen, he would expect the banks would see outflows of at least 10% in the first few days (c. €7.5bn).  As the vote has failed it is a little unclear what happens next. Probably the first attempt might be to try to renegotiate with the EU, talk to the IMF and hope the ECB does a u-turn and provides unlimited support to Cypriot banks. Bank holidays would have to be extended, but an economy cannot survive for so long without banks opening their doors and making payments. Failing all this, Cyprus might be the first country to leave the Euro. The shock waves this could send across the Eurozone are enormous, but such an outcome seems unnecessary when you put it in perspective. The €15.8bn bailout package is equivalent to 0.17% of the nominal size of the euro area economy in 2012, and the €5.8bn deposit tax is 0.06%. Will Brussels really let this happen? Watch this space.

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