It could have been way worse. The Cyprus Stock Exchange opened for trading for the first time in two weeks on Tuesday, with the Cyprus General Index down “only” 2.4% at 99.67, even as the small island nation recently had to ask international lenders for help to avoid a financial meltdown. At the same time other European indexes posted solid gains on Tuesday, seemingly unfazed with the Cypriot debacle. Read: 7 reasons Cyprus is more important thank you think
But could this just be the calm before the real tornado sets in? Capital controls, deposit haircuts and the risk of capital flights have all seen the light of day in the Cyprus rescue actions and according to UBS they point to a dreaded scenario — a euro-zone breakup. Read: Cyprus capital controls could blow the euro apart
Reinhard Cluse, economist at the Swiss bank, highlighted four common trends that have been identified around the breakup of former monetary unions:
-Monetary union break up is preceded by capital flight from perceived weak to perceived strong parts of the union
-Monetary union break up has tended to be regarded by governments as an opportunity for seizing cash or other assets held by citizens
-Capital controls tend to be imposed early in the break up, and foreigners’ asset holdings are often discriminated against
-Break up of a monetary union is normally associated with civil unrest and authoritarian government in at least some part of the former monetary union
“So has Cyprus (as is tirelessly pointed out, only 0.2% of the euro area measured by GDP) set a course for the euro’s destruction? Indeed, with Cyprus having checked the first three items on that list, has Cyprus already left the euro?” Cluse asked in a note.
Well, Cyprus may be “occupying a seat very close to the exit”, but is has ”not actually pushed through the door into the outside world,” he said. Read: Lenders give Cyprus extra year to meet target: WSJ
“Instead, Cyprus – and perhaps the wider euro area – can be thought of as occupying a position not too dissimilar to that of the United States in 1932/33, when the U.S. monetary union effectively ceased to exist and then reformed.”
Meanwhile, Mohamed El-Erian, chief executive at Pimco, said in guest blog on cnbc.com that the Cyprus crisis is far from over.
“In the case of Cyprus, the current set of controls will choke off what little remains in terms of growth momentum and job creation,” he pointed out.
So Cyprus is really only left with begging its international creditors for more money, although “political realities and internal coordination challenges render this hard, though not totally impossible,” El-Erian said.
But instead of turning to short-term palliatives to fix the crisis both Cyprus and its European partners should use a different approach: “Start with what would restore growth and jobs in Cyprus over the medium term and then work back from there to what constitutes the least painful initial steps on this road,” he suggested.
[by Sara Sjolin, writing for MARKETWATCH]
As always, posted for your edification and enlightenment by
NORM ‘n’ AL, Minneapolis