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Cyprus "Moronic" Plan Could End In Euro Exit - Analyst

posted 22 Mar 2013, 03:49 by Mpelembe   [ updated 22 Mar 2013, 03:49 ]

 LONDON, ENGLAND, UK (REUTERS) - Cyprus's finance minister left Moscow empty-handed on Friday after Russia turned down appeals for aid, leaving the island to strike a bailout deal with the European Union before Tuesday or face the collapse of its financial system. Michael Hewson from CMC Markets thinks a euro-exit is inevitable.


"(QUESTION: Well, let's get out now to Michael Hewson, Market Analyst at CMC Markets. Michael, I mean, the obvious question as the clock ticks is, is Cypruspoised to leave the euro zone?) 

That's the million-euro question, isn't it, Jamie, or the €5.8 billion question. I think it's extremely likely if not now, sometime in the future because I think EU leaders have used up so much of their political goodwill with this botched rescue plan, the decision to sort of haircut depositors below €100,000 was ill-advised at best and moronic at worst. Having said that, it's very difficult to say what would happen if Cyprus did leave the euro. But they do have an awful lot of natural resources and gas reserves, and maybe that's something that they could leverage off if in the event they do leave the euro. 

(QUESTION: Well, they haven't been able to do that so far, but of course if we were talking Italy here or Spain, even Greece, I think the markets would be in full-blown panic mode, but they're not. And this suggests that investors, like the ECB in Brussels, they've done their sums, they've come to the conclusion that yes, they can let Cyprus go and the fallout, the contagion will be relatively contained.) 

Yeah. I'm not totally convinced about that, Jamie. We're in uncharted territory. You know, they would have to implement capital controls. And obviously one of the side effects of last weekend's events, the fact that euro leaders are prepared to countenance haircuts which basically circumvent the deposit guarantee scheme. Now, if you're a saver in Spain or Italy, that begs the question that if economic conditions deteriorate further in those economies, and they will, then what happens to savers then in the event that they to come up with a new rescue plan? And let's not forget this OMT rescue plan is conditional on a sign-up. Now, Italy doesn't even have a government yet and there's no likelihood of them getting one in the near term, so there's an awful lot of uncertainty out there."