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Monday, March 18, 2013

Cyprus Rescue euro zone bailout Risks

It is, of course, true that imposing principal losses on Cyprus bank depositors in itself shouldn't cause the sort of economic disruption that would justify hundreds of billions on global market value shifting at once. Which is why Monday's selloff in risk assets is best viewed here as a handy excuse - rather than highly targeted cause - for an overstretched stock market carried toward unseen heights to pull back hard and undergo a reality check on its gentle and previously unflappable first-quarter rally. Here are a few reasons markets are registering significant concern - aside from the obvious threat that the pain imposed on Cypriot banks' depositors could (though my no means is certain to) invite a flare-up of European debt contagion concerns for a fourth summer running.With the money due to have been withdrawn electronically from bank accounts over the weekend, politicians in Nicosia were discussing how they might adjust the levy to make it appear fairer. Monday is a public holiday on the island, when banks are closed, but European officials said contingency plans were being put in place to calm any turmoil in the country's financial system when the banks eventually reopened. Cyprus needs some 17 billion euros in a loan programme from the euro zone to recapitalise its banks, which were hit by the Greek sovereign debt restructuring, and finance government spending over the next three years. Because such a bailout would almost equal the country's gross domestic product, euro zone officials are examining various ideas for how to make the island's debt sustainable. Some proposals have been strongly opposed by the European Central Bank, the European Commission and some euro zone countries, such as imposing losses on depositors in Cypriot banks or restructuring Cypriot sovereign debt. Since the global financial crisis began in 2008, few European bank depositors have taken losses. Denmark forced some large depositors to do so in 2011, when two midsize lenders collapsed. Iceland also decided not to repay foreign depositors when it suffered a bank crisis in 2008—although the British and Dutch governments stepped in to make sure savers didn't incur losses. In 1992, Italy imposed a small tax on its depositors. European Pressphoto Agency A woman found this Bank of Cyprus ATM was out of order Sunday This year's market pattern is uncomfortably familiar. As noted here lately (See: Will Stocks Third Time Around Be a Charm or Hex? and "The 'Relentless Rally' of 2013 Tracks a Familiar Path) the U.S. stock market action to start the year has been a tight match for last year's first act and the run in early 2011. In each year, the Standard & Poor's 500 index levitated out of the gate, logging what might be considered a good year's worth of gains by the turn of spring, with volatility collapsing, economic confidence welling up and investors massing on the bullish side of the boat."The very nature of banking has been shaken to its roots." The parliamentary vote, which could be delayed till Tuesday afternoon, according to Reuters news agency, won't be successful, Gartman said. He foresees that by the time of the vote there could be so much organized opposition to the law that it may not become fact. Softer economic data, new signs of an unsettled Europe and U.S. budget standoffs led to deep pullbacks from 9% to 19% into summer each year.
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