Cyprus bailout deal prompts relief rally

March 25, 2013 6:07:28 AM PDT
Investors breathed a sigh of relief Monday after Cyprus clinched a bailout deal with international creditors that will prevent it becoming the first country to ditch the euro -- a prospect that could have worsened the crisis afflicting Europe's single currency.

In the early hours of Monday morning in Brussels, an agreement was reached in Brussels that capped one of the most tumultuous weeks since Europe's debt crisis started three and a half years ago.

In return for a 10 billion euros ($13 billion) bailout from its European partners and the International Monetary Fund, Cyprus agreed to drastically shrink its outsized banking sector, cut its budget, implement economic reforms and privatize state assets -- a cocktail of measures that mean the country's near-term economic prospects are bleak indeed.

The deal will allow the European Central Bank to continue providing liquidity to the remnants of Cyprus' banking system, thereby eliminating any short-term fears of bankruptcy.

Cyprus's side of the bargain is earmarked to raise 5.8 billion euros. To do so, the country's second-largest bank, Laiki, will be restructured and bond holders and savers with more than 100,000 euros deposited will have to take significant losses. Depositors in the biggest bank, the Bank of Cyprus, with over 100,000 euros will also bear a cost but those with savings up to 100,000 euros will be guaranteed in accordance with the EU's deposit insurance guarantee.

"Equities are enjoying a relief rally this morning as the imminent threat from Cyprus appears to have been abated, but where the markets go from here remains to be seen," said Mike McCudden, head of derivatives at Interactive Investor.

In Europe, the FTSE 100 index of leading British shares was up 0.8 percent at 6,446 while Germany's DAX rose 1.1 percent to 8,002. The CAC-40 in France was 1.2 percent higher at 3,816.

And Wall Street was poised for a solid opening with Dow futures up 0.2 percent and the broader S&P 500 futures 0.4 percent higher.

The focus will likely remain on developments surrounding Cyprus for a while yet. In particular, investors will be interested to see if the level of bank withdrawals from the country's banks when they reopen. That's scheduled for Tuesday.

A longer-lasting concern though is how the Cyprus deal plays out in other countries, notably those at the forefront of Europe's debt crisis. Will depositors look to reduce their holdings in Spain, Italy and Greece?

"The risk is contagion and the political fall-out from a badly handled crisis," said Jens Larsen, chief European economist at RBC Capital Markets.

That fear is capping the euro's upside. After earlier breaching the $1.30 mark, the euro gave up its day's gains and was trading flat at $1.2957.

Earlier, investors in Asia had the first chance to respond to the Cypriot developments and there too the response in financial markets was of relief. Japan's Nikkei 225 index surged 1.7 percent to 12,546.46 while South Korea's Kospi jumped 1.5 percent to 1,977.67. Hong Kong's Hang Seng rose 0.6 percent to 22,251.15.

However, mainland Chinese shares fell Monday, with the Shanghai Composite Index down 0.1 percent at 2326.72 and the smaller Shenzhen Composite Index falling the same rate to 959.93.

Oil prices tracked equities higher, albeit modestly, with the benchmark New York rate up 64 cents at $94.35 per barrel.
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