Tatiana Kashyrskaia
Since entering the eurozone, Cyprus has been some of the most offshore places in Europe for businesses, investments and banking activities. However, Cyprus is currently in panic as people are standing in endless lines in front of ATMs and are hoping to withdraw some cash. The Bank of Cyprus has paralyzed the country’s banking system by banning any payments and transactions. In this aspect, more and more experts and common people ask a lot of related questions.
What will happen to Cyprus and its banking system in the near future? Will it avoid a default? How will the situation influence the Euro exchange rate?
Let’s try to ponder on these questions together with .
Saving Cyprus
The EU’s latest masterpiece – the Cyprus salvation plan – seems to be only hindering the overall situation and undermining the common currency. Apparently, it cannot solve the long-term problems in Cyprus . This is what Maxim Gunn, an expert from , thinks on the issue.
He says that more and more analysts are afraid that the decision to tax bank deposits (which is nothing but a mere robbery) will result in Cypriots losing confidence in the local authorities, which may further provoke an exit from the eurozone and even a break-up of the entire currency union.
1. The salvation plan includes multiple obligations, including debt reduction down to 100% of GDP by 2020 along with heavier taxation that must be imposed on bank depositors and bond holder.
2. At the same time, experts say that the negative consequences of such actions may outweigh all the benefits. Apparently, the consequences of such policies will be felt for years to come. This will be a devastating blow to the common European currency. The Euro is weakened. Therefore, the mentioned activities may eventually finish it off.
3. It seems like the EU and the IMF do not care what will happen to Cyprus banks when depositors rush to withdraw their funds in panic.
At the same time, the ECB’s promise to buy Spanish bonds may hinder the spread of the Cyprus panic over the rest of the eurozone. However, the balance is fragile. Possible tax tyranny in Cyprus along with the Italian political crisis and difficult economic situation in other crisis-ridden eurozone economies make it difficult to exclude any worst-case scenario.
Expert Opinion On Euro Prospects
At the end of last week, EURUSD was testing 1.3140/60. The situation has changed. The currency pair has opened today’s trading session with a huge gap and is now consolidating around local lows - 1.2882.
Maxim Gunn from says:
Taking into account the mass discontent caused by the new salvation plan that implies extra taxes for bank depositors and bond holders, the local authorities are currently trying to ease the tensions by announcing that the tax rate may me decreased. Still, these efforts are aimed at calming down the electorate.
This would mean no improvement to investors. This is definitely a wake-up call for them. The situation is unlikely to be resolved in the short run. More experts say EURUSD will drop further down to 1.26.
As we have already mentioned, the futures on EURUSD opened today’s trading session with a gap, thereby collapsing by some 180 point. Even though some minor recoveries are possible, in mid-term perspective, the bulls will stay under pressure. Therefore, later on, the price may well drop below pattern 28.
Tatiana Kashyrskaia
