From a Cypriot perspective, this week will likely been seen as an incredibly damaging one.
Had Cyprus passed some kind of deposit levy early in the week, it might still have a future as a banking/tax haven, albeit one that was weakened.
However, now that it’s imposing capital controls and closing banks and limiting ATM withdrawals, the scars will likely last for much longer.
But actually the rest of Europe should be pretty thrilled with how it went down.
First thing to get straight – from a Eurogroup point of view, this week has been if not a triumph, a respectable success. Markets held extremely well. Probably best generic Eurorisk indicators are the BTP future – since the CDS Ban, one of the few vehicles for shorting Eurozone credit – and the Eurozone financials stocks index. BTPs hit their low for the week within a couple of hours of Monday’s open and closed the week flat; financials did worse, but far from a panic. The ECB’s marginal lending facility – which would be the place where bank funding difficulties would show early – remained similarly untroubled. And this despite a week where the policy-making process was essentially “Laurel and Hardy carry a piano upstairs” (Thx @dsquareddigest) The triumphalism of Eurozone policymakers escalated through the week, with the Eurogroup’s laconic 45-word statement on Tuesday, and even the comparatively verbose 144 words they added on Thursday. If these messages conveyed that the issue is seen as a local problem, the ECB’s action Thursday morning to turn Tuesday into “drop dead day” for Cyprus lawmakers signaled that the EU has no compunction about making things worse for the Cypriots (in the interests of the greater European good, natch). None of this is accidental. If we haven’t seen much panic out of Europe at large this week, we’re unlikely to see more this week.
This is the second time in recent weeks that it looked like things could “flare up” again. The Italian election in late February provided an opportunity for that, but while stocks there sank hard initially, for the most part nobody has cared since.
This really speaks to the stepped up power of the ECB, which since last summer has begun to assume its role as a lender of last resort and backstopper of government bond markets.
The economy is still in shambles. So much of the Euro structure is broken. But a week like this can pass in Cyprus, and markets don’t go to hell. That’s improvement.
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