- The situation in Cyprus has intensified after the Cypriot parliament yesterday voted down the controversial deal to tax bank deposits. There are media reports of possible capital controls being imposed.
- The Cyprus situation is worrying investors and it has increased global risk aversion. That said, the global stock markets are holding up fairly well and the US stock markets ended yesterday's trading more or less flat on the day, while Asian stock generally are moderately higher this morning.
The crisis in Cyprus continues. Yesterday the Cypriot parliament failed to pass the bailout deal with the EU. As a consequence, the local banks are still closed and so is the local stock market. Cyprus is heading for a make or break situation; there is no doubt that the credibility of the EU and the euro's economic policy process have been seriously dented.
Somewhat alarming media reports overnight indicate that the Cyprus government is working with EU officials to impose capital controls. This would be very unwelcome news as it underscores the seriousness of the situation. Needless to say that free movement of capital is at the core of the EU internal markets and capital controls in Cyprus would be an extreme measure. It is equally worrying that Cypriot Prime Minister Mavrides overnight has said that the government is ‘considering nationalising pensions.
Volatility in the global financial markets has increased this week as a consequence of the crisis in Cyprus. That said, the reaction has been less extreme than was feared. For example, the US stock markets ended yesterday’s trading more or less flat on the day, and this morning Asian stock markets are generally trading higher.
While the global stock markets have been fairly calm, the Cyprus crisis has had somewhat of a bigger impact on global currency markets, where the euro continues to weaken. This morning, the euro is close to a four-month low against the US dollar.
Investors also continue to look towards safe assets and as a consequence, US Treasury bond yields continue to inch down, while peripheral European bond markets have been under some pressure. That said, there is certainly no panic in the European bond markets.
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