Cyprus Reviews Plan B: Euro Left Vulnerable

Financial markets were weighed down by the escalating crisis in Cyprus. The DOW dropped -90 pts overnight, and was followed by broad based weakness in Asian equities. The euro is relatively steady after the news, just hovering at around 1.29 against dollar. Nonetheless, it remains vulnerable to deeper selloff against all other major currencies. The ECB has issued the March 25 deadline for Cyprus to complete the negotiation, with its international lenders on the bailout deal, or it would cut off the emergency liquidity assistance. Cypriot MPs are expected to discuss plan B as soon as possible.

Cypriot central bank president Demetriades said that the draft of the new bill related to "reorganization and recovery of the Cypriot banking system". And, "this consolidation process will prevent the risk of bank failures and protectedall insured deposits in their entirety up to the amount of 100,000." I was also reported that part of the package will include setting up of a "national solidarity fund" which nationalizes provident funds, with bonds issued against future natural gas revenues.

Eurogroup chairman and Dutch Finance Minister Dijsselbloem stated that "the Eurogroup is ready to discuss and new proposal with the Cypriot authorities, who should present it as rapidly as possible". He said that "the Eurogroup would subsequently, on the basis of a Troika analysis that needs to be undertaken, be prepared to continue negotiations on an adjustment programme".

S&P lowed Cyprus' rating to CCC with negative outlook, down from CCC+, and said that "given that the assets of Cyprus' indigenous banking sector are more than 5x GDP, we consider Cyprus' credit standing to be inextricably linked to its banking system." And, "in the absence of a credible alternative source of capital and fiscal financing, the risk of a disorderly credit event is rising." The rating agency expects "over the next few days, Cyprus and the Eurogroup or other partners could reach an alternative agreement,"

The Canadian dollar was strong overnight as Finance Minister Flaherty said that he would eliminate the country's deficit before the 2015 election. He projected that Canada will turn into surplus of CAD 800m in the fiscal years of 2015/16. Spending growth is expected to average 2.1% over the next five years, much lower than the average 4.9% since 2007. Revenue growth is expected to be 4.6 per year, more than double the current pace. BoJ governor Kuroda pledged again yesterday that he would "do whatever we can to achieve the 2 percent price target at the earliest time possible." SNB governing board member Moser said that share of SNB in international foreign exchange volume never exceeded 1.5% on any day.