Saxo Bank (Saxo Bank)
Markets  |  February 13, 2013 14:08:49

Rescue Cyprus and markets? Possible scenarios, Russia plays an important role

The most important news Monday morning was Cyprus. So that he was able to reduce the large debt burden, needs around 17 billion euros. At the current pace, the public debt reached 140% of Cyprus GDP in 2015. Eurozone finance ministers also met on Monday, but no specific conclusion help Cyprus to grow up. Agreement must be reached by 1 March 2013. What will it mean for markets?

Leaked considered three scenarios.

1) Hard Bail-in: debt reduction to around 75%, which would cause great losses to foreign depositors and bondholders. This solution would also be hard for a large investor - Russia.

  2) Light Bail-in - reduction would affect only part of the debt (subordinated debt), and thus did not affect the depositors. But that would prolong the restructuring of the banking sector for ten years. At the same time the plan are to increase corporate taxes from 10 to 12.5% ??withholding tax on capital gains to 28%.

3) Classical approach using ESM - sold to "nationalized" Cypriot banks ESM and the subsequent cheaper financing. The problem is the prohibition of direct financing through banks ESM.

This political decision but ultimately it depends on how much debt reduction Cyprus needs. Some experts favor a decrease of 100% in 2015, others in 2020.

It is ironic that Greece and its debt solutions should be an exception and should not be repeated. However, it is a simple   - Foreign money is easier to spend.

Agreement complicate two things.

17th 24th February and then February, will hold elections in Cyprus. And as Europe now often happens, will take the helm of the opposition. Election surveys also show the growing gap.

Cyprus is viewed by many as a tax haven for Russian rich. Support for Cyprus is in fact perceived as "help Russian investors." We are neutral in this view, but it is worth mentioning access ECB board member Jörg Asmussen. The German press for a total of strongly expressed that rescue Cyprus sees as a bright object at the end of March.

How to invest?

The market is worrying news that Greece was not after all a unique exception.   Hard bail-in solution has opened the question of the fundamental order in Europe and the scheme risk aversion is still likely.

We therefore propose the protection of profits and reducing overall risk - especially against the Euro, yen and major European indices. The agreement will likely be signed at the last minute. Until then still two weeks, during which markets will be exposed to greater political risk. Which markets do not indicate.

Steen Jakobsen, Chief Economist at Saxo Bank



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