THE TAKEAWAY: Cyprus must obtain 5.8 billion in Euro funding in order to receive needed loan from ECB or face bank failure > Potential Cyprus exit could lead to EU break-up momentum > Euro Outlook Bullish
The financial problems surrounding Cyprus came to a crescendo on Thursday with Cypriots lining up outside the ATM’s of the nation’s most prominent banks. Currently Cyprus needs to raise 5.8 billion Euro by Monday in order to secure the ECB’s 10 billion Euro loan, which is sorely needed in order to save the island nation’s two largest banks, Bank of Cyprus and Laiki, from financial ruin. This deadline comes following the Cypriot rejection of a ECB engineered bail-out agreement which would have required bank depositors to pay 9.9% on deposits over 100,000 Euros and 6.6% on deposits below this threshold. In turn Cypriot policymakers are now struggling to formulate a “Plan B” aimed at generating the necessary revenues needed to obtain ECB financing. The plan, currently being formulated, would include the restructuring of the failing Laiki bank, as well as potential asset-backed loans from Russia, whose citizens hold significant deposits within Cyprus banks.
If Cyprus fails to obtain the necessary funding needed to obtain the ECB bailout, the reverberations felth through-out the Euro Zone would be significant. Failing to secure an ECB loan would likely doom Cyprus to a EU exit, making it the first nation to leave the world’s largest economy. Up until now, this is an event Euro zone policymakers have successfully been able to prevent. Should Cyprus be remitted from the EU, momentum may begin to form among those other nation’s (ie: Greece, Portugal, Spain, Ireland) who have faced painful austerity measures in order to obtain the ECB financing through-out the financial crisis. This “exit-minded” momentum could lead to a domino effect and the EU may once again find itself in the grips of a complete break-up, dooming the Euro currency. This possibility still remains distant, however, as Cyprus lawmakers have agreed to propose on new plan by late Thursday and both sides appear to recognize the danger of a Cyprus exit from the EU.