Cypriot lawmakers rejected a 5.8 billion euro tax on bank depositors yesterday as part of a rescue plan for its financial system Tuesday, meaning the island-nation doesn’t have a bailout plan as banks face collapse.
Plan B? Beg Russia for help.
Finance ministers from Cyprus and Russia were in talks Wednesday about a potential bailout, but no deal has been reached yet.
Regardless of the outcome, more broadly the eurozone crisis has reared its head once again.
The euro has been under pressure since the news broke earlier this week, and Marc Chandler, global head of currency strategy for Brown Brothers Harriman, told the Daily Ticker it could get much worse.
“I think the euro can get hit very hard, because if Cyprus is not resolved, it means they’ll probably be having to leave the Eurozone,” Chandler says in the accompanying video.
While Cyprus is just 0.2% of eurozone GDP at 18 billion euros, Chandler says in this case “size is not the key factor,” comparing it to Thailand in 1997, a small country which sparked the Asian financial crisis.
Europe's ongoing fiscal and banking crisis is a reminder of desire for safe haven currencies, like the Japanese yen. Chandler says this shock has interrupted the “yen devaluation story” which prominent investors including George Soros have reportedly been betting on.
And in terms of the U.S. Dollar, another safe haven currency, Chandler sees its appreciation this year as a more sustainable trend, based not just on safety but on the U.S. economy gaining traction.