SALON

Monday, Mar 25, 2013 3:25 PM UTC

Analysts: Cyprus bailout will cripple euro zone

Even in the best-case scenarios, they warn, the country remains at risk of default

By

Topics: International Business Times, Cyprus, Euro Zone, Greece, Europe, euro, Wall Street, U.S. Economy, ,

Analysts: Cyprus bailout will cripple euro zone (Credit: AP/Petros Karadjias)
This article originally appeared on International Business Times.

International Business Times Wall Street analysts weren’t impressed by the deal struck to bail out Cyprus, emphasizing that even in best-case scenarios the country remains at risk of default.

“The system’s profile as an offshore financial center is unlikely to survive this crisis,” Moody’s senior credit officer Sarah Carlson said. “The potentially irreparable damage to the country’s current drivers of economic growth leaves its ability to sustain its current debt highly in doubt.”

The crisis had negative implications for the credit ratings of the region’s countries. Moody’s Investors’ Service says Cyprus will still be at risk of default for a “prolonged period” and possibly a euro zone exit. “Even if negotiations are successful and Cyprus remains within the euro area,” the service said in a Monday statement, “policy makers’ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign-funding costs and broader financial market dislocation.”

Cyprus early Monday secured a bailout from its international creditors after reaching preliminary agreement on how to restructure the country’s banking system.

“This Band-Aid deal will have ramifications,” Evan Lucas, a strategist at IG Markets told Fox Business. “This deal calls into question the safety of bank deposits, as the next time one of these countries asks the European Central bank for funding, the bank could come back and tap them on the shoulder with a similar deal Cyprus has now agreed to.”

The euro rose to $1.30 against the dollar and other major currencies in late Monday morning trade in Europe and also rose slightly against the Yen.

“Cyprus may be too small to matter much economically to the euro area, but the events around the bailout are significant, and contagion remains a risk,” Michala Marcussen, global head of economics at Societe Generale, wrote in a note to clients.

Some investors could see Cyprus’ bailout as a bad example for the euro zone’s larger economies that have struggling banks.

“The way that this bailout has been found, and the compromises there, could have much longer-lasting ramifications,” Jane Foley, senior currency strategist at Rabobank, told Reuters. “It does set a bad precedent for the rest of the euro zone, in particular those countries that have a weakened banking sector.”

Head of trading at ETX Capital Joe Rundle told CNBC Monday the Cyprus deal was “unpalatable” and the past week left markets nervous about the possibility of contagion spreading across the euro zone’s weaker economies.

“Markets are welcoming the news, but this rally is likely to be short-lived with the attention likely to reshift again to the prolonged political uncertainties in Italy, a country that remains ungovernable,” Rundle told CNBC.

Former Cyprus Central Bank Governor Afxentis Afxentiou told state radio the effects could last up to a decade.

“Cyprus has suffered a big hit, and our standard of living will spiral downward; although the economy may be able to recover in two to three years, our standard of living will take at least 10 years to return,” EUBusiness reports.

Fiona Mullen, partner at Strata Insight energy policy risk consultancy and an economist specializing in Cyprus, told AFP that drastic limits on withdrawals from bank ATMs were likely for several weeks.

“That means it’s difficult for businesses to pay salaries and buy goods and things like that,” Mullen said. “The companies that are big are the food importers and food sellers and medicine importers who might have a very short-term crunch on things like food, and Cypriots are already starting to stock food in the past few days,” she said.

For the longer term, she warned that the economy could suffer its biggest blow since Turkey invaded northern Cyprus in 1974, and the likely impact on growth could be minus 15 percent for for the first year and minus 5 percent the next year.

“Employment was already 15 percent. With Laiki, it will instantly be 17.5 percent,” Mullen said. “It will be 20 percent within three months and 26 percent within a year.”

More International Business Times

More Malik Singleton.

Next Article

Related Stories

More Related Stories

Featured Slide Shows

The week in 10 pics

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • This photo. President Barack Obama has a laugh during the unveiling of the George W. Bush Presidential Center in Dallas, Tx., Thursday. Former first lady Barbara Bush, who candidly admitted this week we've had enough Bushes in the White House, is unamused.
    Reuters/Jason Reed

  • Rescue workers converge Wednesday in Savar, Bangladesh, where the collapse of a garment building killed more than 300. Factory owners had ignored police orders to vacate the work site the day before.
    AP/A.M. Ahad

  • Police gather Wednesday at the Massachusetts Institute of Technology to honor campus officer Sean Collier, who was allegedly killed in a shootout with the Boston Marathon bombing suspects last week.
    AP/Elise Amendola

  • Police tape closes the site of a car bomb that targeted the French embassy in Libya Tuesday. The explosion wounded two French guards and caused extensive damage to Tripoli's upscale al-Andalus neighborhood.
    AP/Abdul Majeed Forjani

  • Protestors rage outside the residence of Indian Prime Minister Manmohan Singh Sunday following the rape of a 5-year-old girl in New Delhi. The girl was allegedly kidnapped and tortured before being abandoned in a locked room for two days.
    AP/Manish Swarup

  • Clarksville, Mo., residents sit in a life boat Monday after a Mississippi River flooding, the 13th worst on record.
    AP/Jeff Roberson

  • Workers pause Wednesday for a memorial service at the site of the West, Tx., fertilizer plant explosion, which killed 14 people and left a crater more than 90 feet wide.
    AP/The San Antonio Express-News, Tom Reel

  • Aerial footage of the devastation following a 7.0 magnitude earthquake in China's Sichuan province last Saturday. At least 180 people were killed and as many as 11,000 injured in the quake.
    AP/Liu Yinghua

  • On Wednesday, Hazmat-suited federal authorities search a martial arts studio in Tupelo, Miss., once operated by Everett Dutschke, the newest lead in the increasingly twisty ricin case. Last week, President Barack Obama, Sen. Roger Wicker, R.-Miss., and a Mississippi judge were each sent letters laced with the deadly poison.
    AP/Rogelio V. Solis

  • The lighting of Freedom Hall at the George W. Bush Presidential Center Thursday is celebrated with (what else but) red, white and blue fireworks.
    AP/David J. Phillip

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

Comments

 8 Comments

Comment Preview

Your name will appear as username

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

follow salon

Most Read

Popular on Reddit

links from salon.com

vote
Would we give up burgers to stop climate change? New study suggests if we reduce our intake of animal products by 25%, we can halt climate change
545 points546 points | 203 comments
vote
Facebook has been used to find ex-lovers, childhood BFFs or the one who got away. He used it to find the guy who, without his consent, made him his drug mule.
230 points231 points | 21 comments
vote
“This could be a career ender for Michele Bachmann”
139 points140 points | 54 comments
vote
Poll: 3 in 10 voters say “armed revolution might be necessary” - 29% say they believe they'll have to act "in order to protect our liberties" in the next few years
46 points47 points | 16 comments
vote
Capitalism, not feminism, killed home cooking–and fixing our broken food system is gonna take a lot more than some privileged women embracing “new domesticity”
36 points37 points | 19 comments

From Around the Web

Presented by Scribol
listener_new_rect The Listener: "The Shelter Cycle": Raised in a cult

Recommendations