St George Economics economy and finance update
A deal was reached between Cyprus and the EU/IMF/ECB yesterday. Insured deposits at all banks (that is those under €100k) will be preserved.
The most troubled and second largest Cypriot bank, Laiki Bank, will be split into a good bank (deposits under €100k) and a bad bank (deposits over €100k).
The bad bank will be resolved, with full contribution from equity, bond holders and uninsured depositors (those with deposits over €100k).
The good bank component of Laiki Bank (those with deposits under €100k) will have their deposits moved to the Bank of Cyprus.
Uninsured deposits with the Bank of Cyprus (those over €100k) will be frozen and used to recapitalise the bank, resulting in a capital ratio of 9%.
For these depositors there will be a deposit for equity swap.
The Cyprus Parliament does not need to vote on the deal.
This banking restructure will raise the €5.8bn necessary to receive the €10bn bailout. It should receive the first tranche in early May.
The ECB will provide the Bank of Cyprus with liquidity. It is not yet known when Cypriot banks will reopen.
Meanwhile in Spain, its bank restructuring fund (FOBR) has announced that shareholders of the 5 nationalised banks will incur very heavy losses and that bondholders will wear losses of 30% to 90% as part of the €40bn bailout of the Spanish banks.
European markets reacted poorly to the deal in Cyprus as it introduces uncertainties regarding the approach to any further bank difficulties in the eurozone.
The Spanish market fell 2.3% and Italy was down 2.5%.
The FTSE fell a more subdued 0.2% and the German Dax fell 0.5%.
US markets were weaker as investors contemplated the fallout from the latest bout of European uncertainty.
The Dow was down 0.4% overnight.
European equity weakness saw German government bond yields fall from 1.38% to 1.33% as demand for safe haven assets rose.
Spanish long bond yields moved in the opposite direction, rising from 4.86% to 4.96% overnight.
In the US, 10 year bond yields remain well below 2.0% but saw little movement last night.
The euro weakened as the deal in Cyprus added to European uncertainty.
The AUD was well supported and edged higher against euro, sterling, the NZD and the USD.
The deal in Cyprus eased immediate concerns of imminent Europe-wide economic disruption and this saw gold prices fall and oil prices rise.
Copper traders may have been taking a longer view of Europe's economic difficulties and pushed the price of copper lower.
No date released
UK house prices were unchanged in March compared to a year earlier according to Hometrack, after two and a half years of declines.
However, data from the British Bankers Association, covering 70% of the market, showed just 30.5k new mortgages issued in February.
The Dallas Fed factory index rose from 2.2 in February to 7.4 in March, more than reversing February's fall, its highest level since Q1 last year.
The index has remained positive for the fourth month running after contractionary readings in seven of the eight previous months.
The detail showed production, orders and jobs all recording faster growth in March.
The Chicago Fed national activity indicator recovered from -0.5 to +0.4 in February.
This index is based on more than 80 US data series and reflects the improved overall activity picture since the start of the year.