Cyprus Bailout - Haircuts for Depositors!

We've seen other Eurozone nations bailed out since the Credit Crunch but the Cyprus bailout is different - this is the first time that depositors in banks are being hit and there could be severe implications..

Firstly let me try and explain what is actually going on with this 'bailout'. As things currently stand Cyprus is to receive a €10bn rescue loan, however in return for this there is a one off tax pillage on savers, which should raise €5.8bn. Depositors of more than €100,000 will face a 9.9% levy whilst depositors below  €100,000 will be hit with a 6.75% levy. 

Now it seems strange that an economy that contributes only 0.2% of Eurozone GDP can impact the news and global markets so much. However the key word here is 'contagion' and there is a fear that the levy on savers applied here, could be rolled out to other Eurozone nations requiring bailouts. We have already seen markets reacting today, with global equities tumbling, and yields on peripheral European debt rising and safe haven government bond yields falling (Germany, UK, USA).

So what should investors be mindful of? Well if you hold bank stocks, stock selection in this sector will become even more important. If we see cracks appearing in other nations, savers may begin to withdraw savings on mass as expectations may arise that they may face levies. This run on banks will cause bank stocks to tank, particularly the banks who are facing liquidity constraints from withdrawals. Over the short term I think it reminds investors that we are by no means in the clear yet regarding the Eurozone, and there are still many obstacles. It may lead to some profit taking and equities may fall over the coming week, and yields in riskier debt increase. Some may see this blip as an opportunity to buy in and this could lead to cash being rotated into some of the stocks and bonds that may have been oversold (Buying on the dips)

For me I'm just grateful that the UK is able to print money and that my savings are based in UK banks, which seem safe.... For now!