To Bailout or not to Bailout

Yet another post about Cyprus, well lets hope it’s the last!  With policy makers manically trying to put a bailout agreement together, many will be asking what is the likely outcome?  

This week saw volatility flash back into view, and it was unsurprising the Eurozone was to blame.  It was made clear Cyprus was in need of a bailout at least two weeks ago, and for many who had ventured deeper into this would have realized the extent of the bailout.

So why all the panic? This was purely down to the execution and terms of the bailout agreement.  As the banking system has such large debts they are liable to take some of the pain.  A further €5.8bn needs to be raised. However Cypriot’s and foreign investors alike reacted in outrage as up to 10% levy on depositors was announced.  After being shot down 36-0 by MPs, an alternative agreement is now being drafted ahead of Monday’s deadline.

So what is the likely path?  Unfortunately, it will be the depositors that will have to take some of the burden.  There just isn’t enough money elsewhere that would result in a manageable bailout.  As such, it may be that a larger levy will be made on those above the current €100,000 deposit guarantee (£85,000 UK).  This will cause less outrage for those living in Cyprus, however those wealthy foreign investors will have a significant haircut.

If this is the route agreed upon, markets will soon calm down and we can expect a rise back up to new highs.  Economic data continues to improve out of the U.S and people will be waiting to increase positions once volatility has reduced.  As such, one can take advantage of this by adding a European equity fund.  Yes this may be counter intuitive right now, however, over the last week smaller companies have lost a lot of ground, and as such oversold.   Funds such as Barings European Select will be a great addition to portfolios and will capture some of this upside potential investing in value companies.  Fundamentally, Europe still offers access to a number of quality companies benefiting from global operations.  Whilst they are listed in Europe, this is not where primary earnings come from.

If you think Cyprus will fail to come up with a bailout agreement by Monday, there are ways to manage your risk, check out Portfolio Hedging – it’s not for the faint hearted.