What's next for Cyprus?

It was a shaky start to the markets today as uncertainty remained over whether the banking levies in Cyprus were going to be implemented.  Politicians finally voted on the issue and revealed what I had expected, “no thank you!”  Outcry from both foreign investors and Cypriots made it painfully clear; this was a poor choice of tactic when formulating a bailout agreement. 

It is all very well when it’s not your money on the line, however the game changes entirely when it is.  The 36-0 vote against the levy is a relief to many, however what next? There is the sudden realization that without a bailout agreement, Cyprus is in big trouble.  With very little bargaining power, this small country is backed into a corner and may have to rethink the offer made by the IMF and European Commission. 

It is remarkable how such a small country (representing 0.5% of the Eurozone) can cause such a problem.  This stems from possible contagion risks surrounding this country, if the deal continues to be rejected and no further offer is made, the country will most certainly leave the Eurozone, taking its banks down with it.  Fear will then spread to whether other countries, such as Greece will follow suit as the people give up on harsh austerity measures.  With fragile political states of Spain and Italy still in the fray, will they then follow? It can be a slippery slope in these situations and will weigh on many investors’ minds for the next few weeks.   

The Euro weakened on the back of this news as the future of the Eurozone was questioned, it at least provides a slight relief for exporters as the currency falls from recent highs.

On a positive note, U.S housing starts increased to the most in two years providing a glimmer of hope in the global recovery.  

An uncertain time again, seems somewhat familiar to last year...