Is Cyprus Pushing The EU Down a Slippery Slope?

 
on April 08 2013 10:28 AM

Cyprus was the fifth nation to formally seek emergency financial assistance from the Troika, a coalition of European Union finance ministers, the European Central Bank, and the International Monetary Fund responsible for ensuring euro zone economic stability.

When the call for help went out a few weeks ago, Cyprus was juggling a banking system with assets equal to 750 percent of its 2012 GDP, which was about $24 billion. Meanwhile, the Troika was juggling complicated and politically tense multibillion-euro bailouts in four major economies.

The Troika engineered a 10 billion-euro bailout package for the island nation that called for the closure of its second-largest bank and inflicted tremendous losses on uninsured depositors. The decision to close the bank and charge deposits has created a tremendous amount of fallout that economists and investors are still sorting through.

In an interview with Bloomberg on Friday, Jeromin Zettelmeyer, deputy chief economist at European Bank for Reconstruction and Development, said that stability concerns could spark outflows from large but struggling economies such as Spain and Italy.

From there, the concern is that the contagion would spread and negatively impact the stocks and currencies of weak economies outside of the currency bloc, which have already suffered this year. In particular, Eastern-European markets have been among the worst performers. Bloomberg reports that the Czech koruna, the Hungarian forint, the Russian ruble, and the Polish zloty have slid 2.9 percent, 2.2 percent, 1.9 percent and 1.8 percent, respectively, against the euro this year.

These concerns have been fueled by a recent string of negative reports about the health of Europe’s economy. Unemployment in the 27-member European Union increased from 10.8 percent in January to 10.9 percent in February, according to Eurostat, the statistical office of the European Union. In the 17-member euro area, the seasonally-adjusted unemployment rate was 12.0 percent, an increase from 10.9 percent in the year-ago period.

Compounding Europe’s struggling labor market is the Markit Eurozone Manufacturing PMI report for March, which was also released on Tuesday morning. The report’s index of overall business conditions decreased from 47.9 in February to 46.8 in March, a three-month low.

Separately, a Sentex index tracking investor sentiment fell to -17.3, its lowest since November. Sentex commented: “While the election in Italy led to the first setback for the euro zone index in March, the Cyprus issue is an additional strain in April: both sub-indices, the assessment of the economic situation and the 6-month expectations drop again to a similar degree. Expectations are now in the neutral zone.”

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