• ?Cyprus’ financial bailout still not a done deal 
  • ?The euro & stock markets down?
  • French 10y OAT yield down under 2%
Is there a new European crisis brewing in Cyprus? The country’s banking system needs to be recapitalised, failing which the European Central Bank (ECB) – which is not responsible for solvency issues – could cease to provide support. However, given the size of the banking sector (seven times GDP) the sums in play by far exceed the country’s repayment capacity. The EUR 17bn or so of the rescue plan represents one year’s GDP for Cyprus, which is only the 26th biggest economy in Europe. An advance of this amount from the European Stability Mechanism (ESM) to the government would push government debt up to the unsustainable level of around 200% of GDP. The choice before the euro zone is thus not a pleasant one: use public funds to guarantee wealth which, in large part, belong to non-EU citizens or firms like Russian; or ask depositor to share the burden, creating a dangerous precedent. 

Source http://www.fxstreet.com/fundamental/market-view/ecoweek/2013-03-22.html



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