Thursday, March 28, 2013

Could Slovenia be the next domino to fall?

With Cyprus set to plunge into a deep recession because of harsh bailout terms that target bank deposits, the big question is: which country could be next?

Attention is now turning to Slovenia as the next potential flashpoint in the eurozone debt crisis.

Slovenia joined the eurozone in 2007 and became the first post-Soviet era nation to take on the single currency.

At first, its banking sector grew rapidly, but since 2009, when Europe's debt crisis erupted, Slovenia's banks have been under siege and the biggest are struggling with bad loans that now equate to around a fifth of economic output.

It is estimated that Slovenian banks and companies need around four billion euro in special funding to remain solvent.

Slovenian prime minister Alenka Bratusek admits the nation's finances are in bad shape and has ramped up austerity to rebuild the banking sector.

But she stresses that Slovenia's troubles are not in the same league as Cyprus - which had a much bigger and more bloated banking sector.

While there is no request for a bailout yet, the cost of protecting Slovenia's debt rose around 0.49 per cent overnight in a sign that financial markets are nervous.

The recent focus on Cyprus has also brought the fate of Greece back into sharper focus.

It has received a number of bailouts since 2009, but given that the deep austerity is only having a minimal impact, there are concerns that Greek bank deposits could be targeted if another rescue is requested.

As a result, the share market in Athens fell close to five per cent this morning before recovering.

Currency strategist Kathleen Brooks says patience is running out.

"The appetite to continue with these bailouts is very, very weak from the kind of core countries in the eurozone," Ms Brooks told the BBC.

"Now what we know about Greece which obviously has been bailed out is that there is a lot of expectation they'll need to be bailed out going forward, and if that doesn't happen and a bail in if you like comes into play, then their banks could get hit as well, so their deposit holders could get hit."

The fallout from Cyprus, combined with new fears about Slovenia, is putting pressure on bigger nations like Britain and France to build their capital base to reduce potential exposure.

The caution about Cypriot contagion has also sparked open talk that, in addition to Slovenia, smaller economies such as Malta and Luxembourg could also be exposed.

Wednesday, March 27, 2013

Waiting game on how Cyprus will stop flight of cash when banks re-open

By Business editor Peter Ryan – analysis

The big question for Cypriots - and foreigners holding bank accounts in Cyprus - is what happens when the nation's big two banks finally open.

But the Central Bank of Cyprus is yet to announce a plan to stop money being pulled out of the country.

So far, the central bank's governor has only said capital controls will be "loose" and "temporary" with no word on what form they'll take or how long they'll last

But the early options are not good ones for ordinary Cypriots who need to put food on the table or businesses needing to pay suppliers or be paid themselves.

Some of the options being canvassed include:

* a weekly limit on how much cash can be withdrawn from banks of ATMs

* a temporary ban on the use of cheques

* powers to prevent the use of credit or debit cards to stop money from being switched out of the country

* limits on access to fixed term bank deposits that have matured or are about to mature

* tougher restrictions on the amount of hard cash that can be taken out of the country

Extreme capital controls are rare but there are precedents.

After the collapse of Lehman Brothers in 2008, Iceland imposed capital controls to protect its currency.

Malaysia did the same during the Asian financial crisis on the late 1990s to ringfence its economy.

But as a Eurozone member, Cyprus is meant to be part of the EU model - the free movement of money, people and trade.

The proposed restrictions highlight the looming crisis Cyprus poses to the Eurozone and the imperative to do whatever it takes to stop depositors from draining bank vaults.

In other developments:

* the European Central Bank moved to quash suggestions that the bailout deal for Cyprus was not a model for future rescues in the Eurozone.

* sharemarkets in Italy and Spain fell after unconfirmed rumours that depositors were shifting their money to financial havens

* Russia's main share index fell to the lowest level in more than three months as Cyprus's bailout plan cast doubt on the safety of $60 billion of loans and deposits in the island nation.

* and the British government has told 18,000 expatriate retirees living in Cyprus to consider diverting pension payments into different accounts to avoid any losses - or perhaps have their pensions paid into the account of a trusted friend.

Global economy improving despite Cyprus bailout says cautious Reserve Bank

By Business editor Peter Ryan

Global financial conditions are continuing to improve despite this week's emergency bailout for Cyprus.

But the Reserve Bank has warned the rescue of Cyprus is the latest reminder that the Eurozone debt crisis is far from over and that another financial shock could still hit the global economy.

In it's six-monthly Financial Stability Review released today, the RBA said it was still to early to say if the improved market sentiment was the beginning of a sustained recovery or "merely a temporary upswing".

"The renewed market tension associated with the handling of the sovereign and banking crisis in Cyprus in recent weeks has provided a reminder of the political, economic and social challenges of resolving the pervasive fiscal and banking sector problems," the Review says.

"There have been a number of periods of optimism which ultimately turned out to be short-lived as financial markets refocused on unresolved underlying problems."

In the six months leading up to the Cyprus bailout, the improvement in global investor sentiment has seen a rally in risk appetite and significant gains on major bourses.

But since the Cyprus crisis has emerged, investors throughout Europe have sold off shares fearing that targeting of bank deposits in the island nation could spread to other Eurozone members.

The European Central Bank today moved to quash fears that the Cyprus solution was a precedent after the Dutch finance ministers said it could be a "template" for other rescues.

The Reserve Bank also gave a tick of approval to Australia's banking system and it "remained in a relatively strong position."

The Review says wholesale funding costs for banks have eased "at the margin" while making the point that banks have been "continuing to limit their use of wholesale funding in any case."

The RBA says growth in deposits is outpacing growth for credit and that rates paid for retail deposits "remain around historically high levels."

The comments appear to support claims from the Big Four banks that the competition war for deposits is responsible for an inability to pass on cash rate cuts in full to borrowers.

The RBA says that while banks are looking for new strategies to underpin growth, there was "little sign at this stage that banks have been motivated to take on excessive risk."

Households still prefer to pay down debt rather than take on new debt, according to the Review.

However, the RBA has warned that big household debt remains a major risk.

"Household indebtedness and gearing are nonetheless still at historically high levels and hence continuation of the household sector's more prudent approach to borrowing would assist in strengthening the financial sector's resilience."

The Review also predicts the peak in the mining investment boom is now expected to be lower and occur earlier than previously forecast.

While the impact on the financial system would be limited, the RBA warns that companies servicing the mining industry could be hurt.

"Some mining services companies could face greater difficulties in repaying their debt (and) this could lead to loan losses to financial intermediaries even though their exposure to mining services companies is small."

The Reserve Bank meets next Tuesday for discuss interest rates after cuts of 175 basis points since late 2011.

Most economists think that despite the emergency bailout for Cyprus that the cash rate will be held at 3.0 per cent.