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Cypriot bail-out plan rejection

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The euro recovered from a four-month low after the European Central Bank pledged to provide liquidity to Cyprus following the parliament’s rejection of a bail-out plan that would have raised €5.8bn via a levy on bank deposits.

The euro was last up 0.5% at $1.2955, representing a revival from Tuesday’s four-month low of $1.2843, after the bail-out plan failed to garner a single ‘yes’ vote and left Cypriot leaders scrambling to find an alternative.

The nation’s banks remain closed and could stay that way until early next week, and according to the central bank head, Panicos Demetriades, 10% of deposits (€7.5bn) could flee.

To plug this outward flow of deposits, Cyprus is mulling over a number of dramatic measures, including imposing limits on daily withdrawals from bank accounts; capping the amount of money that can be electronically taken out of the country, and making these transactions slower to clear; and introducing border checks to cap the amount of cash leaving the country.

There has also been some speculation that Russian investors may buy a Cyprus bank, although no such deal has been reached yet.

What does this mean for the euro?

There is some discrepancy between experts with regards to the risk factor this brings, with some investors insisting that the debt-plagued country will secure a deal to avert a default.

“Markets in Europe are used to getting a solution at the very last minute,” said Lutz Karpowitz, currency analyst at Commerzbank.

However, Brian Dangerfield, currency strategist at RBS Securities in Stamford, Connecticut, said: “Headline risks abound with regard to Cyprus.”

Indeed, the euro remains vulnerable given the underlying risk in the region and the threat that problems of a similar nature could hit other fiscally frail eurozone countries such as Spain and Italy.

“The rejection of the deposit grab plan by the Cypriot parliament leaves us in a very fragile situation,” said Lloyd’s.

“There are still several ways that the money can be found to make the bailout work, but it is also true that there are problems with all the options.”

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