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The Cypriot omnishambles rolls on. After the parliament yesterday evening told the other euro area countries where they could stick their deposit levy with not a single vote in favour of the governments revised proposals the Eurogroup refused to budge. Instead, its chairman Dijsselbloem offered little more than a terse reminder that his original bailout offer remains on the table.
So, today the Cypriot finance minister is exploring avenues in Moscow as he searches for funds to ease the burden on his countrys banks depositors. Of course, Russia has an interest in an orderly resolution to the crisis. Moodys recently estimated that Russian bank loans to Cyprus totalled around $30-40 billion at year-end 2012, or around 15%-20% of Russian banks' capital base, and that Russian banks had around $12bn placed with Cypriot banks, plus around $1 bn invested in the capital of their subsidiaries in Cyprus. And Russian corporate deposits at Cypriot banks were additionally estimated at $19bn last September.
But quite how far the Russia authorities will be willing to go to provide assistance without significantly adding to Cyprus debt stock and thus rendering IMF participation impossible is unclear. Suggested solutions involving Russian stakes being taken in the Cypriot banks and future national gas company could theoretically do the trick, but also seem unlikely to play well in Berlin, Frankfurt and Brussels. A press conference in Moscow is reportedly scheduled for 10am GMT.
The ECB, meanwhile, looks to have been the first to jump in the game of chicken, conceding that it will continue, for the time being, to offer ELA, thus refraining from triggering financial meltdown. And to preserve a degree of financial stability, there is credible talk of the Cypriot banks remaining closed at least through to early next week and additional capital controls (new limits on ATM withdrawals and funds leaving the country) being applied. But this would simply confirm that a dangerous vacuum is set to persist in place of a coherent bailout policy for some time.
Ultimately, a solution involving new adjustment measures from the Cypriot authorities (including some hit on depositors), a contribution from the Russian authorities, and some tweaking of the eurogroup offer, perhaps seems most likely. But the longer there is no solution, the greater will be the costs of any eventual bailout, and the greater the risks that, even if by accident rather than by design, the crisis ends in a disorderly manner with the Cypriot banks in meltdown, the country quitting the euro and hugely damaging contagion elsewhere. So, thank Draghi that the OMT remains a credible backstop. Today, however, expect more rumour and little of ground-breaking substance.
There are, of course, other notable things occurring elsewhere today, not least in Italy where President Napolitano starts his discussions with party leaders to try to cobble together a new government. Quite what bearing the events in Cyprus will have on those discussions is also difficult to guess.
Meanwhile, in the UK, Chancellor Osborne will present his fourth annual Budget and his first since his own omnishambles a year ago. Following the recent poor public finances data, Osborne will have to acknowledge that his deficit-reduction strategy remains off course in the face of a flat-lining economy. But he will again deny that his dedication to austerity has much to do with it, and so seems unlikely to amend significantly the existing fiscal stance of ongoing tightening every year into the medium term. And any new substantive initiatives might be centred around the BoE, whether through an enhancement of the Funding for Lending Scheme or plans for a modest revision to its monetary policy remit. (Ahead of the budget announcement, meanwhile, the latest BoE MPC minutes will indicate whether anyone joined Governor King, Paul Fisher and David Miles in voting for additional QE this month.)
Later today in the US, meanwhile, attention will turn to the conclusion of the Feds latest FOMC meeting. While we (along with everybody else) expect policy to be left on hold, all eyes will be on Bernankes press conference where he will unveil the FOMCs updated economic forecasts and might well also provide clearer guidance on the future of the Feds asset purchase programme and its planned exit strategy.
Data-wise, meanwhile, in the euro area this afternoon we will see the preliminary estimate of the European Commissions consumer confidence survey for March, with the latest current and financial account data out this morning. In the UK well see the latest labour market report, which is expected to show that the ILO unemployment rate remained unchanged at 7.8% in the three months to January but that real wages continued to decline.
Finally, on the supply side, Germany will sell €4bn of 10Y notes, while Portugal will issue bills.
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