The Cypriot Balance

Cyprus has become the epicentre of the Euro-zone crisis on announcement of the bailout plan that triggered fears across the globe. Yes, money may be drawn out from citizens’ deposits to fund the bailout. But there’s more to the implications of the move than just the taboo-like feel, that’s causing the markets to be so negative.

Euro-zone authorities and the IMF (International Monetary Fund) agreed to provide the ailing economy of Cyprus a sum of 10 billion euros provided Cyprus manages to raise 5.8 billion euros from bank depositors to unlock emergency loans, maintaining the revenue target. And thus emerged the idea to levy a one-off progressive tax on the savings of Cyprus’ citizens to save the financial system from collapsing.

Obvious reactions were wide-spread protest, a rush to cash points and fears that such measures had the potential of seeping into other troubled European economies. However, crucial things to watch on are the developments that are likely to take place over the next few days. These will hold implications that have a larger gravity and an effect that will be applicable to the Euro-zone as a whole.

To approve the above measures, there would be a debate and a vote in the Cypriot parliament, reportedly scheduled to begin on Tuesday evening. If the parliament fails to impose the levy, Cyprus will not get a bailout. This will lead to a direct face-off with default. And if the country manages to get close to a default, the situation would turn ugly. Many fear the worst case scenario would be an exit of Cyprus from the Euro-zone, which threatens the existence of the Euro-zone.

This situation thus poses a fine balance between levying a one-off tax and not getting bailout funds. Coming days would be thus considered extremely crucial and the mood globally would be dependent on developments here.

On the domestic front, it is an important day considering the fact that today is the announcement of the monetary policy by the RBI. The much-awaited March 19 has arrived. The markets would be closely watching what RBI Governor Duvvuri Subbarao would do with interest rates. Tons of guesses and polls have been flashing already, showing general expectations of a likely repo rate cut. However, even with this so called consensus, markets will remain jittery till the actual announcement takes place.

Past experience with Subbarao has led the markets to remain uncertain till the very minute of announcement. Markets will remain range-bound today till the monetary policy review and will see a soft opening. Asia has seen paring of yesterday’s losses that were caused as a reaction to the situation in Cyprus. India too is expected to see some trimming on the losses front.