Cyprus, Eurogroup Reaches Agreement

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Ailing European country Cyprus has finally reached an agreement with the Eurogroup regarding the levy on deposits below EUR100k. The portion on the levy has finally been done away with, giving Cypriots a temporary sigh of relief.

The country and the Eurozone still have a lot of work ahead of them, however. These include capital controls, which, according to EU commissioner for economic affairs Ollu Rehn, would be taken locally by the government of Cyprus. The move will also be temporary and will be supervised by the EU. While this goes against the EU’s support for a free movement of capital, Eurogroup Chairman Jeroen Dijsselbloem said that capital controls are the best option for Cyprus at the moment.

There was also particular focus on the banking sector during the meeting, which revealed the ultimate closure of Laiki Bank and the transfer of deposits under EUR100k to the Bank of Cyprus. Those holding deposits of over the said amount would contribute to the recapitalization of the Bank of Cyprus, which will face a major restructure.

While the issues were seen as the return of the region to an economic crisis, Dijsselbloem downplayed that only as a banking crisis. He further added that he sees the economy of Cyprus picking up quickly.

The current developments have allayed fears that Cyprus would default on its debts and leave the Eurozone. The country still has to secure the remaining USD5.8 billion needed to supplement the EUR10 billion bailout package that it is set to receive from the EU.

With the current news, the EUR/USD pair rose from 1.2980 to 1.3047, reaching latest highs seen on 15 Mar. Resistance, however, is expected at around the 1.3135 mark and gains would fade in the short term after the market’s initial reaction to the news loses intensity.

By FX Strategy Team, Published on 25th of March 2013
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