• Bank restructuring needed to prevent Cypriot collapse




  • ECB gives Monday deadline for liquidity help




  • UK retail sales surge higher, GBP hits multi-week highs




  • German IFO due but Cyprus the focus



The Cypriot situation came to a crescendo last night as it became clear that a restructuring of the country’s banking system would be needed by the weekend. Rumours that the country’s 2nd largest bank, Laiki, was on the edge of collapse prompted the first real reports of bank runs in the country and forced the government to impose a EUR260 a day limit on ATM withdrawals. The decision to restructure Laiki is, ironically, more than likely to see those with deposits less than EUR100,000 protected but those with amounts over that seeing heavy losses.


Fears were ratcheted up by the ECB’s decision to announce that they would set a deadline of this Monday for Cyprus to find the EUR5.8bn needed to fund that part of the bailout. Should this not be fulfilled then the ECB would withdraw its emergency liquidity assistance program for Cypriot banks. That would be the last nail in the coffin for the banking system on the island without other outside help. It seems that the plan of asking Russia for aid has also failed.


The S&P decision to downgrade the country to CCC can hardly be seen as unnecessary but can be seen as piling on in this instance.


UK retail sales ploughed higher yesterday lifting sterling to 4 week highs vs the dollar and 6 week highs vs the euro. Sales rose by 2.1% on the month against an expected rise of 0.4%.
This was the biggest increase in retail sales for 11 months and will be partly down to a rebound from the snow related issues that saw the previous month’s number slump into negative territory.


The number is a surprise, however, given the level of consumer confidence and the fact that earnings growth is poor given the recent 2.8% CPI reading and average earnings growth of 1.2%.


The data series has been volatile through the past 5 years of crisis, with the 12 month average now sat at 1.3% retail sales growth. I expect to see us moderate around this level throughout the rest of the year, as higher inflation and lower real wages continue to negatively impact real disposable income.


Even without the Cyprus conundrum we expect the euro would be lower this morning following yesterday’s PMI releases from France and Germany which suggested that expectations that Q1 would be the worst quarter for Eurozone growth this year may be unfounded. It also highlighted that the French economy (22% of Eurozone GDP) is the real economic issue in the Eurozone as opposed to Cyprus (0.2% of Eurozone GDP).


Optimism around Cyprus is very thin on the ground at the moment and we would expect to see the euro remain offered into the weekend in the absence of the Eurozone politicians pulling victory from the jaws of defeat.


Have a great weekend



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