Asian shares rose on Wednesday as positive US data confirm a moderate recovery. US Home sales and manufacturing fed optimism with the Dow Jones industrial climbing more than 100 points to a new record high. 14 559 beats he former record from March 5th 2007. Data showed that single family home prices in January rose at the fastest pace in six years. Durable manufactured goods also shot up in February. The numbers are boosting investor confidence and loading up on equities.
The rosy US picture is in stark contrast to Europe where the Cyprus crisis and its possible contagion impact on other vulnerable members of the euro zone take central stage. The Cyprus bank bailout inflicts huge losses; up to 40% on deposits above Euro 100 000. Banks are still closed. When they hopefully open tomorrow it would be strict restrictions on currency transactions to avoid a run on the banks.
The second biggest bank, the Popular Bank of Cyprus, has been closed down. Its healthy assets, deposits below Euro 100 000, will be transferred to the Bank of Cyprus in an effort to boost and save the island’s biggest bank. Minister of Finance Michael Sarris stroke a positive tone yesterday when he stressed that the banking transaction restrictions would last only for some weeks. Others are more realistic. Cyprus fears capital flight and a run on their banks. It is likely that big Russian, British and Middle Eastern clients will take their money out as soon as there is a chance.
The handling of the Cyprus crisis also threaten to set a bad precedence. For the first time EU, the European Central Bank, ECB, and the International Monetary Fund, IMF, has confiscated funds on private accounts to finance a bailout. That has violate sacred principles. European politicians have later indicated that this practice would be followed in connection with possible other bailouts inside the Eurozone. This has sent shock waves through the European financial system and threaten banking clients especially in countries like Italy and Spain which might be next in line.
The practical consequence of the Cyprus bailout is that it might have undermined public trust in a banking system ridden by high profile scandals and banker’s speculation and misuse of client funds. The way the EU, ECB and INMF has handled the Cyprus crisis has further increased the divide between north and south in Europe. Southerners are reacting with dismay on what they see as German and EU technocrat arrogance. Confidence in the common currency is thereby also hit. While bankers are saved with generous parachutes the EU and IMF imposed austerity measures have meant unemployment and misery for the people in the southern periphery.
The Euro/USD is under steady downward pressure and trades at 1.2849. Currency analysts are expecting 1.25 in a short two months perspective. Oil prices are up with NYMEX trading above 96 the highest level seen for weeks. Brent crude is above USD 109 a barrel on the better US data. The BRIX countries meeting in Durban in South Africa has decided to establish a new investment bank in support of weaker economies with acute payment problems. It is stressed that this banking establishment is not a substitute, but a complementary to IMF.
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