City Watch: Cyprus ‘cash grab’ could undermine trust in banking system, warns Brian Tora

Brian Tora of J M Finn & Co

Brian Tora of J M Finn & Co - Credit: Archant

JUST when all seemed calm in Europe and investors were starting to regain their confidence, along comes an upset of potentially huge proportions.

The news that the Cyprus government would even contemplate a raid on bank deposits as part of a bail-out package seems totally at odds with the need to continue to rebuild trust in the banking system. That there is speculation the plan originated in Germany makes it even more worrying.

While it is still too early to be sure whether this proves a pivotal moment for markets, there are some initial lessons to be learned. For a start, it suggests the appetite for continuing to bail out over indebted states has diminished.

After the European Central Bank pronounced that it would do whatever was necessary to keep the single currency zone intact, it was felt the potential domino effect would ensure rescue packages would continue. It seems they will – but at a price.

The news overshadowed trading as the week commenced. The big news was expected to be the Budget, though the likelihood remains that this will prove even more of a non-event than usual. Asian markets certainly took a tumble as the implications of a cash grab to help balance the books sunk in, despite some encouraging economic news out of China where, it seems, the government is determined to stick to its 7.5% per annum growth target.

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Here in the UK early sharp falls reversed mid morning, perhaps reflecting the potential benefits that not being part of the Eurozone conferred. The pound, though still weak against the US dollar saw strength against the Euro. The very thought of such a plan as that debated in Cyprus being adopted elsewhere must be concentrating the minds of anyone with a positive bank balance.

So a generally more positive mood in the market has been brought up short by events in Europe once again. This could prove an important week for investors, whatever the decision of the Cyprus government.

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: : Brian Tora is an associate with investment managers, JM Finn & Co.

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