Criticism of Cyprus bank levy bodes ill for euro
LONDON: Prime Minister Dmitry Medvedev’s warning that Cyprus’s proposed bailout might make Russia review the share of euros in its foreign reserves bodes ill for the single currency.
The Russian premier’s words, and remarks by US Federal Reserve Chairman Ben Bernanke, have brought into the open central bank concerns about the impact of the plan to tax bank deposits that have hitherto been expressed in private.
Investors who were previously willing to hold euros may yet prefer the security of the dollar.
The euro could be forced lower against the dollar, through the key support area bounded by its 200- and 233-day moving averages, currently $ 1.2877 and $ 1.2853 respectively, with a test of $ 1.2500 to follow.
However the Cyprus crisis plays out, international investors now know that in extremist European Union policymakers are prepared to levy a tax on deposits without notice and without giving investors time to adjust.
Asked whether the situation in Cyprus was a reason to reduce the euro share of Russia’s reserves, Medvedev said that “this is a reason to think about it,” according to Russian media.
Putting this into context, as of Jan. 1 Russia’s gold and forex reserves were worth $ 537 billion. Some 42 percent of the foreign exchange holdings — the world’s fourth-largest — were held in euros.
“If it can be done in Cyprus, why not in Spain, in Italy, or in other countries where there are problems with finances? Tomorrow they will start to confiscate deposits there. This is a reason to begin to think,” he added.
Of course Medvedev’s comments must be seen against the backdrop of the fact that Russian depositors in Cyprus stand to lose a lot if the proposed bank deposit levy is imposed.
But he was not alone.
Even as Fed chief Bernanke outlined, after the Fed’s latest meeting, a steady-as-you go monetary policy amid signs of improved US data, he seemed to have some qualms about the way the situation in Cyprus had been approached.
“I think everyone understands that there are certain risks with that,” Bernanke said referring to the proposed levy on bank deposits in Cyprus, even while acknowledging Cyprus’s predicament was tough to address.
“Besides the equity issue of taxing lower-income people, there is the issue of setting a precedent that might reduce confidence in banks in subsequent periods,” he said.
If two such senior policymakers appear to have reservations about the handling of the latest episode in the euro zone financial crisis, investors holding euros may vote with their feet.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.
