Money Transfer News: Cyprus continues to dominate market attention

For the second consecutive day, the tiny island of Cyprus continues to dominate the market’s attention sending the euro to a four month low against the dollar.

The euro fell heavily last night after the Cypriot parliament rejected a one off levy on savings to meet the terms of a bail-out from the European Union. The Cypriot government now faces the task of finding another way to raise the €5.8 billion hole in their balance sheet to meet conditions made by international lenders. If Cyprus does not meet these conditions, it could eventually lead to a default and exit from the euro zone.

The Cypriot parliament rejected the proposed levy on all bank deposits as the ruling party abstained from the vote and 36 other lawmakers voted unanimously to reject the bill.

The rejection was a set-back for the European Union, which in the past has requested tough austerity measures from Greece, Portugal, Ireland, and Spain in order to secure emergency funding. This time around, the demand by Germany, Austria and Finland for the imposition of a levy on bank depositors sparked outrage not only amongst ordinary Cypriots who rushed to empty ATMs across the country but attracted worldwide condemnation as the measure flies in the face of the long established €100,000 euro wide bank deposit guarantee scheme.

EU policymakers argue that Cyprus is a unique situation because it's banking sector is five times larger than the size of its economy and are therefore unwilling to increase the size of the bailout beyond €10 billion because the debt would become unmanageable for the country.

Dutch Finance Minister and Eurogroup President Jeroen Dijsselbloem said the bloc "deeply regretted" the vote, but that the issue was not over yet. "It’s disappointing, but at the same time it’s clear that the offer from the Eurozone and the Eurogroup to Cyprus still stand," he said.

The recently elected Cypriot President Nicos Anastasiades had said he expected Parliament to reject the tax on bank deposits "because they feel and they think that it is unjust and it's against the interests of Cyprus at large". He was expected to meet party leaders on Wednesday morning to find a way forward.

Meanwhile, Cypriot Finance Minister Michael Sarris is reported to have flown to Moscow in order to seek Russian financial assistance. Russia has bailed out Cyprus in the past as the two countries have strong ties with many Russians keeping their money in Cyprus banks and operating businesses from there due to the country's business model and reputation as a tax haven.

Today sees UK Chancellor George Osborne present his latest budget against a background of the loss of the UK’s AAA credit rating and a possible triple-dip recession.



It is reported this morning that Osborne has told government departments to make a further £2.5 billion in spending cuts ahead of today’s budget. With Osborne reported to have ordered ministers to trim up to 2% of their budgets over the next two years to fund a capital spending program.

The spending reductions come on top of a 3% cull announced for the next two years in last year's Autumn Statement. The Chancellor is under pressure to offer a UK budget that addresses the financial crisis. He is also being pushed to increase spending on capital projects, such as roads and housing, as critics say the government needs to do more to facilitate economic growth.