The euro endures another volatile day in the markets

The Euro endured a day of ‘two-halves’ yesterday. In the morning, it enjoyed a rally after the overnight announcement that a deal had been struck between the eurogroup and the Cypriot government that would enable the proposed €10 billion bail-out of the tiny island state to go ahead and avoid a damaging default. The rally was not long lasting as comments from senior eurogroup officials in the afternoon undermined confidence in the euro.



The details of the bail-out, a plan to restructure two of the country’s largest banks and impose a ‘one-off’ levy on all deposits larger than €100,000 came into place was announced as the Asian markets opened the trading week. News of the bail-out calmed jitters about possible contagion in other euro zone countries such as Italy, Spain and Greece lifted the euro.

However, market sentiment quickly deteriorated followed comments in the afternoon by Eurogroup President Jeroen Dijsselbloem who suggested that the Cypriot bailout plan, if it works, could be used as a template for rescuing banks throughout the region in the future.

The Cypriot government has decided to keep all of the country's banks closed until Thursday, giving officials two more days to work out measures to avoid a run on deposits.

Dijsselbloem later back-stepped and published a new statement to attempt to clarify his position stating that “Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday. Macroeconomic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.”

The pound benefited from the turmoil in the euro zone and also found support on the news that the UK government has been repaid £4 billion by the UK Asset Resolutions (UKAR), the bank that was established to wind-down the closed mortgage books held by Northern Rock and Bradford & Bingley following their bailout during the height of the financial crisis in 2008.

The sum marked a 40% increase compared to that paid by UKAR the previous year, with the rise due to an increase in the company's underlying profit before tax. The group, which was established by HM Treasury in 2010, still owes £43.4 billion. Chairman of UKAR Richard Pym said "We still have a long way to go, but it remains our expectation and determination to repay that debt in full. Last year, with the sovereign debt crisis in the euro zone threatening to derail the global economy, we were cautious about the outlook for the UK. However, the outlook is now somewhat more positive than a year ago although the recovery remains weak by historic standards and pressure on many households' finances remains acute. Against this background we expect to make further progress in 2013 in reducing the balance sheet and repaying more of the government loans."

In a less positive move, UK mortgage lending suffered a decline in February according to the latest data published by the British Bankers' Association (BBA). The data showed the lowest number of loans granted since July with a 30,506 house purchase mortgages were granted during the 28-day period, down from 31,983 in the same period the previous month.

BBA's Statistics Director, David Dooks, said “Banks continue to support household borrowers, providing almost £8 billion of mortgage lending in February. But low interest rates allow homeowners more scope to increase repayments on their mortgages and reduce the outstanding amount.”

The latest data indicates that the Bank of England's much touted ‘Funding for Lending Scheme’ (FLS) which enables banks to borrow money at a cheaper rate, has yet to have an impact.