© E.Walk/A.Praefcke
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Cyprus accounts for only 0.2% of the Eurozone economy. Why did the issue become closely watched?
I think it has to do with the substantial amount of foreign deposits, which are mainly held by Russians and by other perhaps dubious sources. As the German parliamentary elections are looming in September this year, it would be a hard-sell to bailout Russian oligarchs using German taxpayers' money. To my mind, this is the key reason why the discussion about Cyprus' bailout has taken so long and has been under so much scrutiny.
What were reasons behind conditions for Cyprus bailout? Why levy on tax deposits was asked to be implemented in order to receive financial help?
I believe the bailout conditions were mainly demanded by Germany. The German government can probably only get a majority in the Bundestag for a rescue package for Cyprus if depositors are bailed-in. Thus, mainly political considerations played a role even though the proposed tax on deposits is highly risky from an economic point of view.
Do you expect that there might be capital flight in other European countries?
I do not think that there is a risk in the near term. However, in my opinion when there is negative news flow in any European country in the future about the banking system, for instance, major banks are making losses, then I believe we could see a deposit flight. I expect that people will become much more sensitive in the future to negative news about banking issues. Therefore, the deal on Cyprus might become very dangerous. Thus, I think that the sentiment stays negative for quite a while as there is a feeling that promises are not going to be kept and nothing is secure in Europe any longer.
Antje Praefcke, Senior FX Analyst at Commerzbank AG, Germany
How serious might be the situation in Cyprus for the fragile European economy?
It is true that the economy of Cyprus is not that big. Therefore, the problem is not a pure macroeconomic problem but it is rather a financial system and market issue, where the uncertainty is mounting. Currently it is seriously affecting the financial market. The Euro has dropped recently, however for the moment it has stabilized around the 1.29 area. The FX market will focus on this issue for the next days, because market participants are waiting to see how it will unfold. In addition to that, there are some concerns whether savers in other peripheral countries might react cautiously as well.
Given the current shaky and unstable situation in the Eurozone, what performance do you anticipate from the Euro and relatively safe Swiss Franc in the near future?
We think that the Swiss Franc will likely remain supported for the time being. We saw the reaction already yesterday morning, when the Swiss Franc gained ground. However, the 1.20-level will be the barrier in EUR/CHF, since the Swiss National Bank at its meeting last week again pointed out that it will by all means defend EUR/CHF floor. We expect that there will be an upside pressure on the Swiss Franc and a downside pressure on the Euro, but the 1.20 barrier will hold.
What is your short term forecast for USD/CHF, EUR/CHF and EUR/USD?
We expect USD/CHF to trade around its current level of 0.96 in the near term. As concerns EUR/CHF, since our economists do not expect that the crisis will boil up again, we expect 1.22-1.23 throughout April, while we are looking for EUR/USD to stay at 1.29.