Reuters News - Cyprus reopens banks under tight restrictions

1 of 14. An European Union flag is seen ablaze during an anti-bailout rally outside the presidential palace in Nicosia March 27, 2013.

Credit: Reuters/Yannis Behrakis

By Karolina Tagaris and Michele Kambas

NICOSIA | Thu Mar 28, 2013 4:22am EDT

(Reuters) - Cypriots banks reopen on Thursday with tight controls imposed on transactions to prevent a run on deposits after the government was forced to accept a stringent EU rescue package to prevent the country from going bankrupt.

Banks were shut almost two weeks ago as the government negotiated a 10 billion euro ($13 billion) bailout package, the first in Europe's single currency zone to impose losses on bank depositors.

 

Bank staff turned up for work early in Nicosia as cash was delivered by armored trucks. At a branch of the second-biggest lender, Cyprus Popular Bank, in central Nicosia, staff were being briefed before opening at noon (1000 GMT). The new opening hours were displayed in a hand-written notice taped to the door.

Authorities say the emergency rules imposed to limit withdrawals and prevent a bank run will be temporary, but economists say they will be difficult to lift as long as the economy is in crisis.

In Nicosia there was relief that the banks were reopening, but some apprehension about what might happen.

Yorgos Georgiou, who owns a dry cleaning business, said: "Finally people's mood will be lifted and we can start to trust the system again."

But he added: "I'm worried about the poor kids working in the cashiers today, because people might vent their anger at them. You can't predict how people will react after so many days."

One man, Kostas Nikolaou, a 60-year-old pensioner, said the uncertainty of the past two weeks had been "like a slow death".

He added: "How can they tell you that you can't access your own money in the bank? It's our money, we are entitled to it."

The Cyprus stock exchange said it would remain closed on Thursday.

On Wednesday night, container trucks loaded with cash pulled up inside the compound of the central bank in the capital Nicosia to prepare for the reopening, a Cyprus central bank source said. A helicopter hovered overhead, and police with rifles were stationed around the compound.

As in all countries that use the euro, Cyprus's central bank supplies cash for its banks from the European Central Bank in Frankfurt. Officials have promised that enough funds will be on hand to meet demand. The ECB did not comment on reports it had sent extra cash to the island.

A Finance Ministry decree imposes strict controls limiting cash withdrawals to no more than 300 euros per day and banning the cashing of cheques.

The island's central bank will review all commercial transactions over 5,000 euros and scrutinize transactions over 200,000 euros on an individual basis. People leaving Cyprus can take only 1,000 euros with them. An earlier draft of the decree had put the figure at 3,000.

With just 860,000 people, Cyprus has about 68 billion euros in its banks - a vastly outsized financial system that attracted deposits from foreigners as an offshore haven but foundered after investments in neighboring Greece went sour.

The European Union and International Monetary Fund concluded that Cyprus could not afford a rescue unless it imposed losses on depositors, seen as anathema in previous euro zone bailouts.

"CYPRUS EURO"

Cyprus's financial difficulties have sent tremors through the already fragile single European currency. The imposition of capital controls has led economists to warn that a second-class "Cyprus euro" could emerge, with funds trapped on the island less valuable than euros that can be freely spent abroad.

The finance ministry decree said the measures had been imposed for seven days, after a central bank official had initially said the period would be four days, subject to review.

Many experts are skeptical. In a Reuters poll of economists this week 30 out of 46 said the controls would last months, while 13 expected they would endure a matter of weeks. Three said they could last years.

"This is a typical set of exchange control measures, more reminiscent of Latin America or Africa," said Bob Lyddon, General Secretary of the international banking association IBOS.

"These are permanent controls until the economy recovers."

The bailout, agreed in Brussels on Monday, looks set to push Cyprus deeper into an economic slump, shrink the banking sector and cost thousands of jobs.

Cyprus Popular Bank will be closed and its guaranteed deposits of up to 100,000 euros transferred to the biggest bank, Bank of Cyprus.

Deposits of more than 100,000 euros at both banks, too big to enjoy a state guarantee, will be frozen, and some of those funds will be exchanged for shares issued by the banks to recapitalize them.

While big depositors will lose money, the authorities say deposits up to 100,000 euros will be protected. The Cypriot parliament had vetoed an earlier plan that would also have hit small depositors.

European leaders said the bailout deal averted a chaotic national bankruptcy that might have forced Cyprus out of the euro. Many Cypriots say the deal was foisted upon them by Cyprus's partners in the 17-nation euro zone, and some have taken to the streets to vent their frustration.

On Wednesday, some 2,500 people rallied outside the offices of conservative President Nicos Anastasiades, waving banners and flags. They chanted: "I'll pay nothing; I owe nothing."

For now, residents say they are confused and worried by the capital controls, and wonder how they will affect daily life.

A 42-year-old Romanian hotel maid, who gave her name as Maria, said she was worried she would not be able to cash her pay cheque due on Friday. The hotel, she said, was unable to pay staff in cash because most guests paid by credit card.

"What shall I do?" she asked. "Hold up the cheque and look at it?"

($1 = 0.7824 euros)

(Additional reporting by Laura Noonan and Costas Pitas; Writing by Matt Robinson; Editing by Will Waterman)

BBC News - China and Brazil sign $30bn currency swap agreement

China and Brazil have signed a currency swap deal, designed to safeguard against future global financial crises.

Beijing has been trying to push the yuan as an alternative global reserve currency

The pact, first announced last year, will allow their central banks to swap local currencies worth up to 190bn yuan or 60bn reais ($30bn; £20bn).

Officials said this will ensure smooth bilateral trade, regardless of global financial conditions.

Along with being the world's second-largest economy, China is also Brazil's biggest trading partner.

"If there were shocks to the global financial market, with credit running short, we'd have credit from our biggest international partner, so there would be no interruption of trade," said Guido Mantega, Brazil's economy minister.

The agreement was signed on the sidelines of the fifth Brics (Brazil, Russia, India, China and South Africa) summit being held in Durban, South Africa.

'Guarantee normal trade'

Trade between China and Brazil has grown robustly over the past few years, with volumes rising from $6.7bn in 2003 to nearly $75bn in 2012.

A large chunk of this growth has been driven by growing Chinese demand for Brazil's resources, such as iron ore and soy products.

Meanwhile, Brazil has also become a key export market for goods manufactured in China.

Brazil's Central Bank governor Alexandre Tombini said the swap agreement would ensure that trade volumes between the two nations did not suffer if a financial crisis in the future hurt global liquidity.

"The purpose of this swap is that, independent of the conditions prevailing in the international financial market, we will have $30bn available which would represent eight months of exports from Brazil to China and 10 months of imports to Brazil from China," he said.

"This is sufficiently large to guarantee normal trade operations."

Bigger yuan role

China has been pushing for a more international role for its currency, the yuan. It has been trying to promote the yuan as an alternative to the US dollar as a global reserve currency.

As part of that push, it has signed a series of swap deals with some of its key trading partners.

Such agreements not only allow central banks to swap currencies, but can also be used by firms to settle trade in local currencies rather than in US dollars, as happens now, since China's currency is not fully convertible to other currencies.

Earlier this year, the Bank of England said that it was in negotiations with its Chinese counterpart to finalise a three-year swap agreement.

Last year, China signed a swap deal with Australia worth up to A$30bn ($31bn; £20bn) to promote bi-lateral trade and investment.

It is also looking at currency pacts with Hong Kong and Japan.

Sky News - Banks Warned Over £25bn Capital Shortfall

Banks are told to beef up capital levels as they face a potential £50bn hit from the eurozone crisis and banking scandals.

Britain's banks have been told they face a capital shortfall of £25bn as the Bank of England delivers its verdict on the strength of the sector.

The Bank's new Financial Policy Committee (FPC) said regulators will order institutions to fill the capital hole by the end of the year - with further increases required in the future.

But Vince Cable has warned that boosting banks' balance sheets in this waywould be counterproductive.

The Business Secretary told Sky's City editor Mark Kleinman he believed the move would slow the pace of economic recovery in the UK.

The FPC warned that over the next three years banks could suffer around £30bn in bad debts on exposure to property and eurozone economies.

They could also be hit by a further £10bn in so-called "conduct costs" such as mis-selling claims and around £12bn on a more prudent approach to risk.

"Taken together, the effect of these three adjustments would be equivalent to around a £50bn reduction in the regulatory capital of the major UK banks and building societies," the FPC said in a statement.

The business secretary criticised the FPC's recommendations

Shares in Lloyds and Royal Bank of Scotland rose after the announcement, as the shortfall figure was not as bad as feared in the City.

It comes after a warning in November that the capital hole needed as a cushion against future crises could be as high as £60bn.

Some of Britain's biggest banks have already taken action to boost their balance sheets after discussions with the Financial Services Authority.

But the FPC said that some lenders - which it did not name - still did not have the necessary capital to meet the requirements.

These banks and building societies will have to meet the gap by raising new capital or restructuring their balance sheets.

This must be done in a way that "does not hinder lending to the economy", the FPC stressed, with many small businesses across the UK already struggling to get loans.

The Treasury also made it clear that the taxpayer will not stump up any more cash for taxpayer-backed lenders RBS and Lloyds.

Today's statement is seen as a pivotal one for the FPC, whose job it is to spot and prevent another financial crisis.

It is also the pillar of the new regulatory regime introduced by the coalition, which comes into force on April 1.

As part of the overhaul, the incoming Prudential Regulation Authority will ensure banks and building societies have capital ratios of at least 7%.

BBC News - Brics nations discuss development bank

Leaders of the so-called Brics nations - Brazil, Russia, India, China and South Africa - are meeting in Durban to discuss the formation of a new development bank.

Vladimir Putin said a development bank would help boost trade between Brics nations

The bank would fund infrastructure and development projects throughout the developing nations.

Negotiations will focus on where the bank will be based and how much capital it will have.

It would be the first formal institution of the Brics group.

Some commentators see the bank as a potential rival to the World Bank.

Growth potential

Speaking in Durban before negotiations began in earnest, Russian President Vladimir Putin highlighted the economic success of the five nations.

"The common annual economic growth rate in 2012 constituted 4%, in contrast to the 0.7% of the [biggest] seven financial countries," he said.

"Russia calls for using the economic potential of Brics more effectively, with the backing of business for increasing the volumes of mutual trade, investment and broadening industrial and technological co-operation. Certainly, the creation of a Brics development bank [would support] this task."

He added that any bank would have to work "exclusively based on market principles and offer support to the business community of all of our countries".

Reports suggest the bank would have access to $50bn (£33bn) in capital.

Reuters News - Last-minute Cyprus deal to close bank, force losses

1 of 10. Cyprus' Finance Minister Michalis Sarris holds a news conference at the end of a Eurogroup meeting at the European Council building in Brussels, March 25, 2013.

Credit: Reuters/Sebastien Pirlet

By Jan Strupczewski and Annika Breidthardt

BRUSSELS | Mon Mar 25, 2013 5:01am EDT

(Reuters) - Cyprus clinched a last-ditch deal with international lenders to shut down its second-largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a 10 billion euro ($13 billion) bailout.

The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.

 

Swiftly endorsed by euro zone finance ministers, the plan will spare the Mediterranean island a financial meltdown by winding down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a "good bank".

Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki's debts and recapitalize Bank of Cyprus through a deposit/equity conversion.

The raid on uninsured Laiki depositors is expected to raise 4.2 billion euros, Eurogroup chairman Jeroen Dijssebloem said.

Laiki will effectively be shuttered, with thousands of job losses. Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution.

An EU spokesman said no across-the-board levy or tax would be imposed on deposits in Cypriot banks, although the hit on large account holders in the two biggest banks is likely to be far greater than initially planned. A first attempt at a deal last week collapsed when the Cypriot parliament rejected a proposed levy on all deposits.

Cyprus government spokesman Christos Stylianides said: "We averted a disorderly bankruptcy which would have led to an exit of Cyprus from the euro zone with unforeseeable consequences."

Asked about the level of losses on uninsured depositors on Bank of Cyprus, he told state radio it was not possible to be specific at this stage. "The assessment is that it will be under or around 30 percent. But that is a bit of an arbitrary estimate."

German Finance Minister Wolfgang Schaeuble said Cypriot lawmakers would not need to vote on the new scheme, since they had already enacted a law setting procedures for bank resolution.

"It can't be done without a bail-in in both banks ... This is bitter for Cyprus, but we now have the result that the (German) government always stood up for," Schaeuble told reporters, saying he was sure the German parliament would approve.

Lefteris Christoforou, vice-chairman of the ruling Democratic Rally party, said it was important that Cyprus had avoided a chaotic bankruptcy.

"It is a bad deal, but the extreme scenario we had to contend with was worse."

Former central bank government Afxentis Afxentiou added: "It's a new day for Cyprus ... I believe that in two or three years Cyprus will find its feet."

A senior source in the Brussels talks said Anastasiades threatened to resign at one stage on Sunday if he was pushed too far. He left EU headquarters without making any comment.

Conservative leader Anastasiades, barely a month in office and wrestling with Cyprus' worst crisis since a 1974 invasion by Turkish forces split the island in two, was forced to back down on his efforts to shield big account holders.

Diplomats said the president had fought hard to preserve the country's business model as an offshore financial centre drawing huge sums from wealthy Russians and Britons but had lost.

The EU and IMF required that Cyprus raise 5.8 billion euros from its banking sector towards its own financial rescue in return for 10 billion euros in international loans. The head of the EU rescue fund said Cyprus should receive the first emergency funds in May.

IMF chief Christine Lagarde said the agreement was "a comprehensive and credible plan" that addresses the core problem of the banking system.

"This agreement provides the basis for restoring trust in the banking system, which is key to supporting growth," she said in a statement.

With banks closed for the last week, the Central Bank of Cyprus imposed a 100-euro daily limit on withdrawals from cash machines at the two biggest banks to avert a run.

French Finance Minister Pierre Moscovici rejected charges that the EU had brought Cypriots to their knees, saying it was the island's offshore business model that had failed.

"To all those who say that we are strangling an entire people ... Cyprus is a casino economy that was on the brink of bankruptcy," he said.

The euro gained against the dollar on the news in early Asian trading.

Analysts had said failure to clinch a deal could cause a financial market sell-off, but some said the island's small size - it accounts for just 0.2 percent of the euro zone's economic output - meant contagion would be limited.

The abandoned plan for a levy on bank deposits had unsettled investors since it represented an unprecedented step in Europe's handling of a debt crisis that has spread from Greece to Ireland, Portugal, Spain and Italy.

ORDINARY PEOPLE

Among ordinary Cypriots, there was a mood of wariness about the deal.

"How long will it last?" asked Georgia Xenophontos, 23, a hotel receptionist in Nicosia. "Why should anyone believe anything this government says?"

Cyprus's banking sector, with assets eight times the size of the economy, has been crippled by exposure to Greece, where private bondholders suffered a 75 percent "haircut" last year.

Without a deal by the end of Monday, the ECB said it would have cut off emergency funds to the banks, spelling certain collapse and potentially pushing the country out of the euro.

Under the bailout agreement, Laiki's ECB funds will pass to Bank of Cyprus, and the central bank will "provide liquidity to BoC in line with applicable rules".

Anticipating a run when banks reopen on Tuesday, parliament has given the government powers to impose capital controls.

PARLIAMENT

About 200 bank employees protested outside the presidential palace on Sunday, chanting "Cyprus will not become a protectorate".

On Tuesday, the 56-seat parliament had rejected a levy on depositors, big and small. Finance Minister Michael Sarris then spent three fruitless days in Moscow trying to win help from Russia, whose citizens and companies have billions of euros at stake in Cypriot banks.

On Friday, lawmakers voted to nationalize pension funds and split failing lenders into good and bad banks - the measure to be applied to Laiki. The plan to tap pension funds was shelved due to German opposition, a Cypriot official said.

The tottering banks held 68 billion euros in deposits, including 38 billion in accounts of more than 100,000 euros - enormous sums for an island of 1.1 million people that could never sustain such a big financial system on its own.

($1=0.7694 euros)

(Additional reporting by Luke Baker, John O'Donnell, Robin Emmott, Philip Blenkinsop and Rex Merrifield in Brussels, Michele Kambas, Karolina Tagaris, Costas Pitas in Nicosia and Lionel Laurent in Paris. Writing by Paul Taylor, editing by Mike Peacock and Will Waterman)

Bloomberg News - German Business Confidence May Improve as Economy Defies Crisis

By Jana Randow - Mar 22, 2013 2:00 AM GMT+0200

German Business Confidence May Defy Crisis

Hannelore Foerster/Bloomberg

A euro sign sculpture, right, is seen illuminated at night against the business district skyline in Frankfurt.

German business confidence probably rose to the highest in almost a year in March, adding to signs that Europe’s largest economy will return to growth even as Cyprus inflames the region’s debt crisis.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, will climb to 107.8 from 107.4 in February, according to the median of 42 forecasts in a Bloomberg News survey. That would be the fifth straight gain and the highest reading since April last year. Ifo releases the report at 10 a.m. in Munich today.

With the European Central Bank threatening to cut off emergency funding for Cyprus’s banks unless it agrees to the terms of a European Union-led bailout, the tiny Mediterranean island has re-ignited concerns about the euro and roiled financial markets. Still, German investor confidence unexpectedly rose to a three-year high this month and the Bundesbank said the nation’s economic recovery remains on track.

“Confidence of German companies staged an impressive comeback in recent months” and “there are unambiguous signs of a strong recovery in German industry,” said Alexander Koch, an economist at UniCredit Group in Munich. “We see good chances that the latest German sentiment jump will soon be reflected in hard data and then increasingly lift other European countries.”

Improving Outlook

Ifo’s measure of executives’ expectations probably rose to 105 from 104.6 in February, while a gauge of the current situation may have increased to 110.5 from 110.2, the survey shows.

Some recent indicators have pointed to economic weakness.

A gauge of activity in Germany’s manufacturing industry, based on a survey of purchasing managers, unexpectedly fell below 50 this month, signalling contraction. Gauges of activity in the euro-area manufacturing and service industries also showed them shrinking at a faster pace than economists forecast.

The ECB lowered its projections earlier this month to predict the euro-area economy will contract 0.5 percent this year before growing 1 percent in 2014. By contrast, the Bundesbank estimates German growth of 0.4 percent this year and 1.9 percent next year.

Sales Growth

K+S AG (SDF), Europe’s largest potash maker, predicted on March 14 that earnings and sales will rise “slightly” this year.

Schaeffler AG, the industrial-bearing maker that’s the biggest investor in car-parts producerContinental AG (CON), said yesterday that demand in North America and Asia will more than make up for a drop in Europe to allow revenue growth of about 4 percent in 2013.

Germany’s benchmark DAX share index is up more than 4 percent this year.

“Companies are beginning to be more positive about exports and orders and there’s room for even more improvement,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “If the revival of the debt crisis threatens planning certainty, it could potentially become a big risk for the economy. But at the moment, companies have hope that there’s a way around that.”

Reuters News - EU gives Cyprus bailout ultimatum, risks euro exit

By Michele Kambas and Paul Carrel

NICOSIA/FRANKFURT | Thu Mar 21, 2013 2:57pm EDT

(Reuters) - The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In stark twin warnings on Thursday, the European Central Bank said it would cut off liquidity to Cypriot banks and a senior EU official made clear to Reuters that the bloc was ready to see the bankrupt island banished from the euro in the belief it could then contain damage to the wider European economy.

 

The ECB ultimatum came as the island's leaders struggled to craft a "Plan B" to raise the 5.8-billion euro contribution demanded by the EU in return for a 10-billion euro ($13-billion) bailout from the EU and IMF; angry Cypriot lawmakers threw out a tax on deposits, calling the EU-backed proposal "bank robbery".

In a mark of strained relations and confusion, euro zone officials conceded during a conference call on the crisis which Cyprus failed even to join that the situation was "in a mess".

The Cypriot government said party leaders had agreed to create a "solidarity fund" that would bundle state assets as the basis for an emergency bond issue, but the speaker of parliament, Yiannakis Omirou, insisted a revised levy on uninsured bank deposits was not on the table.

The European Central Bank, which has kept Cyprus's banks operating with a liquidity lifeline, said the government had until Monday to get a deal in place, or funds would be cut off - putting not just the Cypriot economy in jeopardy but billions of euros held on the island by foreigners, notably from Russia.

"Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF program is in place that would ensure the solvency of the concerned banks," the ECB said.

In Brussels, a senior European Union official told Reuters that an ECB withdrawal would mean Cyprus's biggest banks being wound up, wiping out the large deposits it has sought to protect, and probably forcing the country to abandon the euro.

"If the financial sector collapses, then they simply have to face a very significant devaluation and faced with that situation, they would have no other way but to start having their own currency," the EU official said.

Bank branches have been closed all week and are not due to reopen until Tuesday, though ATMs have continued to issue cash.

Several hundred protesters, many of them bank employees, rallied outside parliament after rumors that the island's second-largest lender, Cyprus Popular Bank, was to be wound up. The central bank issued a swift denial of that.

Demonstrators chanted "Hands off the bank!" and several jostled with riot police, briefly breaking through a cordon. Cyprus has so far avoided the kind of unrest seen in neighboring Greece, the epicenter of the euro zone debt crisis and the origin of many of the losses undermining Cypriot banks.

Until this week, the expectation in Brussels and on financial markets had been that the election of a new Cypriot president in February would smooth the path to a bailout deal.

But although conservative President Nicos Anastasiades struck a deal last weekend in Brussels, it was unanimously rejected by parliament on Tuesday. While EU lenders, notably Germany, wanted uninsured bank depositors to help ease banks' debts, Cyprus feared for its future reputation as an offshore banking haven and planned to spread the tax also to small savers whose deposits under 100,000 were covered by state insurance.

Cyprus's central bank governor said he expected to clinch a financial support package by Monday. He did not say how.

Bank of Cyprus, the country's largest lender, issued a statement pleading with the political leadership to strike a deal "to save the Cypriot economy".

In Moscow, Cypriot Finance Minister Michael Sarris said he was discussing possible Russian investments in banks and energy resources to reduce its debt burden, as well as an extension of an existing 2.5-billion-euro Russian loan.

"The banks are the ultimate objective in any support we get, so it'll either be a direct support to the banks or the support that we get through other sectors will be channeled to the banks," Sarris told Reuters during a second day of talks with his Russian counterpart, Anton Siluanov.

He said Cyprus had no plans to borrow more money from Russia and add to its debt mountain. The Russian Finance Ministry had said on Monday that Nicosia sought an extra 5-billion-euro loan.

LIMITED OPTIONS

The chairman of euro zone finance ministers, Dutchman Jeroen Dijsselbloem, told the European Parliament in Brussels that Moscow had informed the EU it had no intention of ploughing more money into Cyprus beyond the existing loan.

"Any other options, to go further, another loan or an investment in the banks, the Russians let us know that they are not willing to do that," he said, adding that that might change.

But Dijsselbloem said new loans from Russia would in any case not solve the country's debt problem, and that a revised levy on larger bank deposits was also still a possibility.

"I'm not sure that this package is completely gone and failed, because I don't see many alternatives," he said.

Senior euro zone officials acknowledged in a confidential conference call on Wednesday that they were "in a mess" and discussed imposing capital controls to insulate the currency area from a possible collapse of the small Cypriot economy.

Cyprus itself refused to take part in the call, minutes of which were seen by Reuters. Several participants described its absence as troubling and reflecting the wider confusion surrounding the island's predicament.

EU officials believe at least some of the 5.8 billion they are demanding should come from the 68 billion euros in Cypriot banks, 38 billion of which are in large deposits of more than 100,000 euros, mainly from Russians and other foreigners.

Hitting small savers caused visceral outrage, but the Cypriot government fears that foisting too big a burden on large depositors would wreck the offshore financial industry that accounts for much of the country's economy.

Among the other options, nationalizing pension funds of semi-public companies could yield between 2 billion and 3 billion euros. Issuing bonds linked to future natural gas revenue is problematic because pumping any gas is years away.

Doubts about the fate of the small nation of just 1.1 million people has shaken confidence in the euro zone and raised geopolitical tension between the EU and Russia.

Russian Prime Minister Dmitry Medvedev said the bloc had behaved "like a bull in a china shop".

Tuesday's parliamentary vote marked a stunning rejection of the kind of strict austerity accepted over the past three years by crisis-hit Greece, Portugal, Ireland, Spain and Italy.

European officials were growing increasingly exasperated.

Austrian Finance Minister Maria Fekter told the newspaper Oesterreich: "I cannot rule out a Cyprus insolvency."

(Additional reporting by Jan Strupczewski and Luke Baker in Brussels, Karolina Tagaris and Costas Pitas in Nicosia, Georgina Prodhan in Vienna, Lidia Kelly and Darya Korsunskaya in Moscow; Writing by Matt Robinson and Paul Taylor; Editing by Peter Graff and Alastair Macdonald)

Bloomberg News - Cameron Evokes Black Wednesday as Pound Weakens 7%: U.K. Credit

By Gonzalo Vina & Lucy Meakin - Mar 20, 2013 2:01 AM GMT+0200

The pound is bearing the brunt of a loss of confidence in the economic policies of U.K. Prime Minister David Cameron.

Simon Dawson/Bloomberg

Sterling has lost 4.8 percent since the end of 2012, the worst performer after the yen, according to Bloomberg Correlation-Weighted Indexes.

Sterling has weakened more than 7 percent against the dollar this year. In the week through Sept. 16, 1992, when investor George Soros earned $1 billion by helping to force the pound out of the exchange-rate system that preceded the euro, sterling dropped by 9.5 percent. Black Wednesday, as the day became known, damaged the Conservatives’ reputation for economic competence. Economists and investors say a similar judgment faces the present Tory-led government unless it gets the economy moving. U.K. bonds are the world’s worst performers this year.

“The chancellor’s policy is bankrupt -- he is going to have to face that,” Robert Skidelsky, a member of the upper chamber of Parliament without party affiliation and biographer of John Maynard Keynes, said in a phone interview on March 14. “The economy is not growing, the pound will go on slipping and we will lose further credit ratings.”Chancellor of the Exchequer George Osborne delivers his annual budget to Parliament today amid calls by the opposition Labour Party and even his own Cabinet colleagues to spur an economy at risk of falling into a third recession in five years. Britain has recovered only half of the output lost in 2008-2009, and the country forfeited its top credit rating at Moody’s Investors Service on Feb. 22. Output in the U.S. is back above its pre-recession peak and the recovery is gaining pace.

No Growth

When Cameron and Osborne took office in May 2010, they predicted the economy would grow more than 5 percent over the next two years, a budget deficit equal to 11 percent of gross domestic product would fall to 2 percent by April 2015 and the U.K. would keep its top credit rating. Instead, output rose 1.1 percent, the deficit is still 8 percent of GDP and analysts say Fitch Ratings and Standard & Poor’s will follow Moody’s in downgrading Britain’s credit score after today’s budget.

Credit-default swaps insuring gilts rose 67 percent from a more than four-year low of 26 basis points on Nov. 1, the most among 67 governments tracked by Bloomberg. The premiuminvestors demand to hold gilts rather than German bunds has increased almost fivefold since August to 48 basis points.

BOE Stimulus

Constrained by his self-imposed austerity program, Cameron is relying on the Bank of Englandto revive the economy. The central bank has bought 375 billion pounds ($566 billion) of government bonds since March 2009 as part of its quantitative- easing program and kept its benchmark interest rate at a record low of 0.5 percent.

Investors are speculating Osborne will give BOE policy makers more room to pursue growth as Mark Carney prepares to take over as governor on July 1, even if it means inflation staying above the 2 percent target. Consumer prices rose 2.8 percent in February from a year earlier, the fastest pace since May, the Office for National Statistics said yesterday.

“The fiscal side of things certainly plays in and is impacting via the monetary policy route because that has to do more of the work,” Ian Stannard, head of European currency strategy at Morgan Stanley in London, said by phone on March 18. “That is putting the pound under pressure.”

Pound Losses

Sterling has lost 4.8 percent since the end of 2012, the worst performer after the yen, according to Bloomberg Correlation-Weighted Indexes. The pound has had its worst opening two months of the year since 1985 against the dollar. It tumbled to a 2 1/2-year low of $1.4832 on March 12 and was trading at $1.5094 as of 5:30 p.m. in London yesterday.

Gilts fell 0.5 percent in pounds and 7.5 percent in dollars this year, the most among 26 indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies. The yield on the benchmark 10-year gilt will rise to 2.46 percent by year-end compared with 1.86 percent yesterday, according to the weighted average in a Bloomberg News survey.

Black Wednesday broke Britain’s peg to the deutschmark as the Treasury failed to defend the pound against short sellers such as Soros who bet sterling was overvalued in the European Exchange Rate Mechanism, a euro precursor that required members to keep currencies within trading bands.

Sterling dropped 12 percent against the German currency between Sept. 15, 1992 and the end of that year, and by 19 percent against the dollar. While the decline aided Britain’s recovery from recession by making exports more competitive, the ERM crisis shattered public confidence in John Major’s government. In the 1997 election, the Conservatives lost to Tony Blair’s Labour Party, which retained power until 2010.

Cameron’s Challenge

The pressure on the pound this year underlines the challenges facing Cameron, 46, who witnessed the events of Black Wednesday as a 25 year-old adviser to then Chancellor of the Exchequer Norman Lamont.

Britain’s economy was 3 percent smaller in the fourth quarter of 2012 than it was in the first quarter of 2008. Only Italy has had a worst performance among leading industrial nations. By contrast, output in the U.S. was 2.5 percent above its previous peak in the fourth quarter of 2007. The American economy will grow 1.9 percent this year, while Britain’s will expand 0.9 percent, median forecasts in a Bloomberg survey show.

Osborne should be replaced as finance minister, according to 44 percent of people questioned by U.K. polling company ComRes Ltd. between March 15 and March 17. Sixty-one percent said Britain was heading for another recession and trust in Osborne to run the economy stood at minus 40, a drop of 13 percentage points from a year earlier. The poll of 2,032 adults was broadcast by ITV News yesterday.

‘Poor Position’

Morgan Stanley cut its year-end forecast for sterling by 8.9 percent on March 18. The bank estimates the pound will trade at a 33-month low of $1.43, from a previous forecast of $1.57. The median estimate compiled by Bloomberg is for sterling to end the year at $1.52, compared with a forecast of $1.60 at the end of December.

“The poor position of the fiscal backdrop, the failure of the government to be hitting all of its fiscal targets and the fact that growth prospects have disappointed are all part of the reason why sterling is weaker,” Jane Foley, a senior foreign-exchange strategist at Rabobank International in London, said in a phone interview on March 15. Rabobank cut its second quarter forecast by 4.5 percent to $1.49 to $1.56 on March 8.

Rebuffing opposition arguments that austerity is depressing the economy, Osborne has ruled out any relaxation in today’s budget, saying it would drive up government borrowing costs. Cameron’s spokesman, Jean-Christophe Gray, told reporters yesterday that departments face further budget cuts over the next three years to fund an extra 2.5 billion pounds of capital investment.

No Ideas

Britain is facing a difficult economic situation and the government is doing everything it can to help people who work hard, said a Treasury spokesman who declined to be named in line with government policy, when contacted by Bloomberg News.

“The coalition don’t seem to have any ideas up their sleeve about how to create any kind of growth, so my fear is that things get a lot worse in the short term,” Haig Bathgate, chief investment officer at Turcan Connell in Edinburgh, which manages about 1 billion pounds ($1.5 billion), said by phone on March 13. “We are going to keep diversifying out of sterling for the foreseeable future.”