Negotiations between Cyprus and the EU on the conditions for a 17.5 billion euro rescue package, ongoing for the last few months, have come to a standstill on Wednesday. German lawmakers threatened to veto the bailout due to concerns with claims that Cypriot banks might have been laundering money coming from Russian tax crimes.
“As matters stand, I cannot imagine that German taxpayers save Cypriot banks whose business model is based on facilitating tax evasion,” Sigmar Gabriel, the head of the German Social Democratic party told Sueddeutsche Zeitung in the European morning. Later on Wednesday chancellor Angela Merkel supported this stance by saying that Cyprus needs to agree to deep economic reforms in exchange for the bailout
Cypriot president Demetris Christofias, who opposes the privatization of state companies, finishes his term in February. Eurozone finance ministers want to delay the decision on the bailout until then.
Marc Chandler, Global Head of Currency Strategy at BBH believes that the situation in Cyprus is serious and might have grave implications for the Eurozone if not addressed urgently: “While last year we argued against the widespread view of a Greek exit, we are not as sanguine about Cyprus. Although one does not see it reflected in the survey or policy markets like intrade.com, we suspect the risks of a Cyprus exit are greater than currently appreciated.”
Strong demand at German 5-year debt auction
Germany held a debt auction on Wednesday during which it sold a total of 4.09 billion euros of new five-year government bonds at an average yield of 0.53%, compared with 0.53% seen at the previous auction.
The bid-to-cover ratio was 1.8, versus 1.9 seen in November. The strong demand supported the Bunds which rose to session's high at 143.72.