Eurozone Debt Crisis: Cyprus bail-out
After an extremely tense period, during which banks in Cyprus were closed, a bail-out package with the Troika was agreed last weekend. Crucially, Laiki Bank (the country’s second largest bank) will be split into a ‘bad’ and a ‘good’ bank. In the former, 40%
of deposits above EUR100,000 will be converted to equity. The latter will be absorbed by Bank of Cyprus (BoC, the largest bank) in which deposits above EUR100,000 will also be subject to a debt swap (sufficient to reach a capital ratio of 9%, but probably at least 30%). The ECB will continue to provide liquidity support. Temporary controls will be placed on bank withdrawals. Another requirement is a reduction in the size of the banking sector to the EU average. Fiscal measures include a higher corporate tax rate and a privatisation programme. The Eurozone and IMF will provide up to EUR10 billion to cover the government’s financing needs while maintaining debt sustainability. Following the agreement, the recession is likely to be deeper than expected and there is considerable uncertainty over its duration, particularly in the context of the wide modification of the economic structure as the banking sector contracts and public debt increases. Full implementation of the adjustment programme will also be challenging and will test government resolve, with debt sustainability finely balanced for some time. Banks re-open today, providing the first major test as the authorities try to shore up depositor confidence.
Eurozone: Difficult H1 2013
In March, business confidence (composite PMI) reached a four-month low (-1.7pps to 46.5, compared with a consensus expectation of 48.2) reflecting deteriorating prospects in both the manufacturing and services sectors. In Germany, the fall was more pronounced in services (-3.1pps to 51.6), while the manufacturing index fell below the ‘no growth’ threshold (-0.9pps to 49.8). The outlook is more worrying in France, with confidence in the services sector reaching a four-year low (41.9) and the index for manufacturing output remaining flat at a very low level (42.8). Overall, despite some recent improvement, current levels of business confidence suggest economic activity will remain weak in the coming months. Against this background and continuing political risk, EH expects a difficult H1 but with gradual signs of stabilisation emerging from early H2 2013.
Germany: Fewer start-ups
In 2012, the number of larger business start-ups—classified by the Federal Statistical Office as having a marked significance for the overall economy—totalled 134,200, down by -7% y/y. The number of new small business start-ups was also down in 2012, by a sharp -17% y/y, at 243,400. In the same period, the rate of establishment of new part-time businesses was stable, with around 241,000 start-ups. In terms of business de-registration, there were mixed results in 2012, with larger business closures up +2.4% y/y at 122,100, while closures of small businesses declined by -3.3% y/y, at 292,100. The number of de-registrations of part-time farms increased by +3.5% y/y at 157,600 in 2012.
This week, leaders from Brazil, Russia, India, China and South Africa met in Durban and a key topic for debate at the BRICS summit was the establishment of a development bank, principally as a conduit for financing infrastructure projects. Details have still to be worked out, not least where the bank will be located, its structure and how (and to what extent) it will be capitalised. The countries also agreed to establish a pool of foreign exchange reserves (potentially USD100bn) to be used in support of a member in financial difficulties. Again, details are limited. Overall, the rather loose grouping is now showing some signs of deepening through mutual support and formal organisation. Expect further progress, but at a measured pace.