By Matthew Hedrick, Hedgeye
FORTUNE -- The market's reaction to Cyprus's bailout is overdone, and these 'crisis' conditions will be short-lived.
A quick update on the latest development is that parliament has delayed until Tuesday a scheduled vote on the proposed bailout, namely on the levying of a one-time tax of 9.9% on Cypriot bank deposits of more than €100K and a tax of 6.75% on smaller deposits.
Internally there's much pushback on the scheme as the country's banking system is tied with political and banking corruption that allows a home for Russian money laundering. It is therefore playing out on the streets that "oligarchs" banking in Cyprus should pay disproportionately more vs. average deposit holders, if the latter should play at all.
Externally, the move to tax deposit-holders for bailout packages (vs. for example sovereign bond holders) sets a dangerous precedent that throws fear across Eurozone deposit holders. We expect Eurocrats to rhetorically smooth over the deposit levy and signal that Cyprus is a unique and extreme case given the inner workings of its corrupt banking system.
Note that Monday is a holiday in Cyprus, and there's talk that a bank holiday will be extended at least to Wednesday to prevent capital flight as the terms around a €10B bailout are voted on this week. This morning the Wall Street Journal cited an official that said the new proposal will allow depositors with less than €100K to be taxed at 3%, savers with €100K-€500K taxed at 10%, and those with over €500K taxed at 15%. While we cannot know the accuracy of this citation, it appears likely that the government will tax higher deposits at a higher rate to go after large Russian deposit-holders. Depending on the crafting of the levy, it would also seem probable that temporary restrictive measure may have to be put in place to prevent the flight of deposits to other countries.
Here are some takeaways to consider as the media runs hard with this story.
While we think the market will move past Cyprus over the short term, this event, along with the Italian elections, provides good ammo to put pressure on the euro.
Nothing like another good crisis to stir up the markets!
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