Markets & Economy
What's the euro's future after the Cyprus bank bailout?
May 22, 2013
Peter Westaway: I think the situation that happened in Cyprus was very much seen as an ominous turn when it was first announced. I mean, yes, it was ominous in the sense that the original proposals were suggesting that all depositors were going to take a haircut on their funds, not just the large depositors, the small depositors as well, and if that had been allowed to happen, it would’ve potentially undermined faith in the banking system, not just in Cyprus but across the whole of Europe, especially in those vulnerable periphery countries. It might've led to bank runs and so on.
So I think changing the proposal so that only large-scale depositors were hit was appropriate, and I think it calmed nerves down, and I think the statements that policymakers have been making that Cyprus is a one-off—I think we should take those at face value because there were special circumstances.
The reason I'd say it's not an ominous turn is actually that given the Cyprus crisis blew up, it was surprising how calm financial markets were about it. I think if that had happened a year ago before the ECB [European Central Bank] had made it clear that they would step in and help countries if they needed it, I think a year ago, there would've been a lot more panic. We would've seen bond yields spike, stock markets falling, but as it was, yes, there was a little bit of disruption to markets, but I think things were treated relatively calmly.
I don't think I have really changed my outlook for the euro, and if anything, the recent market reaction to the events around Cyprus and the troubles that they've been in Italy on electing a government have made me actually more optimistic because it now seems that market participants have sort of lost the appetite to really speculate on the demise of the euro. It now looks as if people are really believing policymakers when they say they'll do whatever it takes. I mean, that's not to say that there aren't still risks out there. Politics can rear its ugly head and cause things to go off track, but I think my main case is still very much that the euro will stay together in one piece. There won't be any countries leaving the euro, and it will survive.
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Excerpt from a recent video with Vanguard's Chief European Economist
Can the euro survive after the bank crisis in Cyprus caused some depositors to lose money?
In a short video, Vanguard Chief European Economist Peter Westaway puts the Cypriot bailout in perspective, including what it says about the euro's future.
- All investing is subject to risk, including the possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss.
- Past performance is not a guarantee of future results.