+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

BNP: Plan For 'Massive Selling Pressure' And A Surge In 'Risk-Off' If Cyprus Doesn't Pass The Deal

Mar 19, 2013, 16:07 IST

Flickr/sloleeThe biggest source of uncertainty from the Cyprus bank bailout deal this week is whether the government can get it through parliament.

Advertisement

The deal, which features a controversial haircut for depositors, is being revised to make it more progressive, so that the burden of the haircut falls more heavily on those with bigger bank accounts.

Still, people are angry, and understandably so. Meanwhile, the new haircut distribution doesn't raise the total 5.8 billion euros that the EU demands Cypriot depositors chip in to the bailout.

That's why everyone is watching to see what happens in parliament this week.

BNP Paribas rates strategists lay out two scenarios for markets: one if parliament passes the deal, and one if it doesn't.

Advertisement

(1) Cypriot parliament rejects the plan: the risk-off mode surges

Direction: We would probably see a strong rally in the Bund. We would expect the 1.30% level to be rapidly reached and maybe broken, with the risk of an extension closer to last year’s lows of 1.20-1.25%. Massive selling pressure on the peripherals would materialise, with higher yields across the board. A return to the 5.25-5.50% (10y BTP), 5.50-6.00% (10y Bono) and 7.00-7.50% (10y PGB) areas could be expected.

Curve: A flight-to-quality-driven rally is usually linked to steepening pressure. However, this would probably be more limited at the current levels of yield on short-dated German paper. A break through 0% on the 2y Schatz would be likely, as the contagion risk effect would cause the embedded FX option (eurozone break-up) to be partly priced in. This should not prevent the German curve from flattening. The move could be similar and even more pronounced in swaps, with more widening pressure on 2y swap spreads than on 10y swap spreads. In the peripherals, the reaction would probably be bear steepening, as the short ends should benefit from the protection of potential ECB support if the situation worsened.

(2) Cypriot parliament accepts the plan: Risk-off mode eases slightly

Direction: We would only expect a very limited setback in core markets. As long as Cypriot banks remained closed, the risk of a bank run will remain elevated. This would offer core EGBs solid protection very near term. Peripherals would recover, but as the deterioration in Italy and Spain would be very limited, we wouldn’t expect a decent rally.

Advertisement

Curve: A limited bear steepening in the cores and a limited bull flattening in Italy and Spain. Once again, because of the lack of reaction in both countries so far, any correction would likely be limited as well.

It's unclear when a vote will be held.

You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article