Following up on our piece earlier this week, the coming hours and days are pivotal for Cyprus. Whatever is decided will be bad. Choosing the right solution for Cyprus is like trying to pick the best horse in the glue factory.
The ECB has threatened to withdraw ELA from the Central Bank of Cyprus on Monday if a deal has not been reached. If this is the case, and the required two thirds of the ECB board vote to stop Cyprus’s ELA, then other eurozone banks will be ordered to cease the transfer of reserves to Cyprus, and not to recognize any reserves received from Cyprus as euros. Cyprus, at this point, will be the first country to leave the EMU.
Sterling remains one of our least favourite currencies. We have frequently highlighted the terrible state of the UK economy, and the baleful effects the heavy private and public debt loads are having on its long-term health. This places the burden on the external sector, eg exports and earnings from overseas investments, to revitalize the UK economy. A weaker currency is the easiest and quickest way to increase the competitiveness of the external sector.
In the aftermath of the Lehman bankruptcy, the Bank of England helped engineer a 25% weakening of sterling. But this was not enough, and the current account and trade deficit have shown no signs of a sustainable pick-up.