Mar 25, 2013 04:52 PM IST | Source: CNBC-TV18

Risks still linger in Cyprus; US to take lead: Expert

Nick Parsons of National Australia Bank believes that though the problems in Cyprus have been resolved, certain systemic risks such as the increased vulnerability of the banking system still linger.

Nick Parsons of National Australia Bank believes that though the problems in Cyprus have been resolved, certain systemic risks such as the increased vulnerability of the banking system still linger.

Speaking to CNBC-TV18 about the performance of global markets, he added that the US will continue to outperform till policy tensions ease and stability returns to the emerging markets.

Below is an edited transcript of the analysis on CNBC-TV18

Q: How do you expect the Cyprus situation to pan out? Is the problem completely resolved?

A: I think the Cyprus problem has been resolved to the extent that a bank resolution agreement has been arrived at. Deposit-, bond- and the equity-holders are going to exclusively bear the pain and deposits under 100,000 euro will be protected.

However, there are still some systemic implications for the euro zone as a whole and indeed for the financial system globally because it is now known that the principle of deposit guarantees can be changed instantly. So, deposits and financial institutions are no longer as safe as they were thought to be.

And any future uncertainty in any of the euro zone members or elsewhere in the world, could provoke a run on the banking system much more quickly than in the past.

So, although the problem in Cyprus has been dealt with, there are a lot of systemic concerns that linger. And it is for that reason that the markets are not going to regain the losses made over the last ten days.

Q: How do you expect the merger of the Laiki Bank with higher level deposits being frozen and senior bond and equity holders probably in danger?

A: It is positive that this at least reinforces the notion of a capital structure because in a capital structure bond holders and equity holders are supposed to take losses. So, that principle at least has been respected but it certainly offers no comfort for bond holders.

Although a few analysts have indicated that the merger is of only two banks in Cyprus to all purposes, the fact remains that there were only two banks in Cyprus.

The situation is not one where there are 10 banks and each has a market-share of 10 percent, though the merger is an enormous amount of concentration. So, it is going to be a big event.

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What it will also do is it just puts the burden back on the investor and back on the depositor to be more careful in their choice of financial institution.  So, I think there is going to be a flight to safety and liquidity.

But there could also be, at the margin, an exit from the banking system. With interest rates at zero-levels, a hole in the backyard or a safe in the bedroom or a biscuit tin in the kitchen looks as pretty good a place for to save money as compared to a financial institution.

Q: Will there be a risk of contagion and a few bank stocks may fall or a few yields may rise?

A: The likelihood of contagion sows seeds of doubt and that certainly is enough to cap any upward momentum in stocks.

Q: At the moment, appetite for risk seems to have been given  a leg up. Do you think there is going to be a return of the January-February tide?

A: The markets, over time, will edge higher, but certainly not to the recent highs. So progress will be substantially more difficult due to the events that occurred over the last ten days.

Q: There has been a distinct differentiation with respect to risk assets in the past eight-ten weeks. Developed-market equities have been preferred, US to be precise, to emerging markets. Will this trend continue?

A: I think the trend will continue in the short-term due to the lack of policy clarity and concerns on the events in Japan. A few of those concerns were most forcefully expressed in South Korea. But until there is a reemergence of stability and easing in policy tensions, the US will continue to outperform in the near-term.

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