More volatility seen, if Cyprus banks remain shut: Expert

Cyprus bail out proposal which shook to global markets on Monday is likely to bring more volatility going ahead if the banks of the Euro-nation remains closed for few more days, believes Justin Urquhart Stewart, Partner, Seven Investments.

"What you cannot have is the banks being shut for yet more days and it already look its going to be for three days and if that continues that is going to lose more confidence...they have certainly destroyed the confidence in their banking system," Stewart said.

Below is the verbatim transcript of the interview

Q: What is the market expectation and what are you hearing about the Cyprus parliament vote today?

A: We are trying to get some clarity out of it. It is just a low of unintended consequences, isn't it? When they come up with proposal, not really realising what impact it is going to have. What they have done has effectively created a precedence, whereby you can effectively go and block people's account. Even though there is a guarantee for individual investors in those banks up to 100,000 euro to be protected. Of course they are not actually confiscating that money, not losing that money, it is a tax on it, but to the popular flavour that is in effect allowing government to raid bank accounts. Russian have been extremely annoyed as they have been pushing money through Cyprus whether through legitimate ways or as money laundering as highlighted by the authorities.

It has been a very bloated banking system there (in Cyprus), so the banks will remain shut for next couple of days. They (authorities) have certainly destroyed the confidence in their banking system.

Q: Irrespective of the merits and demerits of this action and certainly the demerits out way, how are the markets going to take it from here?

A: What you have seen in euro area that the markets have bounced back and certainly we have seen in Japan, they have shrugged that off quite simply. But the markets will be more nervous if there is not a simple resolution to this. What you cannot have is the banks being shut for yet more days and it already look its going to be for three days and if that continues that is going to lose more confidence. Even though Cyprus is in such financial inconsequence, (this is the mouse that rot ), having disproportionate amount of effect to eurozone (just 0.2 percent), where as Greece is 2 percent. So it is much smaller than that, but it could easily have ramification into Greece and reverberate from there. So, at the moment the markets already have that nervousness but does not show how fractious they are-- be prepared for further volatility.

Q: We understand that the Cyprus parliament will be voting on the stacks today. What happens if it is delayed or perhaps it's not approved then what is the kind of uncertainty that we are facing?

A: As everyday goes by it just erodes yet more confidence and creates more concerns because you cannot keep the banking system shut, you cannot stop trade for any length of time; the country starts grinding to a halt. So although the western European nations will probably try to put pressure on the Cyprus and certainly get those broader shoulders to take great responsibility by carrying out this very inelegance and clumsy way of trying to get the debt; they have destroyed their own credibility. Unless the eurozone acts pretty quickly, they will find that there will be contagion of confidence will now be reflected in the bond markets.

Q: Would you buy the euro at 1.2880 or are you already buying it?

A: I will be buying that pretty soon.