Skip to Content
Credit Insights

Mini-Crisis in Cyprus Fails to Alarm Investors

For the most part, the credit markets were unfazed by the news out of Cyprus and likewise indifferent to the lower-than-expected earnings and weak guidance from FedEx and Oracle.

Mentioned: , , , , , , , , ,

Is it apathy or did everyone leave for spring break? While the average spread of the Morningstar Corporate Bond Index widened 3 basis points to end the week at +137, the credit market never felt very threatened by the negative news last week. Similarly, the average spread of the Morningstar Eurobond Corporate Index widened 2 basis points to +137. For the most part, the credit markets were unfazed by the news out of Cyprus and likewise indifferent to the lower-than-expected earnings and weak guidance from  FedEx (FDX) (BBB+) and  Oracle (ORCL) (AA). The Federal Reserve's statement was a non-event as the Federal Open Market Committee intimated that it would continue along its same course of easy money and does not appear to be poised to make any changes in the near term. The Fed did slightly reduce its projections for GDP growth by reducing the top end of its projection range by 0.2%, to 2.3%-2.8%. In addition, the Fed reduced its projection range for the unemployment rate to 7.3%-7.5% and decreased its expected PCE inflation to a range of 1.3%-1.7%.

Cyprus surprised the world last weekend when it announced that it would "tax" bank depositors as part of a EUR 10 billion rescue package to recapitalize its banking system. The plan was to raise EUR 5.8 billion through a levy of 6.7% on deposits under EUR 100,000 and 9.9% on deposits over EUR 100,000. This plan received a tremendous amount of pushback. While the absolute amount of money is small in the grand scheme of things, the precedent could affect future bailouts in the rest of the eurozone. In addition, if the ordinary depositors in the Cyprus banks are impaired, it could set off another run on the peripheral banks. Although we don't have any special insight into how the situation will develop, the absolute size the bailout is minuscule compared with the potential negative shock to the eurozone. Therefore, we think policymakers will resolve the situation such that depositors with less than EUR 100,000 in their accounts, which are guaranteed by the government, will not suffer losses. Protecting the deposits of the average citizen will go a long way to minimize the risk of starting bank runs in other countries. In addition, the European Union will probably try to resolve the crisis without forcing Cyprus to leave the eurozone, as that would set a dangerous precedent. Italian and Spanish 10-year bonds ended the week at 4.52% and 4.85%, respectively. The yields on both bonds declined as investors surmised that the turmoil in Cyprus will be contained and Spain successfully auctioned off EUR 4.5 billion of new bonds.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.