Oh how the central bankers and politicians long for the days when a bailout could generate a stock market rally that would last longer than a week. Take the Cypriot equity market as an example: after the latest Greek bailout was announced on July 22, stock markets around the world, including Cyprus, surged (you can read our post about this here). But the euphoria in Cyprus barely lasted through the weekend as the market began to roll over on Monday. Here's a chart of the General Market Index CSE which is the main Cypriot equity index:
After a 4% drop today, the gains from the bailout news have almost been completely reversed and the index is now nearing the lows of 2011. This article from Reuters does a good job of highlighting the different issues facing the island nation's economy which include:
- recent debt rating cut by Moody's
- exposure to Greek debt
- loss of over 50% of power generation capability
- gdp growth estimates cut to 0 for 2011
- 10 year government bond trading at 9.5%, effectively cutting Cyprus out of bond market
Also mentioned in the article is a quote by the head of the Cypriot central bank that the government may be forced to seek a bailout. The impact of a Cypriot bailout would most likely be more psychologically damning rather than causing any actual economic damage. The Cypriot economy is after all only 10% the size of Portugal's which is then only 10% the size of Italy's.
(Data is courtesy of the IMF)
But with that being said, remember that when Iceland (who's economy is only half that of Cyprus) imploded in 2008, it had sent out some major economic shock waves, the effects of which are still being dealt with today. Just recently Iceland finally agreed to a payment scheme for reimbursing Dutch and UK depositors of Iceland banks.
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