The European bailout sugar high is rapidly wearing off as the Cypriot equity market tanked 7.6% today. It has the honor of being the first equity market in the world that is now trading below its pre-bailout level. The next 2 worst performers globally were Finland and Ukraine at -4.6% and -4.4% respectively.
Here's the line chart for 2011 of the main Cypriot equity index, the General Market Index CSE:
The net impact of the bailout on the Cypriot economy may in fact be negative as Cypriot banks have a large exposure to sovereign Greek debt. S&P downgraded the island's sovereign credit rating the past Thursday (10/27) and kept it on a negative watch. From Business Week:
The new debt exchange may lead to the need to recapitalize Cypriot lenders “through a public offering or a government capital injection,” S&P said. “Weaker economic growth could worsen the Cypriot government’s debt dynamics and reduce the willingness of its political leaders to press forward with fiscal and labor-market reforms.”
The Cypriot government aims to reduce the budget deficit to 5.5 percent of GDP this year from 6.5 percent of GDP in 2010. Lawmakers approved a 220 million-euro ($313 million) austerity package in August, which included public-sector wage cuts and higher taxes in a bid to prevent borrowing costs from rising.
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