In the past few weeks, Cyprus has successfully distanced itself from Greece while the latter slipped further towards either default or exit from the eurozone (Grexit). The main demonstration of this was the successful issuance in late April of a seven-year, €1-billion-euro bond at a yield of 4%.
As noted to subscribers in my January report, it looks as though Cyprus is already suffering from the risk I had identified as “reputation contagion”, a risk that has more to do with perceptions than fundamentals but which can have very serious consequences.
The likelihood of left-wing Syriza coming first in the snap Greek elections due on January 25 has again raised the prospect of “Grexit” – Greece’s exit from the eurozone.
If Greece falls out of the eurozone it is likely to see a massive devaluation that would increase the size of what would become foreign-currency, euro-denominated debt.
When Argentina broke from its hard peg to the US dollar, its currency dropped 75%. This means that Greece’s euro-denominated debt could treble in size.
For Cyprus in particular, there are two key reasons why the economy is less vulnerable today.