Investors wary of ‘slow panic’ on growth after Cyprus rescue

By Mike Dolan ,Reuters

LONDON – World markets have reacted calmly to the twists and turns of Cyprus’s financial rescue in the last fortnight but many investors fear the economic fallout is yet to come. They have sold European assets, rather than make a global dash for safety that could signal concerns about a euro breakup. Euro blue chip and bank equity prices, regional bank bonds and the euro exchange rate have all fallen sharply this week but Wall St. stocks set a record closing high. Mutual fund data released by fund tracker EPFR on Friday showed that European equity, bond and money market funds all saw hefty redemptions this week even as investors continued to pile into Japanese and U.S. equity funds. Cyprus’s 10 billion euro rescue averted an immediate financial meltdown that could have caused a Lehman Brothers-style shock in financial markets.

But it came with a forced shut down of the island’s second largest bank and a raid on bank deposits of over 100,000 euros, that forced big depositors to become part of the rescue.

Global investors are worried that the precedents set in the messy rescue will strain bank funding, hurting businesses and the fragile regional economy and delaying any recovery. Ben Bennett, strategist at British fund managers Legal and General Asset Management described the scenario of depositor fear, bank solvency and recession as a “slow panic.” “I don’t think there’s anyone who’s woken up in a cold sweat at midnight wondering what assets they need to dump — this is much more of a slow grind,” said Ben Bennett, strategist at British fund managers Legal & General Asset Management. Investors are worried that the precedents set for resolving a bank’s problems has pushed up the cost of lenders’ funding. If banks have to pay more to borrow they will be reluctant to lend to businesses, already grappling with a recession and difficult credit conditions.

This would hurt growth and questions about the ability of the bloc to shake off its debt spiral and the viability of Europe’s single currency would resurface.

Forcing savers to take a hit also sets a precedent that may mean depositors in other countries withdraw money more quickly in the future if they hear of troubles in the banking system.