The Canadian dollar closed higher Monday but off the best levels of the session as traders considered the effects of a bailout deal reached between the Cypriot government and the so-called troika of creditors – the International Monetary Fund, the European Commission and the European Central Bank.
The loonie was up 0.2 of a cent at 97.92 cents (U.S.) after Cyprus clinched a €10-billion ($13-billion) bailout aimed at preventing the country from sliding into bankruptcy and ditching the euro currency.
But in order to get the money, the country had to come up with €5.8-billion on its own. The bulk of that money is now being raised by forcing losses on holders of large bank deposits, with the remainder coming from tax increases and privatizations.
Markets were rattled after a top European official said Monday that inflicting losses on banks’ shareholders, bondholders and even large depositors should become the 17-country euro zone’s default approach for dealing with ailing lenders.
Banks’ owners and investors must be held responsible “before looking at public money or any other instrument coming from the public side,” said Jeroen Dijsselbloem, who chairs the Eurogroup gatherings of the 17 euro zone finance ministers.
He later pointed out that “Cyprus is a specific case with exceptional challenges” but traders worry that forcing losses on large deposits could encourage investors to pull money out of weaker southern European economies to more stable nations in the north, like Germany.
The ECB had threatened to cut crucial emergency assistance to the country’s banks by Tuesday if no agreement had been reached.
The country’s second-largest bank, Laiki, will be restructured, with all bondholders and people with more than €100,000 in their bank accounts facing significant losses.
Also on Monday, Cyprus’s President said the central bank will impose some limits on bank transactions on Tuesday, when most of the country’s financial institutions reopen for the first time in over a week.
All banks except the Bank of Cyprus and Laiki are due to reopen on Tuesday morning. President Nicos Anastasiades did not specify what limitations would be imposed on transactions.
Investors also kept a wary eye on the other major trouble spot in the euro zone as Italy had to pay slightly higher interest rates to raise €3.8-billion in bond sales. The treasury paid a rate of 1.75 per cent in the sale Monday, up from 1.68 per cent at the last such auction last month.
Commodity prices were mixed with the May crude contract on the New York Mercantile Exchange up $1.10 to $94.81 a barrel.
May copper was down 2 cents at $3.44 a pound while April gold bullion fell $1.60 to $1,604.50 an ounce.
Looking ahead, traders will take in the latest read on Canada’s economic strength on Thursday. Gross domestic product is expected to have risen by 0.1 per cent in January following a 0.2-per-cent dip the previous month.
Canadian consumer price index numbers for February are due on Wednesday. The data is expected to show that inflation jumped 0.7 per cent, on higher gasoline prices, according to consensus expectations from Bank of Montreal.