Europe, Cyprus vulnerable to US Market turbulence

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By Stelios Orphanides

Turbulence on US financial markets which is spreading to other regions may well be an indication of an impending worldwide economic slowdown, two people familiar with the matter said in separate interviews on Friday.

The sell-off, which started last week on the New York Stock Exchange and led The Dow Jones Index on Thursday to drop by over 1,000 points for the second time in a week, is related to the expected phasing out of the Fed’s accommodative monetary policy, said financial consultant Elena Constantinou.

The Dow closed 4.2 per cent lower on Thursday compared with Wednesday. On Friday, Chinese shares fell by an average 4 per cent, while European markets fell for the ninth time in ten days.

Due to the time lag in the transmission of the impact of policy decisions in the US to Europe the European economy could be affected as early as late 2019, said Constantinou, founder and director of the Nicosia-based RIM Think Acute Consulting Ltd. That means economies with vulnerabilities, such as Cyprus with its over-indebted public and private sector, should take proactive measures to mitigate the impact of increased borrowing costs, she added.

Due to the expected impact of Brexit on the euro area’s economy, the European Central Bank (ECB) will not be too aggressive while phasing out its low-interest-rate policy, and will first halve its asset purchases to €30 billion a month before communicating its intention to proceed with interest rates hikes, Constantinou said.

“As a (Cypriot) finance minister I would try to take advantage of the current low interest rates to repay more expensive debt and resort to reforms, including privatisations,” she continued. Privatisations are seen as a way for the economy improve its competitiveness and the government to reduce public debt, which last year was projected to have fallen below the 100-per cent mark for the first time since 2013.

Constantinou warned that the government needs a long-term plan to encourage the reduction of the economy’s excessive reliance on certain opportunistic economic activities and offer incentives to the primary and secondary sector.

Bank of Cyprus’ chief economist Ioannis Tirkides said that US financial woes may have been sparked by more than the long overdue ‘correction’ he initially saw on Tuesday, the day after the Dow fell by 1,175 points, the largest drop in a single day ever.

Three days later, Tirkides saw there may be “deeper causes than a mere correction,” including concern about the outcome of the Italian election causing more political uncertainty in Europe.

Still, the underlying long-term trends remained positive despite concerns about regional geopolitical tensions, the impact of the latest tax reform in the US expected to lead to larger fiscal shortfalls and fears of trade wars, he said three days later.

“This year will not be as calm as the years before it,” he added. The announced phasing out of the Fed’s accommodating monetary policy will lead to a reduction in central bank balance sheets and to ‘sustainably higher’ levels of interest rates.

“This is going to cause a change in the direction of money flows, this time out of equities,” he said. “More selling may be forthcoming, but it will not necessarily mean that there will be a recession in the global economy any time soon”.

Constantinou added that all these ‘risks existed last year and will continue to exist this year’.

“However, throughout 2017, and in January, markets were complacent about the prospects of the global economy, as growth was accelerating,” she said.

 

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About Author

Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]

  • Kevin Ingham

    Surely this somewhat contradicts the headline of 3 days in this paper ;

    “US market meltdown unlikely to affect Cypriot economy, economists say”

    • Barry White

      “Time flies when you are having fun”.

    • JS Gost

      Which delusional economists were they ?we have some of the worst financial indicators in the ‘real’ world.

  • Eye on Cyprus

    As they say: “When American sneezes, the world catches a cold.”

    • JS Gost

      The real quote is not the summary as stated with the data behind it supporting the fact that when the US economy falters the unsound and broken economies have to face their demons. Oh boy, we have a whole wagon load of those.

  • European Citizen

    “That means economies with vulnerabilities, such as Cyprus with its over-indebted public and private sector, should take proactive measures to mitigate the impact of increased borrowing costs, she added.”

    Maybe I am totally retarded, but how does that make any sense?

    If the stock market is losing investment, that means more cash is freed up for other things. Then governments come along and hike rates to push traders into bonds. If anything, during this stock-to-bond shift (will only happen if interest rates are increased) there is more free money, which means, in the absence of a rate hike, private loans should get slightly cheaper, thus, borrowing costs should decline. Am I totally wrong here?

    • Eye on Cyprus

      Sounds totally right to me.

    • Barry White

      You are certainly not stupid, EC.

      Sunny Isle economics and politics often lead to confusion.

      Constantinou simply said that the thousands of surplus to requirements Civil Servants needed to be fired forthwith and the promises made to privatise a number of the parasitic SOE’s and collect NPL’s starting immediately must be implemented by the Government.

      You are allowed to say that it all too logical for it to happen.

  • Costas

    the stockmarkets have caught a cold, this time could be a crash just like what happened in 2008

  • Barry White

    Which is it? Earlier this week we were told that Cyprus (the Hub) would not be affected.

    • Costas

      Cyprus has no money left to launder

      • ROC

        you talk as if Cyprus is the exception, you not done your homework have you?

        • JS Gost

          Delusional as always. Your name suggests you have a basic inkling of what is happening when you don’t really have a clue.

      • Barry White

        Don’t say that, Costas. This calls for dynamic action and we are i
        on strike until we get more.

    • JS Gost

      Passport selling has an expiry date. about 6 months ago.

  • Kyrenia

    Is it because things are inside out, as it were? Ordinarily, at this phase of the economic cycle, interest rates would start to come down in order to ease fears. It’s just that they’ve never been up in the first place. The era of micro borrowing charges was ushered in as a response to the economic collapse. Problem is they never bothered to correct them. Like a patient being addicted to the drugs. Look what happened to Michael Jackson!

  • Costas

    more Cypriot Bad debts. perpetual NPL

  • Bruce

    The narrative of the Anastasiades Government and cheer-leading economists from the University of Cyprus, the Central Bank and the Bank of Cyprus prior to the Presidential election and just after was that owing to Government policies the economy was performing exceptionally well and would continue to do so if current policies were continued.The relatively rapid growth of real GDP was relied upon almost solely as the measurement for assessing the health of the economy.
    However, a number commentators on CM articles pointed to fragile sources of growth and the precarious situation of banks with their very high levels of NPLs and non-existent profitability as factors leading to the prospect of another crisis.
    Now bank economists and Government officials are realising that rapid economic growth could be halted and another financial crisis could occur, but are preparing the ground to blame this on external factors such as rising global interest rates and Brexit rather than on Cyprus Government policies such as turning a blind eye to widespread strategic debt defaulting and prolific tax evasion, especially that by the ruling oligarchs and professional elite.

    • JS Gost

      The emperors new clothes come to mind….

  • JS Gost

    Lol, a sparrow fart could knock Cyprus into the depth of obscurity, 20% of the sustainable economy is based on selling passports and 30% of the economy is bad debt. The US markets and others have nothing to do with the perilous state of the economy, it is down to greed arrogance and a stupidity that beggars belief. I would like to say I hope things get better but as someone who has a real income in dollars and pounds I really hope Cyprus gets the fate it deserves…..I challenge the CPL to counter.