Forex Flash: Cypriot negotiations have a few days to be completed - Societe Generale

FXstreet.com (Barcelona) - Sebastien Galy, Senior FX Strategist at Societe Generale notes that negotiations in Cyprus have a few days to be completed, with the ECB saying that Cyprus´s ELA facility would be funded until the 25th.

In option terminology, that is called a terminal stop. In this sense he notes that EUR/USD now contains an embedded credit, transfer risk premium that is fully defined. He feels that the optimal solution is for locals to hoard cash, delay payments and use existing inventory.

However, this can't last too long and in game theory, it is called a credible threat. Russia has tried its own version saying it could review its EUR reserve holdings if its interest in Cyprus are not well accounted for. As capital is not the issue in Europe, Galy believes that only its distribution, ie a lower EURUSD doesn't have the same ring as a threat to cut off the ELA. Overall, he believes that the interests both in core Europe and Cyprus seem fairly aligned with broad agreement that touching insured deposits was a bad idea. He finishes by writing, “Necessity being the mother of invention it is just a matter of time before we see where the pain will be distributed (within Cyprus and from Europe). Till then good old negotiation and its game theory friend will hold sway. Reports are that Cyprus could present a draft proposal today.”