March did not go well for the euro. It was not the worst-performing major currency (that honour went to the Japanese yen) but it fell by two cents against the pound and one and a half US cents in money transfer reports provided by Moneycorp. It also weakened by a cent against the Swiss franc. Two particular problems hampered the single currency. One, the post-election political impasse in Italy, was already apparent a month ago. The other, Cyprus’s bailout by the EU/IMF/ECB “troika”, grew in importance as the month progressed.
The situation in Rome has not changed. There is still no government because the anti-establishment Five Star Movement, which has a quarter of the seats in the Senate, will not form a coalition with any of the other parties. President Giorgio Napolitano has not yet given up but he is running out of time because his term of office expires in two weeks’ time. A fresh election is the most likely outcome.
The situation in Nicosia was of more concern to investors. A botched bailout initially threatened the confiscation of part of every bank deposit, even those smaller than €100k which should have been covered by the EC guarantee. That plan was later modified such that only larger depositors would be hit but they have been hit hard, losing 80% of their money in some cases. The simultaneous imposition of capital and exchange controls, to prevent an efflux of money from Cyprus, worried investors, especially when Eurogroup President Jeroen Dijsselbloem said the Cypriot bailout model would provide the template for any future rescues.
That bomb was partially defused by European Central Bank President Mario Draghi, who contradicted Mr Dijsselbloem when he said “Cyprus is no template”. But there is a lingering concern that the EU authorities are ready to change the rules whenever it suits them and this will affect all including the sending money abroad services by moneycorp.
There are also worries about the Euroland economy and how it might affect ECB policy. The central bank expects a return to growth in the second half of the year but sees “downside risks”. At this month’s meeting the Governing Council had an “extensive” discussion about lowering the 0.75% Refinancing Rate and considered “non-standard measures”, assumed to mean bond purchases.
Meanwhile in Britain the Bank of England held back again from extending its asset purchase programme and the economic data tended to look better than those from Euroland. With the Italian political situation still unresolved and the possibility of more bad news from Cyprus there is no reason at the moment for investors to be restocking their portfolios with euros.