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Key pointsWorld Peace

After doubling in value against the $US over the last decade, the best is likely behind for the Australian dollar.

The commodity price boom is starting to fade in response to a moderation in Chinese growth as commodity supply starts to increase, the impact of quantitative easing in the US is being blunted by rate cuts in Australia with the prospect of more to come and the rise in the $A has exposed the high cost base of the Australian economy.

While further gains are likely in the value of the $A against the Yen (to around ¥110 by year end), the $A is likely to remain range bound this year against the $US with the risks on the downside, particularly over the next few years.

For Australian based investors, this means less need to hedge global exposures back to Australian dollars.


The last decade saw a huge surge in commodity prices on the back of rapid growth in demand, as China industrialised, and as the supply of commodities was constrained. This hugely benefitted assets geared to commodity prices including emerging market shares in South America, resources companies and of course the Australian dollar which were all star performers.

For the $A it meant a rise from a low in 2001 of $US0.48 to a high in 2011 of $US1.10 and a 70% gain on a trade weighted basis. However, since 2011 the outlook for the Australian dollar has become more confused: commodity prices are high but have been sliding recently; monetary easing (particularly money printing) in the US and Japan is positive for the $A but has been blunted slightly by rate cuts in Australia and the chance of more to come; safe haven flows from central banks looking to diversify have helped support the $A but I get the feeling that they are late to the party and some would question Australia’s safe haven status; and the damage to Australia’s international competitiveness has become more evident.

Purchasing power parity

One of most common ways to value a currency is to compare relative prices. According to purchasing power parity theory, exchange rates should equilibrate the price of a basket of goods and services across countries, such that 100 Australian dollars would buy the same basket of goods in other countries as it does in Australia when translated into their currencies. A rough guide to this is shown in the chart below which shows the $A/$US rate against where it would be if the rate had moved to equilibrate relative consumer price levels between the US and Australia over the last 110 years or so.

Source: RBA, ABS, AMP Capital

Quite clearly purchasing power parity doesn’t work for extended periods with huge divergences evident at various points in time when the $A was fixed such as in the 1950s and 1960s and/or when other factors come into play. In fact, the $A as has gone from being dramatically undervalued in 2001 to similarly overvalued now on this measure now. However, it does provide a guide to where exchange rates are headed over very long periods of time. Such an approach has been popularised over many years by The Economist magazine’s Big Mac index.

An obvious problem with such measures is that they can give different results depending on the estimation period and the types of prices used. The relative consumer price measures used in the chart above would suggest that the $A is currently around 35% overvalued, whereas according to the Big Mac index it is only about 12% overvalued.

However, the broad impression is that the $A is overvalued on a purchasing power parity basis. This is consistent with current perception and news stories recently appearing about how Australia has gone from being a relatively cheap country a decade ago when the $A was much lower to an expensive country today. This suggests the $A could face downward pressure if some of the factors that have been holding it up reverse.

The major factors on this front are commodity prices, relative monetary policies and perceptions of Australia as a safe haven.

Commodity price boom starts to fray

Over the last forty odd years swings in commodity prices have been perhaps the main driver of the big picture swings in the $A. Rising commodity prices helped the $A into the mid 1970s, falling commodities correlated with a fall in the $A until around 2000 and over the last decade rising commodity prices explained the huge surge in the $A. The logic behind this is simple. 70% or so of Australia’s exports are commodities and moves in commodity prices are key drivers of our export earnings. However, the commodity price story is starting to fray at the edges. The pattern for raw material prices over the past century or so has seen roughly a 10 year secular or long term upswing followed by a 10 to 20 year secular bear market, which can sometimes just be a move to the side.

Source: Global Financial Data, Bloomberg, AMP Capital

The upswing is normally driven by a surge in global demand for commodities after a period of mining underinvestment. The downswings come when the pace of demand slows but the supply of commodities picks up in lagged response to the price upswing. After a 12 year bull run since 2000 this pattern would suggest that the commodity price boom may be at or near its end. Specifically, growth in China remains strong but it has slowed a bit (from 10% plus growth to 7 to 8% growth) just at the time when the supply of commodities is about to surge after record levels of mining investment globally. And a basing in the $US is also not helping: the falling $US helped boost commodity prices from around 2002 as they tend to be priced in US dollars. Now with the $US looking a bit stronger this affect is fading.

The chart below shows an index of prices for industrial metals such as copper, zinc, lead, etc, against the $A and suggest that they have gone from a positive influence, leading on the way up last decade, to potentially a negative.

Source: Bloomberg, AMP Capital

Relative monetary policies

Quantitative easing in the US, Japan and elsewhere should be positive for the $A as it means an increase in the supply of US dollars, Yen, etc, relative to the supply of Australian dollars. And indeed it has been. Various rounds of QE in the US have been associated with $A strengthening, and the heightened efforts by Japan on this front only add to this pressure and have helped to push the $A up 25% over the last six months and the trade weighted value for the Australian dollar up to its highest since early 1985. Our assessment remains that as the value of the Yen continues to fall in response to aggressive monetary stimulus from the Bank of Japan, the $A will see further gains against the Yen, taking it to around ¥110 by year end.

However, against the $US the impact of quantitative easing may be starting to wain a bit. As can be seen in the chart below, while the first two rounds of quantitative easing in the US were associated with strong gains in the value of the Australian dollar, QE3 has just seen the $A continue to track sideways in the same $US1.02 to $US1.06 range it has been in since last July.

Source: Bloomberg, AMP Capital

This may be partly because QE3 has not seen a rise in commodity prices. But the main reason that the impact of quantitative easing may be starting to wain for the $A is that the interest rate differential in favour of Australia has fallen dramatically as the RBA has cut rates. With the Australian economy still struggling this may have further to go.

What about central bank buying and safe haven demand?

Buying by central banks looking to diversify their foreign exchange reserves and by investors allocating to a diminishing pool of safe AAA rated countries has no doubt played a role in boosting the $A. However, one can’t help but think that after a decade long bull market in the $A (or bear market in the $US) central banks are late to the $A party. And with the fading of the mining boom and the Government struggling to bring the budget back into surplus it has to be recognised that Australia is not without risk. So my feeling is that this source of support for the $A will start to fade.

Implications for investors

The bottom line is the best has likely been seen for the $A and the risks are on the downside over the years ahead as the commodity price boom fades, allowing the $A to correct some of its overvaluation on a purchasing power parity basis.

Currency is very important for investors as soon as they invest in foreign countries. Most global investments offered by fund managers come with a choice of being unhedged, ie exposed to fluctuations in the value of foreign currencies, or hedged, where the value of the investment is locked back into Australian dollars.

Over the last decade unhedged international shares returned 2.7% pa whereas hedged international shares gained 9.5% pa. The difference largely reflects the rise in the $A (+4.4% pa), but also the interest rate differential between Australia and the rest of the world (+2.4% pa). But if the $A is likely to go sideways or down there is much less need to hedge and with the interest rate gap between Australia and the rest of the world narrowing there is much less incentive to hedge.

In other words the reward versus risk equation in favour of the $A is diminishing so it makes more sense for investors now to consider taking an exposure to foreign currencies (ideally with the exception of the Yen) beyond the Australian dollar and obtaining the diversification benefits they provide.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital


This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.


Thursday, 02 May 2013 12:49

Term Deposits - the Great Rotation

There has been much discussion that the rally in the Australian share market has been as a result of a switch from investors with Term Deposits seeking a higher rate of income.  The chart below would seem to dispell that notion as it shows continued growth of term deposits in Australia to record levels.

Speculation continues of further interest rate cuts in Australia which would reduce term deposit rates even further.  Bill Evans (Westpac Chief Economist) is of the view that interest rates will be cut to 2% by 2014.

Term Deposit Growth chart

So it seems that there has not been a rotation out of term deposits into shares just yet.

This is further evidenced by the next chart which shows equity ownership by Australian households at 20 year lows.

Equity holdings at 20 year lows

Share prices have risen dramatically from low levels, but it would seem not as a result of a mass movement of funds from term deposits.

One can only imagine what may happen if the rotation from term deposits back into shares actually takes place.


This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.






Anton Tagliaferro (CEO Investors Mutual) talks about the Australian Share market in April 2013.

He discusses the stocks that he has been taking profit from and the stocks he is buying at the moment.

Anton's fund was one of the best performing Australian Share funds in 2012.

Paul Xiradis (CEO Ausbil Funds Management) talks with Mark Draper (Adviser, GEM Capital Financial Advice) about the outlook for the Australian Banking sector.


Key points:

  1. Bank Balance Sheets are in good shape
  2. Housing downturn concerns overblown
  3. Banks have grown their profits consistently in tough times over past years
  4. Australian mortgage owners are well ahead in their repayment schedules

Should investors be concerned that the Australian share market has run too far, too fast?

Mark Draper (GEM Capital Adviser) talks with Paul Xiradis (CEO Ausbil) to answer this question.


Paul believes that the share market response is in reaction to the belief that the worst from the Euro Debt Crisis is now behind us (from a financial market perspective).

The Government has announced a range of superannuation reforms, including:

  • taxing earnings in pension phase that exceeds $100,000pa
  • recognising deferred annuities for earnings tax concession purposes
  • increasing the concessional contributions cap for those aged 50 and over
  • increasing the ability to refund excess contributions
  • commence deeming account based pensions under the social security income test
  • increasing the balance threshold below which lost super must be transferred to the ATO

The majority of these proposed reforms will commence on 1st July 2014.  It is important to note that the changes announced are not yet legislated and may change prior to becoming law.

1. Tax treatment of earnings on superannuation assets supporting income streams – from 1 July 2014

From 1 July 2014 the Government proposes that future earnings, including interest and dividends, on assets supporting an income stream liability will be tax free up to $100,000 a year for each individual. Earnings above the $100,000 threshold are proposed to be taxed at the 15% tax rate that applies to earnings in the accumulation phase of super.

Under current tax rules, all income received by a superannuation fund from assets supporting an income stream such as an account based pension, is completely tax free.

The Government has also announced that the proposed $100,000 threshold will be indexed to the Consumer Price Index (CPI), and will be increased in increments of $10,000.

Special arrangements for capital gains on assets purchased before 1 July 2014

The Government has also announced that special rules will apply to the taxation of capital gains on assets purchased before 1 July 2014 to allow people time to restructure their superannuation arrangements where desired. These are:
  • For assets purchased before 5 April 2013, the proposed changes will only apply to capital gains that accrue after 1 July 2024
  • For assets purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the proposed changes to the entire capital gain, or only that part that accrues after 1 July 2014
  • For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.

Changes to apply to defined benefit funds

The Government has also announced the proposed changes will also apply to members of defined benefit funds in the same way that they apply to members of accumulation funds.

This is proposed to be achieved by calculating the notional earnings each year for defined benefit members in receipt of a concessionally-taxed superannuation pension. These calculations will be based on actuarial calculations, and will depend both on the size of the person's superannuation pension and their age. The amount of notional earnings each year will fall as a person grows older, in the same way that yearly earnings for people in defined contribution schemes fall over time as they draw down their capital.

GEM Comment

At this stage it is unclear how these proposals would practically work. However, to cater for individuals who have two or more pension funds it seems likely that trustees will be required to report income amounts received by the fund in respect of each member.

The proposed special arrangements for capital gains may also require trustees, including self- managed super fund (SMSF) trustees, and their advisers to take into account the potential future tax treatment of a fund’s CGT assets when reviewing the fund’s investment strategy and portfolio.

Other unresolved questions in relation to these reform proposals include:

  • whether capital gains will still attract the capital gains tax discount for the purposes of the $100,000 threshold
  • if capital losses in one fund or investment option will be able to be offset against capital gains in another fund or investment option
  • whether any tax liability on income over the $100,000 threshold will be levied on the member or the fund.

2. Concessional taxation for deferred annuities – from 1 July 2014

The Government will encourage the take-up of deferred lifetime annuities, by providing these products with the same concessional tax treatment that superannuation assets supporting income streams receive.


3. Concessional contributions cap – from 1 July 2013

The Government proposes to introduce a higher concessional contributions cap, initially for those aged 60 or more, and then for those aged 50 or more. This higher cap will be $35,000 per year, unindexed. Table 1 illustrates the concessional caps that will apply for the 2012-13 to 2014-15 financial years.

Table 1

Importantly, the Government has confirmed that it will not proceed with earlier proposals to limit the new higher cap to those aged 50 or more with superannuation balances below $500,000.

GEM comment

The Government has recognised that this measure will “...allow people who have not had the benefit of the Superannuation Guarantee for their entire working lives to have the ability to contribute more to their superannuation as their retirement age approaches...”. However, indexation of the standard concessional cap means that by 1 July 2018, it is expected to reach the higher $35,000 cap for those under 50.

The effectiveness of transition to retirement (TTR) strategies has been limited in recent years by a number of concessional cap reductions. With eligible clients aged over 60 (from 1 July 2013) and aged 55 to 59 (from 1 July 2014) able to make greater concessional contributions, TTR strategies will in many cases be more tax effective and lead to a higher end retirement balance.

4. Excess concessional contributions – from 1 July 2013

The Government proposes allowing all individuals to withdraw any excess concessional contributions made from 1 July 2013 from their superannuation fund. Additionally, the Government will tax excess concessional contributions at the individual’s marginal tax rate, plus an interest charge (recognising that excess contributions tax is collected later than personal income tax).

The Government has also confirmed that individuals with income greater than $300,000 will be subject to a 30% rate of tax on certain non-excessive concessional contributions rather than the 15% rate.

GEM comment

Currently, an individual may request a refund of excess concessional contributions of up to $10,000 made since 1 July 2011 on a once-only basis. It would appear that the important change announced in the current reforms is to extend that relief to all concessional contributions, regardless of amount and when made.

The imposition of an additional interest charge on excess concessional contributions appears likely to curtail strategies for those on the highest marginal tax rate to deliberately make excess concessional contributions. Currently, an individual on the 46.5% marginal tax rate is subject to the same rate of tax on personal income as excess contributions, but benefits by a timing arbitrage on the latter, due to the collection of PAYG income tax compared to that of excess contributions tax. Additional interest charges would appear to remove this benefit.

Details and draft legislation on exactly how the higher rate of tax on contributions for high income earners measure will operate remain outstanding, other than the following:

  • The additional tax will be collected through a mechanism similar to that which operates for excess contributions tax.
  • ‘Income’ means taxable income, concessional super contributions, adjusted fringe benefits, net investment loss, target foreign income, tax-free government pensions and benefits, less child support.
  • If concessional contributions themselves push a person over the $300,000 limit, the higher rate of tax will only apply to the part of the contributions that is in excess of the threshold.
  • ‘Concessional contributions’ means all employer contributions (both SG and salary sacrifice), deductible personal contributions and notional employer contributions for defined benefit members.
  • Excess concessional contributions will only be subject to excess contributions tax, not the additional 15% tax.


5. Deeming on account based income streams – from 1 January 2015

The Government proposes extending to account based income streams the Centrelink deeming rules that currently apply to financial investments such as bank deposits, shares and managed funds.

Currently, the first $45,400 for a single pensioner and $75,600 for a pensioner couple of financial investments is deemed at 2.5% pa. Any financial investments over these thresholds are deemed at 4% pa.

Under the change announced, these standard Centrelink deeming rules would apply to superannuation account based income streams from 1 January 2015. However, all such products held before 1 January 2015 will be grandfathered and continue to be assessed under the existing deductible amount rules indefinitely, unless the pensioner chooses to change to another product.

GEM comment

Many retirees seeking to optimise their financial situation under the Centrelink means tests currently consider strategies involving non-deemed investments or seeking out returns on deemed assets in excess of the deeming rates. Traditionally, account based pensions have featured prominently in the first of these strategies.

Both the assets test and income test determine the actual amount of Centrelink pension payable to an individual. Taking both these tests into account, those clients most likely to be adversely affected by the proposed change are those whose account balances are:

  • greater than the point at which deemed income exceeds the income free area (currently $152 pf for a single person and $268 pf for a couple combined), but
  • less than the point at which the assets test determines the benefit paid. These asset levels are summarised in Table 2.

Table 2


Additionally, applying deeming to account based pensions may result in greater focus on other non-deemed investments, such as direct property.

6. Lost super – increased account balance threshold – from 31 December 2015

In the 2012—13 Mid-year Economic and Fiscal Outlook, the Government announced that super balances of inactive and uncontactable members below $2,000 must be transferred to the ATO from 31 December 2012. In addition, from 1 July 2013 it proposed paying interest at a rate equal to the CPI on all lost superannuation accounts reclaimed from the ATO.

The Government now proposes increasing the account balance threshold to $2,500 from 31 December 2015 and $3,000 from 31 December 2016.


The information contained in this Briefing is based on the understanding Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468 (Colonial First State) has of the relevant Australian laws and the joint media release of the Treasurer and Minister Shorten as at 5 April 2013. The Briefing should not be taken to indicate if, when or the extent to which, announcements will become law. While all care has been taken in the preparation of the Briefing (using sources believed to be reliable and accurate), no person, including Colonial First State, GEM Capital Financial Advice or any other member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on the information. The Briefing has been prepared for the sole use of advisers, is not financial product advice and does not take into account any individual’s objectives, financial situation or needs.

Interest Rate ImageAs expected the Reserve Bank Board decided to leave the cash rate unchanged at 3.00% at its April meeting. 

Given that there has been some discussion in the media around rates rising this year we were very interested to see whether the Governor indicated whether he still had an easing bias. That was confirmed by repeating the term: "The inflation outlook, as assessed at present would afford scope to ease policy further, should that be necessary to support demand". We read this as indicating that the Bank's current stance is that they see it more likely that the next move in rates will be down rather than up. Of course a further assessment of the inflation outlook will be available on April 24 and that will be an important input into whether the Bank still sees scope to ease. Our early forecast is consistent with inflation remaining contained and the Bank's medium term target for both headline and underlying measures to be retained at 2.5%. 

The second area of considerable interest from our perspective in the statement was the official assessment of the surprise jobs growth in February of 71,500. Comments from Bank officials following that print around sampling variability and continuing prospects for rising unemployment indicated to us that the number would be severely qualified. In the Governor's statement in March he referred to the labour market as: "with the labour market softening somewhat and unemployment edging higher conditions are working to contain pressure on labour costs". In today's statement he is much more concise: "labour costs remain contained". This suggests that the Governor is not prepared to accept that the job report signals an improving market but he is also not prepared to publicly dismiss the number. He has left the issue open until we see further evidence around the labour market.

There were some issues around the domestic economy where the wording was a little more positive than in March: 

1. "Dwelling investment appears to be slowly increasing" (March) vs "dwelling investment is slowly increasing" (April); 

2. "Demand for credit is low" (March) vs "Demand for credit has also remained low thus far" (April);

3. "Investment generally outside the resources sector is relatively subdued though recent data suggest some prospect of modest increase during the next financial year" (March) vs "the near term outlook for investment outside the resources sector is relatively subdued a modest increase is likely to begin over the next year" (April);

4. "Though the full impact of this [easing in monetary policy] will take some more time to become apparent there are signs that the easier conditions are having some of the expected effects" (March). Arguably  the following statement is stronger: "there are a number of indications that the substantial easing in monetary policy is having an expansionary effect on the economy" (April).

On the other hand there appears to be a little more urgency around the slowdown in mining: "the peak in resource investment is approaching" (March) vs "the peak in resource investment is drawing close" (April). Secondly: "the exchange rate remains higher than might have been expected" (March) vs "the exchange rate, which has risen recently, remains higher than might have been expected" (April).

On the international front there appears to be little recognition of the threats posed by Cyprus to Europe. Global growth is still described as "a little below average for a time" while "the downside risks appear to be reduced". That is a less confident commentary than "downside risks appear to have lessened over recent months" (March). Unlike March where financial strains in Europe are described as "considerably reduced" there is no commentary on developments on financial strains but Europe is now described as: "remains in recession". Whereas in March financial markets were described as "remain vulnerable to occasional setbacks" they now "remain vulnerable to setbacks" implying a higher probability of these developments.

For the domestic economy there are a number of more positive nuances in this statement than we saw in March around dwelling investment; non mining investment; and the overall impact of the easing in policy. The Governor has sidestepped the issue of the February employment report but is no longer prepared to refer to a softening labour market or rising unemployment. On the other hand there is a little more urgency around the peak in the mining boom while the rising Australian dollar continues to represent concerns. 

By retaining the easing bias the Governor is signalling to us that in the Board's view, despite some more positive nuances, rates are more likely to be cut than increased at the next move. He has not moved to a neutral bias or used language to suggest that he expects rates to be on hold for an extended period. 

Accordingly, it is our view that the arguments around both domestic and international economies still support lower rates. Accordingly we retain our position that rates are likely to be cut by 25bps in June, or shortly thereafter.

Bill Evans
Chief Economist
Westpac Institutional Bank


This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

The most important influence on the Australian economy is arguably China, given our vast exports to China.

The Chinese authorities have successfully cooled the economy down, without trashing it as can be seen by the following charts.





Monday, 25 March 2013 18:24

Cyprus seals Bailout deal

Cyprus has clinched a last-ditch deal with international lenders to shut down its second largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a €10 billion ($12.4 billion) bailout.

The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.

Swiftly endorsed by euro zone finance ministers, the plan will spare the east Mediterranean island a financial meltdown by winding down Popular Bank of Cyprus, also known as Laiki, and shifting deposits below €100,000 to the Bank of Cyprus to create a ”good bank”.

Deposits above €100,000 in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki’s debts and recapitalise Bank of Cyprus through a deposit/equity conversion.

The raid on uninsured Laiki depositors is expected to raise €4.2 billion, Eurogroup chairman Jeroen Dijssebloem said.

Laiki will effectively be shuttered, with thousands of job losses. Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution.

An EU spokesman said no across-the-board levy or tax would be imposed on deposits in Cypriot banks, although the hit on large account holders in the two biggest banks is likely to be far greater than initially planned. A first attempt at a deal last week collapsed when the Cypriot Parliament rejected a proposed levy on all deposits.

German Finance Minister Wolfgang Schaeuble said lawmakers would not need to vote on the new scheme, since they had already enacted a law setting procedures for bank resolution.

“It can’t be done without a bail-in in both banks . . . This is bitter for Cyprus but we now have the result that the [German] government always stood up for,” Mr Schaeuble told reporters, saying he was sure the German Parliament would approve.

Conservative leader Mr Anastasiades, barely a month in office and wrestling with Cyprus’s worst crisis since a 1974 invasion by Turkish forces split the island in two, was forced to back down on his efforts to shield big account holders.

Diplomats said the President had fought hard to preserve the country’s business model as an offshore financial centre drawing huge sums from wealthy Russians and Britons but had lost.

The EU and IMF required that Cyprus raise €5.8 billion from its banking sector towards its own financial rescue in return for €10 billion in international loans. The head of the EU rescue fund said Cyprus should receive the first emergency funds in May.

With banks closed for the last week, the Central Bank of Cyprus imposed a €100 per day limit on withdrawals from cash machines at the two biggest banks to avert a run.

French Finance Minister Pierre Moscovici rejected charges that the EU had brought Cypriots to their knees, saying it was the island’s offshore business model that had failed.

“To all those who say that we are strangling an entire people . . . Cyprus is a casino economy that was on the brink of bankruptcy,” he said.

Analysts had said failure to clinch a deal could cause a financial market selloff, but some said the island’s small size – it accounts for just 0.2 per cent of the euro zone’s economic output – meant contagion would be limited.

The abandoned plan for a levy on bank deposits had unsettled investors since it represented an unprecedented step in Europe’s handling of a debt crisis that has spread from Greece, to Ireland, Portugal, Spain and Italy.

Cyprus’s banking sector, with assets eight times the size of its economy, has been crippled by exposure to Greece, where private bondholders suffered a 75 per cent “haircut” last year.

Without a deal by the end of Monday, the ECB said it would have cut off emergency funds to the banks, spelling certain collapse and potentially pushing the country out of the euro.

Given that Cyprus's GDP is less than a quarter of the market capitalisation of the CBA, plus the fact that most of Cyprus's bank deposits were not widely held by foreign banks, it is difficult to see this situation contaminating global financial markets.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Monday, 25 March 2013 18:24

Angry Cypriots

Cypriot Marcos Baghdatis has earned more than US$5.4 million in career prize money.  I hope he doesn't have it stashed in one of his local banks.

Imagine if he has to cop a near 40% hair cut on his savings, he's going to go "apeshit"