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Friday financial focus

Friday Headlines:
• Cyprus: President readies plan B in bid to secure bailout
• USA: Budget wars thaw to avert government shutdown
• UK: £2.9m public finances boost in February
• Eurozone: Dip deepens as US & China expand
• Markets: Global markets report
• Currencies: Euro trades lower as ECB issues Cyprus deadline
• Energy: Oil falls as German manufacturing contracts
• Commodities: Gold seen extending rebound
• Focus on: Phone-call notes that reveal alarm over Cyprus

Cyprus: President readies plan B in bid to secure bailout
The President of Cyprus is today expected to present a so-called
“Plan B” to avoid a financial meltdown after the island rejected the
terms of an EU bailout.
Proposals expected to be included are potentially nationalising
pension funds and the issuance of an emergency bond based on
future gas revenues, trying to raise €5.8bn (£4.9bn) as a condition for
securing a €10bn bailout from the European Union.

Officials are believed to have also spoken of reviving the rejected plan
for a levy on bank deposits, though at a lower level than first
proposed. The new bill could be voted on as early as this evening, an
official said last night.

The ruling party, Democratic Rally, last night warned time was running
out: “We don’t have days or weeks, we have only hours to save our
country,” deputy leader Averos Neophytou said. The wrangling over
details of a fresh bailout plan, came as Cyprus yesterday pleaded for a
new loan from Russia.

Finance minister Michael Sarris said in Moscow he had reached no
deal with his Russian counterpart Anton Siluanov, but that talks would
continue. Russia’s finance ministry said Nicosia had sought a further
€5bn on top of a five-year extension and lower interest on an existing
€2.5bn.

Meanwhile Russian Prime Minister Dmitry Medvedev slammed the EU and Cyprus’s attempts to thrash out a deal as
resembling a bull in a china shop. He told reporters “every possible mistake that one could have made has already been
made”.

Cyprus has to seek Moscow’s help after the Eurozone’s plan for a €10bn bailout was cast into disarray on Tuesday when
the island’s parliament rebuffed EU demands for a levy on bank deposits to raise €5.8bn. Cypriot officials disclosed that
the country’s energy minister was also in Moscow, ostensibly for a tourism exhibition, fuelling speculation that access to
offshore gas reserves could be part of any deal for Russian aid. Cyprus has found big gas fields in its waters adjoining
Israel but has yet to develop them.

USA: Budget wars thaw to avert government shutdown
US House of Representatives Republicans yesterday approved a stopgap-spending bill to avoid a government shutdown,
in a further easing of the partisan budget wars that have consumed Washington for months. The Republican-controlled
House voted 318-109 to approve legislation that keeps government agencies and programmes funded through to the end
of the fiscal year on 30 September, sending the measure to President Barack Obama to be signed into law. Current
spending authority was to expire on 27 March, but Republicans chose not to use the threat of federal agencies running
out of money and shutting down as leverage to demand deep spending cuts.

UK: £2.9m public finances boost in February
February’s public finance figures made easier reading for chancellor George Osborne yesterday, coming in better than
2012 even after stripping out one-off changes. The government borrowed £2.9bn less in the 10 months up to and
including February than it did in the year before, even with the effect of transferring the Bank of England’s quantitative
easing profits and the assets of the Royal Mail pension plan to its balance sheet removed.

Eurozone: Dip deepens as US & China expand
The divide in global economic prospects widened in March, according to research released yesterday, with US and
Chinese factory growth accelerating just as the Eurozone slump worsened. Markit’s purchasing managers’ index (PMI)
for US manufacturing climbed from 54.3 last month to 54.9, signalling faster expansion in the market, while China’s
manufacturing PMI ticked up from 50.4 to 51.7, separate figures showed. Markit economists said the US was enjoying “a
reassuringly strong upturn in business conditions”, with employment and new orders both on the up. And the Chinese
numbers implied the Asian dragon was “still on track for gradual growth recovery,” the analysts said. But the same index
for the 17-member Eurozone slid from 47.9 to 46.6, further below the crucial 50 level that indicates no change in activity.

Markets: Global markets report
US and European stocks slid, the euro weakened and commodities declined after data showed an unexpected
contraction in German manufacturing and Cyprus’s president worked on a new plan to obtain a European bailout.
Overnight, Asian stocks fell, with the regional equities gauge heading for its biggest weekly decline since October, as
scuffles on the streets of Nicosia underscored concern that Europe’s debt crisis is worsening.

Today, European stocks are expected to edge lower, heading for their worst weekly loss since November as Cyprus
scrambles to find a solution to its funding crisis, which could see the island become the first euro zone country to leave
the currency bloc. In a sign it was at least preparing for the worst, the Cypriot government sought powers to impose
capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen on Tuesday.

Currencies: Euro trades lower as ECB issues Cyprus deadline
The euro weakened toward the lowest level in four months after the ECB gave Cyprus until the start of next week to
agree to a bailout package or lose emergency funding. This adds to its biggest weekly decline in six against the yen, and
a likely 1.4% decline against the dollar.

Energy: Oil falls as German manufacturing contracts
Oil prices dropped as German manufacturing output unexpectedly contracted in March, signaling the Eurozone debt
crisis is slowing growth in the region’s biggest economy. Futures fell 1.1% after a purchasing managers’ index for
Germany’s manufacturing slipped to 48.9 this month, when economists had predicted a reading of 50.5.

Commodities: Gold seen extending rebound
Gold traders are becoming more bullish as concern mounts that a worsening of Europe’s debt crisis will spur demand for
a protection of wealth at a time when nations from the US to Japan are signaling more stimulus. The precious metal is
poised for the longest weekly rally in six months, as the safe haven choice of many investors.

Focus on: Phone-call notes that reveal alarm over Cyprus
By Luke Baker and Mike Peacock, Reuters.com
Eurozone finance officials acknowledged being “in a mess” over Cyprus during a conference call on Wednesday and
discussed imposing capital controls to insulate the region from a possible collapse of the Cypriot economy. In detailed
notes of the call seen by Reuters, one official described emotions as running “very high”, making it difficult to come up
with rational solutions, and referred to “open talk in regards of (Cyprus) leaving the euro zone”.

The call was among members of the Eurogroup Working Group, which consists of deputy finance ministers or senior
treasury officials from the 17 euro zone countries as well as representatives from the European Central Bank and the
European Commission. The group is chaired by Austria’s Thomas Wieser.

Cyprus decided not to take part in the call, a decision that several participants described as troubling and reflecting the
wider confusion surrounding the island’s predicament. “The (Cypriot) parliament is obviously too emotional and will not
decide on anything, if Cyprus does not even feel that they can attend the call it is a big problem for us,” the French
representative said, according to the notes seen by Reuters.

The German representative raised the need to learn more about capital outflows from Cyprus to Russia and Britain, and
emphasised that “we stand ready to find a solution immediately” as long as the parameters of the bailout agreed among
euro zone finance ministers on Saturday are respected. The official also referred to the need to resolve the issue of
Cyprus’s two biggest banks, both of which are close to collapse, and mentioned the possibility of Cyprus leaving the euro
zone.

In the event of an exit, the official said steps needed to be taken to “ring-fence” the rest of the euro zone from the impact
and to ensure there was no contagion to Greece.

One issue repeatedly raised on the call was the risk of large outflows of capital once Cypriot banks reopen, probably on
Tuesday. The ECB representative said the situation was being closely monitored and “technical preparations” were being
made to try to limit the amount of any outflow. “Some additional laws need to be passed. Overall we are in a very difficult
situation,” the official said, according to the notes. “(We’re) trying to do everything within the powers to limit any
unauthorised outflows.”

Cyprus’s finance minister continued discussions in Moscow on Thursday to see whether a way can be found to involve
Russia in the bailout so that large depositors in Cypriot banks, many of whom are Russian, are not hit with a one-off levy.
Financial markets have largely taken the problems in Cyprus in their stride, perhaps calculating that any collapse of an
economy worth only around 17 billion euros, will have only a limited impact, or that a solution will be found in the end.
“Markets believe that we will find a solution and that we will provide more money and this might not be the case,” one of
the participants on the call said, according to the notes.

In wrapping up the teleconference, the chairman described the situation as “foggy” and expressed concern about
Cyprus’s decision not to take part in the call. “The economy is going to tank in Cyprus no matter what,” the notes quoted
him as saying. “Restrictions on capital will probably be imposed,” he said, adding that further conference calls would be
organised in the coming days.

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