With the dust finally settling after Cyprus’s botched bailout negotiations with the Troika, the myriad FX and binary options brokers located on the island are now taking stock of the damage that has been done to their businesses and reviewing what their options are going forward. Cyprus was suddenly in the global spotlight in March of this year when it was announced that its government was negotiating with the Troika (a tripartite organisation composed of the European Union, the European Central Bank, and the IMF) for a much needed bail-out fund of 17 billion euros to recapitalise its banks.
Nothing new there, many of Europe’s member states are now in dire financial need and many require a great deal more cash than Cyprus does. The issue that catapulted Cyprus onto the world stage was the fact that a bail-in was on the table, which would impose a one-off levy on the country’s depositors in order to make up some of the capital that was required to provide liquidity to Cyprus’s banks. As rumours ran rampant and the rest of Europe watched closely, especially Europe’s poorer southern member states, it quickly became apparent to the citizens of Europe that the “haircut” that was been put forward as a condition of Cyprus’s bailout was a measure that could easily be deployed in all future negotiations with the Troika. Many suspected Cyprus to be a sort of test case, a miniature bail-in experiment that the Troika could then use as a template for future negotiations with other insolvent European nations. As a result confidence in the European Union waned, its currency registered lows unheard of in recent history, dipping well below that psychological 1.30 mark against the dollar, and worries mounted of a run on banks in other debt-ridden European countries like Spain and Portugal.
Cyprus’s woes can be put down to a combination of factors. The country was particularly exposed to Greek debt, having invested a great deal of money in Greek bonds to help its sister nation at a time of great need, when Greece’s fiscal situation worsened at the height of the global financial crisis Cyprus’s banks were knocked for six. In addition to this the country was at the tail end of a property boom that had spiralled completely out of control, and helped many of its citizens to massively extend themselves with loans that were backed by the value of the properties they had in their possession. When the air was let out many people owed money they couldn’t hope to repay and couldn’t recoup by selling the properties they had used as deposits. The government’s mismanagement of the Cypriot economy in its post-euro ascension was the final nail in the coffin that led a once robust economy with one of the strongest currencies in the world to financial ruin in just a few short years.
Under the first proposal the European Union and the IMF would have supplied Cyprus with 10 billion euros to recapitalise its banks. The remaining 10 billion would have to be gathered for the country’s residents. In fact the 10 billion bail-out would only be made available to the Cypriot government if and when it managed to secure 5.8 billion by taxing the deposits of its account holders.
The first proposal put forward by Cyprus’s president Nicos Anastasiades, which was roundly rejected by the Cypriot people as well most politicians would have hit depositors under 100,000 Euros for 6.75% of their account balances and those above 100,000 Euros for 9.9%. The proposal - levy on bank deposits as a condition for a European bailout - was voted against on March 19 2013 leaving the problem of the financial shortfall needing to be addressed. Eventually, after much speculation that Cyprus would indeed be defaulting, exiting the union and re-adopting its own currency, the bailout was agreed with the good bank, bad bank system being adopted and only depositors over 100,000 euros receiving a haircut.
How has this Affected the Binary Options and Forex Industry?
The bailout/bail-in in Cyprus has massively affected both the binary options and forex industries. There are a number of reasons for this. Firstly the companies that conducted their banking on the island were hit tremendously hard, if their banking was done with Cyprus’s worst affected bank, Laiki, then they lost everything barring the 100,000 euros guaranteed by the country’s central bank. These companies are now facing serious liquidity issues. But as most companies based on the island are largely there for tax reasons, they normally conduct their banking in other safer countries. These companies have not really been affected, as far as their deposits go at least. The main worry now is that Cyprus has gotten such a bad rap in the global media that it is debatable whether the tax benefits that attracted these companies in the first place are sufficient to offset the negative publicity of being associated with the island in any way. Many are increasingly finding it hard to secure new deposits due to traders being reluctant to do business with companies tied to the island. This is by far the most serious effect of the bailout, not the money lost in the haircut, but the money being lost on a monthly basis as deposits wane. Many companies, especially those involved in binary options are connected to the island sue to its Securities and Exchange Commission being the only one regulating the trading of binary options in the E.U.
Currently only Banc de Binary has been granted such a license but many more are currently in the works. This situation is likely to change in the medium term as Malta moves to also regulating binary options. Then again, many of the better established brokerages are treating March’s events as a flash in the pan that will soon drift from the memory of their clients leaving them in similar position to before the bailout. Many forex brokers we have spoken to are claiming that it has not affected their business at all, some even claiming conversely, the instability and lack of confidence in the euro that is dominating market sentiment presently is causing more and more ordinary people to diversify their investments and begin trading forex an binaries on their own rather than having their capital locked up in an insecure banking system. Only time can tell how the situation will play out in the next year or so. One thing is certain, none of these businesses intend to halt their plans for growth, in many ways what took place in Cyprus this March can be regarded to a kind of extinction level event from which only the strongest and most suitable will survive. This could mean a more robust binary options and forex industry with fewer players and more profits to be shared between them. We will see. Stay posted to our news feed for updates to this most interesting development in the trading industry.