Europe lower on Cyprus fears as talks with Russia collapse

Markets across Europe were slightly lower in early trading on Friday after Cyprus and Russia failed to agree to a rescue deal after two days of talks. Cyprus must raise the required 5.8 billion euro by Monday in order to secure the 10 billion euro bailout or face the collapse of its financial system.

The financial markets have actually held up fairly well this week given the possible disaster facing Cyprus, almost giving the impression that investors are complacent about the potential fallout from the crisis. Should the small European Island see the collapse of its financial system the economy would be paralyzed and Cyprus could in worst case scenario be forced to leave the euro zone. However, despite this possibility the selling of riskier assets has not been as sharp as might have been expected. US and European markets are only down around 1% this week, although we could expect to see some short term weakness as we progress through the day and investors look to come out of positions prior to the weekend in case the ECB pull the emergency liquidity assistance (ELA) to Cyprus by Monday.

That said global markets have seen a surge in risk appetite since the start of the year and there is very much the sensation in the markets that the Cyprus situation could get pushed to the sidelines as we have seen with the Italian elections. Additionally it could be argued that the risk of contagion from Cyprus is small. Greece was pulled back from the brink due to fears of a domino effect and Greece is a small part of the currency block, 2% of its GDP. Cyprus is 10 times smaller than that, with a banking system eight times larger than the size of the economy and full of foreign money, making it a one off case that would not be replicated elsewhere.

By mid morning the FTSE was trading flat, the DAX has lost 0.25% and the CAC was trading down 0.5%.

Elsewhere in Europe Germany released its closely watched business climate survey which came in slightly worse than expected. However, this is likely to represent a slight downward correction of last month enthusiasm rather than the start of a new downward trend. The DAX did slip slightly on the back of the news but quickly regained lost ground.

Looking towards this afternoon there is a shortage of economic data so investors will be looking closely for any further developments in Cyprus.