Markets show optimism as Cyprus continues to look for a solution

Markets across Europe have started the session in positive territory as optimism returns and investors watch closely to see if Russia will step in to support Cyprus. The troubled island still has time to raise the required funds before the banks open on Thursday following the rejection by the Cypriot Government of the proposed bank levy to raise €5.8 billion  to access the eurozone bailout.

The Cyprus Parliament overwhelmingly rejected the proposed tax on bank deposits, with 36 voting against and 19 abstaining. The result has been labelled as disappointing by the president of the Eurogroup, however, the offer still stands and so the ball is still very much in Cyprus’s court. The finance minister of Cyprus has since visited Moscow to look for an alternative. With 37% of deposits in Cypriot banks being foreign investments and a vast majority of these being Russian, it is clear why Russia might be keen to lend a hand. An extension of the current €2.5 billion loan due to mature in 2016 and a reduction of the 4.5% interest rate were to be discussed but talks were also expected to look beyond that to further support.

The bailout rejection opened the doors a bit wider to the possibility of Cyprus leaving the euro currency bloc, however, the markets are far from pricing in this tiny country’s exit. There is very much a sense that a deal will get done although we can expect the markets to remain jittery until a new plan is clarified.

Other big news for today focuses back on the UK, where Chancellor George Osborne is set to deliver another austerity budget to a country still suffering with almost non-existent growth. It is expected that he will announce another round of weaker economic forecasts, pushing back the targets for fixing Britain’s problem further. However he will be able to take heed from the data released this morning showing that the number of Britons claiming unemployment benefit fell to a 20-month low.

Looking towards the afternoon the focus will shift across the Atlantic to the outcome of the Federal Reserve meeting. Investors will be hoping for signs of optimism for the outlook from Bernanke and indications that the central bank will hold steady on policy.