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Prospects Daily: Cyprus rejects EU bail-out package, Portugal debt auction unaffected by Cyprus crisis, Russia retail sales slow

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Financial MarketsEuropean shares and the euro bounced back on Wednesday as Cyprus sought alternative to the EU’s bailout plan that was rejected by the nation’s parliament on Tuesday. The benchmark Stoxx Europe 600 Index gained 0.5% after sliding 1% in the previous three days, while the 17-nation currency advanced 0.5% to $1.2946 in morning trade, recovering from yesterday’s four month low of $1.28435. But investors remain concerned about the Cypriot situation.

Portugal raised 1.5B euros in a debt auction today where it sold €1.2 billion in 18-month Treasury bills at a rate of 1.506% down from 1.963% in January and the remaining €300 million in 3-month Treasury bills a yield of 0.757% up, slightly from 0.737%.

U.S. Treasuries declined after a two-day rally, with the 10-year yields climbing 4 basis points to 1.94%, as investors speculated that the Federal Reserve will maintain its monetary easing policy, supporting demand for higher-risk assets. The Federal Open Market Committee plans to release its statement from its two-day meeting today, which might provide some insights on the outlook of bond-buying program.

Developing-country stocks advanced for the first time in eight days, with the benchmark MSCI Emerging Market Index climbing 0.2%, as the rally in Chinese shares offset sharp declines in South Korea and Thailand. China’s Shanghai Composite Index jumped 2.7%, led by sharp gains in the financial and real estate sectors, while Russia’s Micex index rose 0.5%, the first gain in four days. In contrast, South Korea’s Kospi index fell 1%, the most in two months, and Thailand’s Set index slid 1.6%, the worst among Asian stock markets. 

High-income Economies…The Cypriot parliament rejected conditions for a €10 billion EU-ECB-IMF bailout package negotiated over the weekend. If no alternative source of funding is found and the troika maintains the current terms of the package, Cyprus’ banks risk losing access to ECB lending – which in turn could lead to a bank meltdown and, eventually a possible exit from the euro. Possible assistance from Russia, which has high levels of deposits in the Cypriot banking system, is being explored. Cypriot banks remain closed with no indication when they will reopen.

The troika package had included a bail-in of junior bank debt, an increase in corporate and capital income taxes, privatizations, and, in a break with previous EU practice, a €5.8bn levy placed on bank deposits that included accounts below the guarantee limit of €100k.

In Europe, the European Commission has ordered member countries to pay-off overdue “commercial debt” (unpaid arrears for goods and services rendered). Moreover, the settlement of such debt was to be considered a “mitigating factor” in budget assessments, signaling that countries wouldn’t be forced to make offsetting adjustments to budgets or debt levels. Italy has confirmed that it will unblock shortly the disbursement of some €70billion (4.7% of GDP) that the public sector owes to private companies. To this end, the government is likely to issue some new debt to cover the costs.

Developing EconomiesEast Asia and Pacific: Malaysia’s inflation rate In February increased to 1.5% (y/y), up from 1.3% (y/y) in January on the account of rising food and non-alcoholic beverage prices.

Europe and Central Asia: Russia’s retail sales in February slowed to 2.5% (y/y), lowest down from 3.5% in January, which is the slowest pace in almost three years. Meanwhile, unemployment edged downward to 5.8% from 6.0% in January.

Middle East and North Africa: Morocco’s inflation rate edged down in February to 2.2% (y/y) from 2.6% in the preceding month as prices of food and communication costs receded.

Sub-Saharan Africa: South Africa's inflation rate jumped to 5.9% (y/y) in February, up from 5.4% (y/y) in January and just shy of the central bank's 6% target ceiling. Inflation rate increases were due to higher fuel costs. Separately, South Africa's central bank kept its key interest rate at 5%, the lowest point in nearly four decades, in an attempt to revive tepid economic growth against the background of rising inflation.

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