Cypriot crunch point

March 19, 2013

Cypriot lawmakers are supposed to vote today on a bailout that hits at least some of its bank depositors but the president’s spokesman has said any such legislation is unlikely to pass. This could be brinkmanship but it doesn’t sound like it.

Last night, euro zone finance ministers urged Nicosia to spare depositors with less than 100,000 euros in the bank and hit the richer harder, in order to raise 5.8 billion euros to free up a 10 billion euros bailout. Without it, Cyprus will surely go bankrupt but that is a deal that President Anastasiades baulked at in Brussels over the weekend. The government faces a stark choice: hit those who vote for it and rip up the deposit insurance they thought they had, or clobber the richer (many of them Russians), thus threatening the meltdown of its banking model.

Despite their belated support for the little guy, the euro zone will accept pretty much anything that raises the requisite cash. Germany and others insist the days of bailouts funded solely by taxpayers are over and the Bundestag probably wouldn’t sanction any other sort of deal.

The Cypriot parliament is due to convene at 1600 GMT but we’ve heard suggestions that Anastasiades won’t go for a vote unless he knows he can win it so this could be further delayed. No party has a majority in the 56-seat parliament and three parties have already said they would be voting no. There’s likely to be more protest outside parliament to focus minds.

Banks have already been told to keep their doors shut until Thursday. The president is likely to talk to Vladimir Putin later. Putin sounded genuinely angry about the bank levy and his finance minister hinted it could affect Moscow’s attitude to extending an existing 2.5 billion euros loan to Nicosia. Could Russia come in with more money without the sort of strings the EU is attaching? It seems unlikely. Moscow has made those sort of promises in the past (remember Iceland?) and not delivered and Cypriot officials have hitherto said they are wedded to a deal with the euro zone. However, there could be some leverage with the euro zone in hinting that Cyprus’s untapped offshore gas reserves could end up in the hands of the Russians.

Market reaction yesterday was interesting – European stocks dropped two percent at the open but closed off only 0.3 percent, denoting a minimal amount of alarm. Safe haven Bund futures rose and Italian bonds fell, suggesting that in the bond market there was some concern about contagion, but again it was muted. Is that rational? It might have been yesterday but if a vote is postponed or lost today, expect a lot more jitters. The Bund future has opened slightly higher this morning, The euro is marginally lower and European stock futures are pointing moderately down. Cyprus is the only story in town for the markets today.

Given the European Central Bank’s backstop, the only real threat to other euro zone countries is if their citizens watch events unfolding in Cyprus and think it would be prudent to pull their money out of the bank. There’s no sign of that yet but it’s pretty much a given that there will be a bank run in Cyprus whenever customers are allowed access to their accounts.

As with yesterday, Germany has a stellar cast of people speaking who were involved in the weekend negotiations – Mario Draghi and his ECB colleague Yves Mersch are speaking at one conference, IMF head Christine Lagarde, Bundesbank chief Jens Weidmann and ECBer Klaas Knot at another.


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