Cyprus Plan B – phoenix or dodo?

March 21, 2013

They’ve only been looking for it for a day but Cyprus’s Plan B has already taken on mythical status. A myth it might remain.

Ideas being floated include nationalizing the pension fund (back of the envelope calculations suggest that will raise less than a billion euros) and issuing bonds underpinned by future natural gas revenues (but no one is really sure how much they are worth). So to avoid default it still looks like the Cypriots may have to return to the bank levy they rejected so decisively in parliament on Tuesday, to raise the 5.8 billion euros the euro zone is demanding in return for a bailout.

Finance minister Sarris is still in Moscow hoping for some change out of the Russians and is out this morning saying discussions are ongoing about banks and natural gas.

An existing 2.5 billion euros loan may be extended and on better terms – though there is some doubt even about that. But anything further looks much tougher to secure. Moscow will clearly adopt a “what’s in it for us” attitude and unless it gets its hands on untapped offshore gas reserves for a knock-down price it’s hard to see much money changing hands. The idea floating around yesterday that an essentially failed Cypriot bank could be bought for a chunk of cash seems somewhat fanciful.

Sarris said any help would have to make “economic sense” for Russia. If Moscow merely offered more loans, the euro zone and IMF would presumably say that takes Nicosia’s debts to unsustainable levels so it’s not clear that would work either. After likening the EU to a “bull in a china shop”, Russian Prime Minister Dmitry Medvedev mused this morning that Moscow might review the share of euros it holds in its reserves, saying what was done to Cyprus could happen to Spain or Italy. Medvedev meets a European Commission delegation headed by Jose Manuel Barroso later today. This increasingly feels like a Russian/EU powerplay with Cyprus as the pawn.

Crisis talks between the Cypriot president and party leaders ended without any word last night. They meet again this morning. With ministers saying they have hours not days to decide, it’s a reasonable bet that a decision will be made today. The smart money is still on a bank levy in some form though how that gets through parliament is quite another matter. Banks will stay shut until Tuesday.

Markets still don’t seem to be overly bothered, focusing more on the Federal Reserve’s promise yesterday to maintain aggressive monetary stimulus and a solid China PMI reading. Safe haven German Bund futures have ticked lower at the open. European stock futures are pointing to a marginal fall. The uncertainty surrounding Cyprus will act as a brake on any upside.

Dutch Finance Minister Jeroen Dijsselbloem is in front of a European Parliament committee. After some criticism of  his performance as head of the Eurogroup over the weekend, he may get a rough ride. ECB policymaker Joerg Asmussen, a pivotal figure in the Cyprus talks, is also speaking.

Spain holds a scheduled auction of up to four billion euros of two-, five- and 10-year bonds. Madrid has already seen yields on short- and long-term debt plunge since the ECB’s promise last summer to whatever it takes to save the euro and has made the most of investor enthusiasm for its paper by issuing over 30 percent of its 2013 bond target in the first dozen weeks of the year. There’s no sign of Cyprus upsetting the apple cart so far though the disconnect between bond market appetite and a deeply mired Spanish economy is stark. France will also auction medium-term debt on Thursday against a backdrop of a worsening economy.

On the macro side flash PMIs for the euro zone, Germany and France are due. The picture so far is that Germany is rebounding from a grim fourth quarter but France and others are not.

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