The slow motion Cypriot car crash of the past five days reached impact point last night when not a single lawmaker voted for the bailout with bank levy attached – the first time a euro zone legislature has simply said no.
So what next? The finance minister is in Russia, ostensibly to seek an extension on an existing 2.5 billion euros loan on better terms, but could there be more on offer besides? The Eurogroup made clear last night that the 10 billion euros bailout was still on the table but that Nicosia had to come up with 5.8 billion euros of its own – the sum that a levy on bank depositors was supposed to raise. Could Moscow fill that gap, maybe in return for a slice of the island’s untapped offshore gas reserves? It looks unlikely but not impossible and there are powerful geopolitics at play. That there will be no more money from the euro zone looks like a given and there seems to be a resolve that it would be better to let Cyprus default then buckle at the last moment.
Finance minister Sarris has just said he hopes for a deal on the existing Russian loan today. In Nicosia, the president is meeting party leaders.
The most sensible solution would be to spare Cypriot depositors with less than 100,000 euros – who were supposed to be protected anyway – and hit the big boys. That would go some way to negating the fear of a bank run elsewhere by belatedly respecting the deposit guarantee. Nicosia has rejected that up to now, fearing the destruction of its banking model but at eight times the size of the economy, that’s no sort of model anyway. What is crystal clear is that Germany will not accept another bailout foisted wholely on euro zone taxpayers, nor would the Bundestag ratify it.
The euro zone has some leverage. Cyprus’s main two banks are basically only standing because of the European Central Bank, which said last night that it would continue to provide liquidity “within the rules” i.e. to banks which are solvent. That means money flows for now but the bulk of the bailout will go to sort out the banks so if it completely falls apart they could not be viewed as solvent.