What does a Cyprus deal look like?

by on March 20, 2013 at 6:55 am in Current Affairs | Permalink

Felix Salmon considers some possible scenarios, some of which involve the EU giving ground.  (Sadly the “sell northern Cyprus” option won’t be seriously debated.)  Daniel Davies offers numerous complex scenarios, some of which end badly.  Zero Hedge offers options.

How much is Cyprus per capita gdp lower if the country has no future as a financial center?  That is likely the case anyway.

If this is one of those waiting/bargaining games, for whom does the situation worsen most as time passes?  For how long can the Cypriot banks stay closed?  Can they ever really reopen again without a major bailout?  Germany seems to hold most of the cards.  Maybe Cyprus wins the stare-down game only if the costs of Cypriot collapse — to the Germans — appear higher as time passes.  That’s a difficult scenario to foresee, since it seems that only by having a Cypriot collapse do we get a much better sense of what those costs would be.

The broader problem of course is that Italy, Spain, and Portugal all have their eyes on any possible renegotiations.  It is very costly for the EU to give serious ground because then further and much larger demands come out of the woodwork.  Italian voters and political parties are encouraged too and I don’t have to tell you in which direction.

prior_approval March 20, 2013 at 7:16 am

‘Can they ever really reopen again without a major bailout?’

Nope – at least if a Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel winner is to be believed.

prior_appoval March 20, 2013 at 7:23 am

‘Maybe Cyprus wins the stare-down game only if the costs of Cypriot collapse — to the Germans — appear higher as time passes.’

The cost of the failed ‘rescue plan’ has already been much higher than expected, for everyone. But it nice to see the awareness that the desires of 1 million inhabitants of a currently defaulting country are considered less important than the 100 million + inabitants of the still thoroughly solvent eurozone countries.

sebastian March 20, 2013 at 7:28 am

If push comes to shove, Cyprus and Russia will make a deal that completely sidesteps the Eurogroup .

And Europe/Germany will weep. Those not-yet-developed natural gas ressources? Gasprom will say thank you and can continue to blackmail Europe by shutting down delivery on natural gas.

charlie March 20, 2013 at 8:27 am

Cyprus gives a naval base in exchange for money, Russia now has a backup to the one in Syria. More EU territory is taken by non-eu members.

And if you think having British, Turkish, Russian and Greek military all on little island is a good idea, I’ve got a Icelandic bank to sell you.

prior_approval March 20, 2013 at 11:47 am

‘I’ve got a Icelandic bank to sell you.’

Really? For how much? I’m willing to bid at least 10,000 euros.

What? You can’t actually sell one?

Call me surprised.

Ray Lopez March 20, 2013 at 12:57 pm

That’s a rhetorical phrase PA, not meant to be literal. As for Cold War enemies coexisting on a little island, sounds like a plot from an Agatha Christie mystery. Maybe some good will come of it?

Steven Kopits March 20, 2013 at 7:30 am

It seems reasonable to assume that there will be a run on the Cyprus banks when they open.

So the EU really has only two choices:

1. Allow the Cyprus banks to fail.

2. Have the ECB provide unlimited liquidity essentially without condition.

Having absolutely bungled its opening hand, the EU will see that the ECB provides liquidity without condition. They really don’t have a choice, unless they have psychologically come to the end of the European Experiment. And I don’t think EU decision-makers are there yet.

ThomasH March 20, 2013 at 8:09 am

If ECB had been doing its job of keeping Eurozone ndgp growing smartly since 2007, they would not be in this mess. As Friedman taught us: money matters.
Of course the Greeks should have been encouraged to default on ther bonds way back when, instead of making the problems of the holders of sovreign bonds a Euro zone problem.

Ed March 20, 2013 at 8:10 am

No future as a financial center? Why on Earth does Cyprus need to have a future as a finanicla center? How is that even desirable?

Ray Lopez March 20, 2013 at 1:00 pm

Tiebout Migration. Even tax evaders vote with their feet (and dollars).

X March 20, 2013 at 1:09 pm


ChrisA March 20, 2013 at 10:34 pm

My guess – the banks open with access only allowed for the first 10,000 or so Euro’s. The rest remains “frozen” for an indefinite period. Eventually the banks will be split into a good bank and a bad bank. The bad bank will be back stopped by the ECB but funds will be paid out only based on when Cyprus Government makes payment. Probably it will be one of these things that takes decades to resolve and then it will all quietly be forgotten.

I think Felix is making too much of the potential gas “reserves”. They are not reserves yet, and they may well never turn out to be.

Richard March 21, 2013 at 8:07 am

It’s like the old adage, “owe one dollar, owe the bank, owe 1 billion dollars, own the bank”. In this case, Cyprus has the EU by the balls, not in the impact a default/exit/Russian bailout cum gas or base will cost, but in setting a precedent for defying the Troika. The rest of the PIIGS will see what a nice outcome Cyprus got and become more demanding in their negotiations with the EU in the future.

La nouvelle resistance March 22, 2013 at 11:08 pm

We, the citizens, refuse to allocate our own funds in any form to bailout the gambling debts incurred through the financial speculation of investment banks.

Sign : https://www.change.org/fr/p%C3%A9titions/a-tous-les-d%C3%A9put%C3%A9s-chypriotes-chypre-doit-scinder-les-banques-en-deux-cat%C3%A9gories-bonne-mauvaise-banque

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