Tuesday, March 19, 2013

So Now What With Cyprus? (Updated)

Business Insider seems to have the most stories, if not some of the most recent, on the Cyprus issue. As most of you probably have already read, the Cyprus parliament voted down the proposed bail-out plan, with zero (0) votes in support--although there were 19 abstaining votes.  The reaction from the EU is somewhat mixed. There are reports that the ECB (European Central Bank) may make use of its Emergency Liquidity Program to assist Cyprus. However, German officials seem less sympatheticReuters reports:
German Finance Minister Wolfgang Schaeuble said on Tuesday he regretted a decision by Cyprus's parliament to reject a proposed levy on savings in banks as a condition for a European bailout."We regret the decision," Schaeuble told ZDF television. "Cyprus requested an aid programme. For an aid programme we need a calculable way for Cyprus to be able to return to the financial markets. For that, Cyprus's debts are too high."
Schaeuble added that it was a "serious situation" now in Cyprus and said the country had no one to blame for its situation other than itself. He said he doesn't think its "business model" works anymore and warned Cyprus must act quickly.
Whatever, the outcome, it won't be pretty. David Zervos is reported as stating:
The die is cast. There is no going back for the Cypriots or the Eurozone leaders. As soon as the banks open in Cyprus there will be billions in withdrawals. The question of course is - "where will the money come from?". Well, if the parliament votes YES, then the Euros will have to come from the Eurosystem. But there is a glitch. The Cypriots have already borrowed 10b euro via the ELA and Target2. How can Mario just wire over 20 billion more (less the 10 to 15 percent haircut) for the Russians, and another 20 to 30 billion for the wealthy Greeks. What collateral will an economy with 20b in GDP post to get this cash? Unless Mario violates every collateral rule at the ECB, the Cypriot financial system will collapse even with a YES vote. Its a wonderful life - Cyprus style.
There are reports that Cyprus' banks will now remain closed until Tuesday of next week. (See also here for some possibilities for Cyprus).

Something I haven't seen, however, is that this is a perfect example of how a service based economy does not necessarily result in prosperity.

Update: The Daily Mail reports that Russia may use the crises to expand its influence in the Mediterranean.
Russia could use the crisis in Cyprus to secure a military foothold and energy rights in the Mediterranean, it was claimed last night.
President Vladimir Putin called the decision to seize money from savers’ bank accounts as ‘unfair, unprofessional and dangerous’.
But in a move that has raised eyebrows, the Russian energy giant Gazprom offered Cyprus a plan in which the company will undertake the restructuring of the country’s banks in exchange for exploration rights for natural gas on the island.
Representatives of the Russian company submitted the proposal to the office of Cypriot President Nicos Anastasiades on Sunday evening.

It is also rumoured that the Kremlin is privately offering to help bail out Cyprus in exchange for the right to use a naval base in the Greek part of the island.
Moscow has already handed over £2billion to prop up the economy of Cyprus and is now in talks to restructure the assistance programme.
Russia currently has the use of only one foreign base at Tartus in Syria and docked warships in the Cypriot port of Limassol last year.

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