Why Cyprus is so Important

Cyprus2

ECB’s Asmussen sees Cyprus bailout by end-March | Reuters.

Cyprus is a beautiful island in the Mediterranean near Greece and Turkey. It occupied a very important strategic position for the British Empire. Gibraltar, Malta and Cyprus form a line through the Mediterranean to the Suez Canal, the lifeline of the old Empire.

Nowadays, Cyprus is still significant in a different way. The country set itself up as a tax haven of sorts and the adoption of the euro allowed Russian oligarchs to make use of the country’s banks to deposit funds and avoid taxes.

The Germans are caught in a bit of a bind. On one hand, they cannot allow any country to destabilize the euro. Bailing out Cyprus will cost only €17.5bn, which is only  a few months worth of Greek budget deficits.

On the other hand, the Germans do not want Cyprus to continue as a tax haven. I am unsure of why they are adopting this position. It does not seem that Germans or other EU citizens are avoiding taxes by way of Cyprus. It’s a Russian haven. That oligarch money has to be laundered and deposited somewhere, so it might as well be within the EU.

When the Germans demand that Cyprus “scale down its financial sector” and implement more banking transparency, what will happen if Cyprus refuses? Will the Germans withhold the bailout damaging the euro by causing a Cyprexit, or will they blink?

While Germany has been quite domineering since the beginning of the crisis, eventually one of these countries will realize that it is bluffing. The reason why countries are being bailed out with German money is because the continued existence of the euro is in Germany’s best interests. It is the country that gains the most from the single currency.  The other countries, not so much:

Euro Fair Value

What happens when a country, say Cyprus, calls the German bluff?

***UPDATE***

UPDATE 2-S&P warns risk of Cyprus default material and rising | Reuters

The ratings agencies always seem to be a day late and a dollar (euro) short. Since the fall, Cyprus has been in trouble and in need of German money. The country will receive it after elections. The conservatives will be more pliable to German demands than the left, but I do not expect either side to call their bluff.

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One thought on “Why Cyprus is so Important

  1. Thank you for this interesting article.

    Apparently, the EU would like Russia to contribute to Cyprus rescue, according to comments by Olli Rehn, the EU commissioner for economic and monetary affairs, related by the Wall St Journal yesterday.

    Recently we used onomastics to visualize Russian presence in European economic affairs, and it clearly confirms that Cyprus is a Russian stronghold in the Eurozone :
    http://namesorts.com/2013/01/28/indian-chinese-russian-and-japanese-directors-in-european-big-business-an-onomastics-view-22/

    Yet, Estonia is another one.

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