The markets’ reaction to the Cyprus crisis was a big yawn. Moves were adverse but slight. Today, Greek bonds dropped the most since everything was fixed back in July, and this is a taste of the future. Each crisis country has a potential confiscation waiting to happen, and this factor will cause a run in this sector.
For example, n Greece, there is always the potential for yet another voluntary buyback or some other euphemism masking a default causing the Greek bond yields to rise. As investors wake up to which instrument is likely to bear the brunt of the confiscation, more runs will happen.
Cyprus is delaying the confiscation vote yet again. The deposit confiscation does not have enough support in the Cypriot Parliament even when exempting small savers. This has set up yet another round of eurocrisis brinkmanship. The troika can cut off ELA and allow the Cypriot banks to fail, but that action will probably force Cyprus to exit the euro and default on its debts. The fear is that a Cyprexit would lead to other countries leaving the Eurozone, a.k.a the dreaded domino effect.
Will Cyprus or the troika blink first, or will another solution materialize?
Cyprus is rallying its surrogates to argue against the troika deposit heist. Ex-CCB head Anthanasios Orphanides characterizes the troika’s actions as blackmail. The troika issued an ultimatum to Cyprus early Saturday morning demanding the government to implement the deposit tax or suffer the consequences of the ECB removing ELA from Cyprus’ two largest banks. This action would have pushed Cyprus into immediate insolvency.
While the troika is blackmailing Cyprus, it would be improper for its top government officials to state this publicly; hence, the former central bank head is trotted out to make the point.
Another distinguised Cypriot, Nobel prize winning economist Christopher Pissarides opposes the deposit confiscation. He claims that Germany is bullying the smaller members of the Eurozone and that Germany wants all of the Eurozone members to behave like Germany. These claims are true to an extent. The problem with the euro is that smaller members unwittingly accept a monetary policy fit for the eurozone’s largest member.
Pissarides also points out that Cyprus is in crisis in part due to the ill-conceived bailouts forced on Greece. The bulk of Cypriot bank losses are from Greek debt, both public and private. Greek sovereign bonds have been written down by the troika, while the Greeks are defaulting on the private loans due to the ongoing depression. In essence, the Greek bailouts forced Cyprus to request its own.
This article is a little stale as the vote has been pushed back yet again. All financial services are on holiday in Cyprus for at least another day with another extension likely.
The Russians are protesting the troika’s deposit confiscation. Will they use a natural gas embargo, implicit or explicit, as leverage? Will they wind up bailing out Cyprus? No one knows what the riddle, wrapped in a mystery, inside an enigma will do. The key is Russia’s national interest. Moving Cyprus away from NATO’s influence may be worth a few billion dollars or so.
There is an upcoming election in Germany, and Schaeuble does not want his party to take the political fall-out for yet another bailout. While Cyprus will receive assistance, it also must be punished and humiliated to assuage the resentment of German voters.
Cyprus is the victim of circumstances beyond its control, but Schaeuble spins the story into a morality tale:
Whoever deposits their money in a country because it will be taxed less and controlled less runs a risks when the banks in these countries are no longer solvent. That is what happened in Iceland and in Ireland some years ago. European taxpayers should not be made responsible for this risk.
This characterization ignores the role the troika has played in causing Cyprus’ woes. Schaeuble is talking tough, but the question remains, will Germany or Cyprus blink first?