After Cypriot lawmakers rejected the ECB bailout, there is
much speculation as to what will happen next. The official response from the
Eurozone (Eurogroup) is that they have “noted” the rejection. The bank reopening
that was to occur on Tuesday, but then delayed until Thursday has now been
extended indefinitely. With the closing of banks, the Cyprus Stock Exchange has
announced they will close as well.
What are the options for Cyprus?
Get a loan from Russia and stay
in the Euro -
Russia
has much more vested interest in Cyprus than the EU does. Around 30%
of Cyprus bank deposits belong to Russians. This is a sore spot with Euro
leaders because they feel that much of any bailout would go directly to Russia. It is also
a possible motivation for the deposit tax they demanded.
Russia
has no compelling reason to agree to a loan without monumental concessions from
Cyprus
such as access to their undeveloped offshore gas deposits. Russia has been trying to gain
access to these deposits for years, but have been repeatedly thwarted by the
EU.
A Cyprus
banking collapse would actually be good for Russia
as it would shut down a huge tax haven for Russian taxpayers and bring some
deposits back to Russia.
Convince the Eurozone
leaders to lighten bailout terms -
There are two key elements that might prove to make this
option very difficult or impossible. Number one is the feeling among Eurozone
finance ministers that the Cyprus
banking sector is simply too big, (8 times as big as GDP) and acts
as a money laundering enterprise. The ECB is characterizing the Cyprus bailout
as a unique, one-time situation that will have no affect on other troubled Euro
countries. Cyprus
is also a tiny part of the total Eurozone economy, accounting for far less than
1%.
The second reason is more complex; northern
Euro countries whose economies are doing well are resistant to further
bailouts. The Euro representatives have kept interest rates very low for the
benefit of countries like Germany,
causing countries like Cyprus
and Greece
to become more uncompetitive and making economic recovery much more difficult for them.
Exit the Euro and
return to the Cyprus Pound
This option would require a deflation of approximately
20-30% along with the significant cost of actually converting the currency and
financial instruments. While it would be very difficult in the short term, it
would yield several important benefits in the longer term. The country would
regain the ability to independently adjust the value of their currency to suit
domestic financial conditions instead of being at the mercy of stronger
northern EU member states. It would allow them to keep access to the
potentially lucrative offshore gas fields. It would give them an opportunity to
restructure and further legitimize their banking system
Cyprus
exiting the Euro would be bad of course for the Euro’s reputation and might
further acerbate the problems in the other weak Euro economies. But behind
closed doors, the northern countries may be secretly wishing for a Cypriot
exit.
