By Felix Salmon - REUTERS
CYPRUS
This was not a good weekend for Russian billionaires. First Boris Berezovsky was
found dead at his English
country estate. Now all the uninsured depositors (read: Russian plutocrats) at Cypruss two largest banks are
going to be hit much much harder than they feared they might be when the Cyprus crisis first erupted last week.
Back then a long long week ago Cypriot president Nicos Anastasiades stood firm: there was no way he would allow uninsured depositors to lose more than 10 of their money. What a difference a week makes: now if your uninsured deposits are at the Bank of Cyprus youre probably going to lose about 40 And if theyre at Laiki youre going to lose
everything.
The
agreement between the Cypriot government and the Troika of the EU IMF and ECB is a bold and brutal geopolitical power-play. There might be language in the official
communiqu about how The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution" but given the billions of euros that Russians are being forced to contribute unwillingly the chances that theyll happily throw a bit more money into the pot have to be tiny.
In the Europe vs Russia
poker game the Europeans have played the most aggressive move they can essentially forcing Russian depositors to contribute maximally to the bailout against their will. If this is how the game ends its an unambiguous loss for Russia and a win for the EU. For one thing there wont be any capital controls: thats
a good thing. (Some deposits at Bank of Cyprus will be frozen which is a kind of capital control but there arent
corralito-style barriers on the general movement of euros in and out of the country.) On top of that public markets have been left unruffled: theres been no panic on Europes bolsas partly because the biggest hit has been taken by private Russian citizens.
Much more importantly the two main vectors of contagion hitting insured deposits and exiting the euro have been avoided. And most elegantly of all from the Troikas point of view the whole thing has been constructed under existing bank-resolution authorities which means that no vote needs to be put to the Cypriot parliament and therefore no amount of Russian pressure can veto the deal in Nicosia.
Of course the game does not end here. Its unlikely that
Russia will appear bearing a better deal at some point in the next 24 hours but the hit to Cypruss GDP is going to be so enormous that staying in the euro over the long term absent another round or two of massive debt relief is going to be extremely difficult. The deal as constructed is in
Pawelmorskis wonderful phrase Iceland without the fish": Cyprus as Iceland did before it is letting its banks fail since theyre too big for the government to bail out. But Iceland has other industries besides banking and more importantly has a floating currency as well which by weakening can make those industries more competitive.
In order to truly become Iceland then Cyprus is going to need to devalue and default. If it doesnt then it will live unhappily under the yoke of Europe-imposed austerity until such a time as the parliament revolts the austerity measures are revoked and the island drops out of the euro and probably out of the EU as well. Cypruss economy is going to suffer greatly over the next few years and its citizens are going to blame Europe for their woes; its entirely possible that they will
voluntarily leave the euro if the alternative is negative economic growth as far as the eye can see along with a massively overvalued currency. If and when those rumblings start appearing expect the Russians to start being extremely nice to the Cypriots all over again.
Meanwhile the resolution of Laiki is going to give the world a very real example of what happens when a too-big-to-fail bank is allowed to fail. Laiki is small by global standards but very large by comparison with Cypruss GDP. If Cyprus can survive Laikis collapse then maybe just maybe the world could cope with the resolution" of a big bank like Citigroup. But thats a very big if". More likely the costs to Cyprus of allowing Laiki to fail will be enormous both politically and economically. And 800000 Cypriots will for years to come be paying the price of what
Mohamed El-Erian elegantly calls bailout fatigue".
