Sunday, March 24, 2013

Cyprus Deal

A deal seems was reached between Cyprus, the troika, and the financial ministers of the Eurogroup. According to Bloomberg the deal

which is not yet final, calls for Cyprus Popular Bank Pcl (CPB) to be shut down and split. The Bank of Cyprus Plc would take over the viable assets of the failed bank along with 9 billion euros in central bank-provided emergency liquidity aid, according to three EU officials who asked not to be named because talks are ongoing.

The haircut for deposits above € 100.000 will be 40 % at Bank of Cyprus, while Laiki will see most of the deposits above that level wiped out.  There will be no vote in the Cyprus parliament.

I do not see how this alone solves anything at all. With capital controls now in place Cyprus will suffer economically. A lot of people will be unemployed after the shut down of Laiki. Even more will be affected indirectly. The message that deposits in other banks are not save is out there and it will slowly whittle down the bank deposits. Cyprus will now have a much higher debt to GDP ratio. At the same time it will face at least a heavy recession.

Nothing is decided, yet. I do not think, that the German parliament will vote against the agreement. As I said before Merkel DOES NOT have a majority in these decisions and has to rely on the SPD. In the party's program it claims to want "Wachstumsimpulse" growth impulses, so this could be a chance to force Merkel to agree to less austerity, and at least some positive measures. But, to be blunt the SPD doesn't have any guts whatsoever, so they will probably agree to everything that "Mutti" wants. After some big talk about how their handling of the situation would have been better.

So we have a deal that kicks the can a few yards (probably no real solution for Cyprus, await the next "bailout" in 6-12 months) while the next one, namely Italy, is lying just one step ahead, and if Italy is unable to form a government, it might just turn out to be an immovable object.

Russia's reaction might be interesting. Will they impose an extra tax on European companies to make up for the losses? Possibly. Will they give Cyprus a better deal for their loan? No.

This is a solution, which can only be described as loose(Cyprus)-loose(Eurogroup)-loose(Russia). No winners, just loosers, everywhere.

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