So Cyprus did present other plans

Well, as was to be expected: Cyprus did offer several other plans, how to reach the needed amount without gutting deposits at all. As Spiegel online reports none of those were even considered by the finance ministers and the Troika. Also with Russian help Cyprus expects to come up with a plan to leave deposits below 100.000 € unaffected. Sometimes it pays off to be a cynic.

Cypriots don't seem to like Mondays, next week there will be another holiday. All banks being closed until Tuesday will affect companys. It won't affect confidence in banks though, since it just cannot get worse. The people can get some money so they won't be all cash-strapped.

Still, there are only rumors over a Russian involvement as of now, so we don't know if there is a viable plan B. I think some of the banks will not survive this though. Cyprus has to take steps to regain some confidence in the banking system. Mergers and a bad bank might help. Also the current owners have to be wiped out. A new bank under new management will have the chance to survive. The FDIC can handle this in such a short timeframe. So I hope this could be a first case where the ECB steps up to that.

Sadly a disorderly bankruptcy of the country is not off the table just yet. Tomorrow will bring some clarity as the president Anastasiades will then announce if he has a new plan and how it should work.

Charles Wyplosz presents Scenarios how Cyprus crisis might pan out

On voxEU Charles Wyplosz presents three scenarios of how the crisis in Cyprus could evolve. A benign one, a less benign one and total disaster.

• The benign scenario is that depositors in Cypriot banks will accept the tax and keep their remaining money where it is. Depositors in other troubled countries will accept that Cyprus is special and remain unmoved.
• A less benign scenario is that depositors in Cypriot banks come to fear another round of optimal, time-inconsistent levies. This is what theory predicts. After all, if policymakers found it optimal once, why not twice, or more?
• The really worrisome scenario is that the Cypriot bailout becomes euro-systemic – in which case the collapse of the Cypriot economy will be a sideshow. This will happen when and if depositors in troubled countries, say Italy or Spain, take notice of how fellow depositors were treated in Cyprus.

 It is a must read. Some aspects are somewhat unlikely in my opinion, though. The benign scenario will just not happen because the foreigners will just look for a safer tax haven. So as I have mentioned this is the first time that it makes sense to stage a bank run for every one, even though it will as always bankrupt the finacial sector. In my worst case scenario there will be worry in Italy and Spain but not a full fledged bank run. More a walk. Something that is controllable. But Greece will possibly face a bank run.

But I think there is a new scenario emerging. One that seems more likely by the hour. The parliament will vote against the bail out and the banks will not reopen ever again, well at least not in their current form. From here on I see two paths forward 1. Having stopped all banking activity might actually prove invaluable. There is a chance to now restructure the banks. Create bad banks, were they put say all the European and Russian deposits and good banks with Greek and Cypriot money. Gazprom might be the entity that makes a orderly restructuring possible.  The problem is that even though as Mr. Wyplosz rightly states, this just cannot be described as an emergency measure NO ONE is prepared. The Cypriot government has only been around a few weeks now. There just isn't any way they made any plans.

Which leads us to 2. Cyprus banks will default disorderly, the hits on deposits will be immense, the government will fail and the island will be forced to leave the Euro without a new currency. Still even in this scenario Gazprom might just be the "white knight" the guy who gets Cyprus's natural gas at a bargain and the island will be scared (There will be a Depression - there are just too many people working in banking) . Should this happen I think a bank run in Greece is pretty likely.

Schäuble and the Blame Game

One of the favorite games of the German government is blaming outside entities (usually the EU) for decisions made even though the German government government is deeply involved. Here is how it is played. Schäuble answered questions about Cyprus on the State TV news (ARD Tagesthemen) yesterday evening:

He answered to the question: "was it Your idea to take money from the private deposits of the Cypriots?" (my translation)

No it was the position of the Bundesregierung and the IMF that the major part of the funds needed to stabilize the banks should be taken from the owners and creditors, those are the investors, of the banks. But of course we would have honoured the desposit insurance of up to 100,000 €. But those who did not want a bail in, the Cyprus government, the European Commission and the ECB chose this solution and now they have to explain it to the Cypriot people.

Yes if you have a deposit at a bank you are now an investor in the eyes of the German government it is your own fault that you trusted in the deposit insurance and Germany also pledges to uphold the law IF everybody does as we say. He then said, that to reach the needed amount he wanted to achieve a large base to not overburden the rich, so he might not have been the one who came up with the tax but he was deeply involved in how the plan was carried out.

The Merkel government has a bad habit of using language not to explain something but to defend the indefensible. They use words that sound similar to something which was proposed but mean something toally different. Thursday last week a bank customer was not an investor. The finance minister changed that now. It is extremely annoying that one has to listen to every word exactly because the phrases used just don't mean what one thinks when listening for the first time. The interviewer helped by asking the wrong question. Who cares if it was Schäuble's idea. What matters is was this a plan that the German government proposed? I think it was.

Schäuble was very much against  a "rescue" of Cyprus less than two months ago. Both the coalition and the oposition parties wanted to punish the depositors, since they feared the backlash of the German voters in case that "Russian oligarchs" would be bailed out. So the minister basically did not explain a thing. He just blames Cyprus for choosing the pest over cholera. Even if it wasn't the Merkel government who pushed for this plan, which I find unlikey,  we are at least in part responsible for the outcome. We could have just said that the deposit insurance has to be honoured. We didn't.

Just a reminder, due to the way the ESM is set up Germany can veto any bail-out decision. At least 80 % of the votes are necessary for such a move and Germany controls 27 %. If we actually wanted to, we could have forced the protection of deposits up to 100.000 €. 

How is a "bail-in" different from a deposit tax? Not very. Goldman is not sure if the action in Cyprus wasn't also the former. "Bail-in" describes using deposits to finance the banks, by forcing the bank customers into bank ownership. So instead of just outright losing money, the happy new investors would have had shares of a broken financial system. An actual journalist would have asked the finance minister why "out" was chosen over "in".  Instead German state TV just accepted that some one else is to blame. Also the interviewer did not even ask what the exact plan was that Schäuble claimed to favor. German Quality Journalism For The WIN.

What Schäuble also does not seem to understand is that no matter how the Cypriot parliament votes the banks will be insolvent. Once the confidence in the banks is destroyed it cannot be fixed easily, so when if the banks reopen, the customers will try to get their money out. Worse still is that of course spill over effects cannot be avoided even though Schäuble claims otherwise ("special case" "wont happen again" yadayadayada). As Krugman put it:

It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying “time to stage a run on your banks!”

I am looking forward to what the ECB has to say. In the end no one will be responsible. The deposit tax just happened. Every body wanted to uphold the law but other entities didn't. Sometimes I think they come up with "plans" by playing a drinking game and the proposal of the "winner" has to be accepted. That also explains why no one remembers his own involvement in bad solutions.