Cypriot Parliament Rejects Bailout

Yesterday the Cypriot Parliament rejected the Euro Group bailout deal which called for raising 5.8 billion euros through a tax on all bank deposits even though deposits under 100,000 euros are guaranteed in Cyprus. Liz Alderman reports today that following the vote the European Central Bank put Cyprus on notice that time to arrive at a new agreement is limited:

After the parliamentary vote, the European Central Bank indicated that it would not immediately cut off emergency cash — without which Cypriot banks probably could not survive. In a terse statement, the central bank said it was consulting with the International Monetary Fund and the European Commission, its partners in the so-called troika of international lenders. 

But in a tacit warning that it would not provide assistance forever, the central bank said it would stick to rules that allow lending only to solvent banks. The Cyprus banks, while wobbly, are not yet insolvent.

Cyprus' finance minister, Michalis Sarris, is in Moscow today for talks with the Russians. Apparently, as reported today by Andrew Kramer, there is a Gazprom deal on the table to provide Cyprus bailout money in exchange for exploration rights to offshore gas deposits:

Though not widely publicized, the Russian proposal to prop up Cyprus with assets belonging to the Gazprom pension fund was apparently taken seriously enough by Germany’s chancellor, Angela Merkel. Her office issued a statement on Tuesday noting she had warned the president of Cyprus in a telephone call not to consider alternatives to the European bailout; Russia’s offer is the only known alternative. 

Michael Olympios, chairman of the Cypriot Investors Association, said one possibility under active consideration was for a Russian bank to buy Cyprus’s biggest troubled lender, the Cyprus Popular Bank, in a deal that could reduce the amount of the 10 billion euro bailout sought by Cyprus. Any such move would most likely be backed by the Kremlin, Mr. Olympios added, and could reduce the tax that Russian depositors might otherwise have to pay. 

Russian officials were preparing for talks in Moscow on Wednesday with the Cypriot finance minister, Michalis Sarris, who was expected to request that Russia postpone the maturity date on a 2.5 billion euro loan that it extended to Cyprus in 2011.

A detailed post this morning on naked capitalism, "Gaming the Cyprus Negotiations," argues that there is indeed a chance that a deal might not be reached:

My belief is that there are a lot of moving parts, and while it is perfectly rational for everyone to come to some sort of deal, the principals have a lousy negotiating dynamic at work. Russia has been excluded and is feeling angry and abused, and the Wall Street Journal description of the 10 hours negotiations that led to the original deal sound nightmarish: confused, chaotic, dysfunctional. It’s proof of the old notion that people (in this case finance ministers) should never negotiate their own deals unless they are super experienced negotiators (and pretty much everyone overestimates their negotiating skills). And these all-over-the-map negotiations took place when the principals were in the same location. It’s worse doing this sort of things by phone and e-mail.

So the odds are not trivial that a deal fails to come together, not because a pact is impossible (as in there is appears to be a bargaining space where everyone could find a solution they could swallow) but that the key actors will be unable to get to that agreement before time runs out. Stay tuned.

I think there's some merit to this point of view. But in the end we're talking about a tiny amount of money in the Great Power scheme of things. Certainly you would think someone -- Putin? Merkel? Draghi? -- would intervene.