Greek Zero Hour: Default or Lickspittlry

The flurry of activity yesterday and today surrounding Greek debt negotiations is succinctly framed by this two-sentence paragraph found in "European Leaders Assemble for Urgent Meeting on Greek Crisis," by Liz Alderman, Niki Kitsantonis and Jack Ewing:

Unless they strike an agreement soon, Greece may not be able to make a series of coming debt payments. On Friday, Greece must make a €300 million loan repayment to the International Monetary Fund, and it owes €1.2 billion later this month.

Yves Smith at Naked Capitalism, "Greece’s Creditors Meet to Prepare Offer (Updated – Creditors Agree on Terms)," seems confident that Greece can meet Friday's deadline and has enough wiggle room to survive the month:

The press is awash with reports of a high-level meeting convened yesterday by Angel Merkel and attended by Francois Hollande, Christine Lagarde and Mario Draghi. The upshot is that Greece’s creditors have agreed to sort out their differences and come up with a proposal to present to Greece in the next few days. Greece is generally believed to be able to make its €300 milllion payment due to the IMF on Friday; if not, it has the expedient of asking to bundle payments under an existing IMF rule, which would give it till the end of the month to remit the €1.5 billion it has coming due in June.

So why the splashy optics of a Monday-night emergency powwow of big shots? There are several "technical" issues in play. Two key ones are pension overhaul and the value-added tax. The euro honchos convened to finalize an agreement on which of Syriza's "red lines" Greek leader Alexis Tsipras must cross.

Smith says that Tsipras is giving ground on pensions, agreeing to raise the retirement age to 67. The endgame here is to cripple Syriza and beat back any challenge to a bankrupt neoliberal orthodoxy. If Tsipras is made to kneel, violating his own campaign promises to protect if not increase pensions, and schlep a pension-cut deal back to parliament for approval, the troika will have won. Syriza's parliamentary majority will splinter. Already the Left Platform bloc of Syriza is gaining momentum. Left Platform wants to default on debt payments and return Greece to the drachma. As Alderman, Kitsantonis and Ewing explain:

Far-left Syriza lawmakers have become increasingly agitated recently, accusing Mr. Tsipras of making too many compromises on the anti-austerity pledges that helped sweep the party to power in January’s elections.

A new political uproar broke when a group of Syriza lawmakers refused to back the government’s nominee for a new representative at the International Monetary Fund, Elena Panaritis, a former Greek parliamentarian who once worked at the World Bank. In a letter on Sunday, more than 40 Syriza members, mostly lawmakers, took issue with her support of Greece’s last international bailout agreement in 2012, which the party considered to have been unfair and overly harsh. Ms. Panaritis withdrew from consideration on Monday, citing the opposition.

Although symbolic, it was the latest in a series of uprisings within Syriza, which during the election campaign had promised to take a hard line with Greece’s creditors in debt negotiations and to resist austerity measures. A hard-left faction recently pressed for but lost an internal central committee party vote to have Athens stop paying its creditors altogether if they demanded further austerity.

Mr. Tsipras is facing an array of pressures as critics from both the left and right in the Greek government question whether he has a viable plan to restart the economy, which slid back into a recession in the first quarter. At the same time, Greece’s creditors, the I.M.F. in particular, have resisted unlocking any aid unless the government can show that it will put its finances on a sound footing and run enough of an operating surplus to make regular debt payments. 

The dispute over Ms. Panaritis on Monday “shows that there’s a lot of exasperation in Syriza ahead of a deal with creditors,” said Harry Papasotiriou, a professor of political science at the Panteion University in Athens and the head of the Institute of International Relations. 

Even if dissent within Syriza deepens, the government would probably band together to push through any legislation needed to secure the bailout funds. Few lawmakers want to precipitate a default or force Greece to exit the currency union. But the hard-liners of Mr. Tsipras’s party could eventually break away, analysts said, especially the Left Platform, a faction that has already pushed for Greece to stop paying its creditors if they continue with “blackmailing tactics.”

This is the outcome I believe Merkel, Largarde, Hollande, Draghi et al are after. They want to force Tsipras into "Obama mode." Talk "hope & change" and deliver more of the same. Syriza's governing majority collapses as a result, and the moral to the story becomes, "See, that is what happens when you try to change the order of things."

AP is reporting this morning (Elena Becatoros "Greece submits draft bailout plan, creditors say not enough") that Tsipras has delivered a proposal to the creditors, and he's talking tough:

"It is now clear that the decision for whether they want to adapt to realism and emerge from the crisis without the division of Europe ... belongs to the political leadership of Europe," Tsipras said.

In the end, this is all a Kabuki. There is no alternative to a default. Greece has been hemorrhaging capital and must soon implement controls. This is the last paragraph from the Alderman et al piece:

In the meantime, Greece’s finances continue to deteriorate as deepening political uncertainty accelerates a decline in tax receipts and withdrawals of deposits from the nation’s banks. Last week, Greece’s central bank reported that deposits fell in April to €133 billion, the lowest level in a decade, after savers withdrew nearly €5 billion from the banks during the month. More than €30 billion was withdrawn between the end of last November and the end of April, according to the Bank of Greece.

And yet the troika persists in maintaining the fiction of robust primary surplus targets. According to Smith:

Things are even worse than they appear. The target for this year was 3%, and 4.5% for 2016. Most observers thought both figures were insane. And remember, when Syriza assumed office, Greece has a small primary surplus. As of April, the IMF projected a deficit of 1.5%, and matters can’t have gotten any better. To just meet Greece’s ask of 1% now means a swing of a full 2.5% of GDP, almost the unreasonable level they were expected to hit for 2015. Even if the creditors make what they think is a generous offer of 2% for 2015, that is equivalent to an asphyxiating 3.5% consolidation from the new starting point of negative 1.5%. 

So the creditors may have read too much into Tsipras’ offer to negotiate on pensions. Or they may feel they have to go this step regardless of whether their gambit will work. Or they may be in denial as to how badly Tsipras has been boxed in by his Left Forum (although he can always cut a deal with To Potami). At a minimum, both sides appear to finally be about to get out of the Groundhog Day phase of these negotiations to an end game. 

Zero Hour is rapidly approaching (although this has been said many times before). The "Either/Or" here seems clearer than before. Either Greece defaults on its debt, or Tsipras brings back the creditors' crummy deal to parliament and manages to get it approved only to see Syriza splinter, and with it the momentum of a resurgent Left.

Grexit -- There Is No Alternative

Yesterday ("Deadlines Near as Greece and Germany Seek a Consensus on Debt" by Alison Smale) leftist Greek prime minister Alexis Tsipras was in Berlin meeting with rightist German chancellor Angela Merkel trying to find a path forward out of the funding impasse between Greece and the troika.

Naked Capitalism's Yves Smith ably adumbrated ("Leaked Tsipras Letter to Merkel Shows Increased Desperation, Warns of Imminent Default") the impasse as follows:

If the plan of the Troika was to starve the Tsipras government and produce either capitulation or a loss of domestic credibility, their effort appears to be on track.

FAZ reported that the Greek government is set to run out of funds by April 8. Tonight, the Financial Times reports that Greek prime minister Alexis Tsipras sent a desperate-sounding letter to Angela Merkel on March 15. That appears to have led Merkel to meet with him at an EU conference last week and arrange for a one-on-one session tomorrow.

From the Financial Times account:

Alexis Tsipras, the Greek prime minister, has warned Angela Merkel that it will be “impossible” for Athens to service debt obligations due in the coming weeks if the EU fails to distribute any short-term financial assistance to the country…

In the letter, Mr Tsipras warns that his government will be forced to choose between paying off loans, owed primarily to the International Monetary Fund, or continue social spending. He blames European Central Bank limits on Greece’s ability to issue short-term debt as well as eurozone bailout authorities’ refusal to disburse any aid before Athens adopts a new round of economic reforms.

The troika refuses to release any new bailout money until Tsipras' Syriza-led government can provide a list of revenue-generators to replace the pension cuts and privatizations agreed to by the previous government of Antonis Samaras, as Jim Yardley explains in "In Greece, Syriza Struggles to Deliver Promises as Money Runs Out":

Greece’s finances have deteriorated as postelection anxiety over uncertainty about the bailout spurred a spike in bank withdrawals. Tax collections also plunged, raising questions about whether the government would be able to pay state workers and meet other obligations.

On Feb. 20, Greek leaders signed a four-month bailout extension with its three main creditors — the International Monetary Fund, the European Central Bank and the European Commission. Yet creditors have refused to release a critical 7.2-billion-euro, or about $7.8 billion, loan payment (money that Syriza had once vowed not to accept but that is now badly needed) until the government provides a list of acceptable structural reforms to replace pension cuts and other austerity measures that had been under consideration by the previous government.

To counterattack, Tsipras voiced support for the idea of German reparations. This from a story, "Syriza’s Call for German Reparations: A Bolivaran Tsipras?," by Joshua Tartakowsky which appeared on CounterPunch over the weekend:

In his speech to the Hellenic Parliament, Prime Minister Tsipras touched on the issue which both some Anglo-Saxon socialists and Conservative Germans would wish would have avoided. Tsipras brought to public view the issue of reparations of World War II, and the fact Germany did not pay back the interest-free forced loan made on the Greek bank by the German occupation forces until today. While some reparations were paid in the 1950s, these were quite small considering the damage and did not include the forced loan. Tsipras demanded reparations from Germany for the immense damage and killing caused during the brutal German occupation as a necessary act to restore historical justice. The parliament decided on the establishment of a committee led by economists and historians who will pursue the issue of reparations. The Greek Justice Minister said that if necessary, he would consider seizing German assets in Greece, including, for example, the Goethe Institutes in Athens and Thessaloniki and even homes of German citizens.

In the Merkel-Tsipras story that appears in today's paper Smale summarizes the sniping between Greece and Germany as follows:

Verbal hostilities between Greece and Germany mounted in recent weeks, with particular bitterness lacing the remarks of each country’s finance ministers. Last week, a controversy swirled over whether the Greek minister, Yanis Varoufakis, had made a provocative one-fingered gesture at Germany at a conference in Croatia two years ago.

More gravely, the question of whether Germany should pay more reparations to Greece for Nazi war crimes and forced loans has flared, with some leading figures on the German left ready to consider such payments.

The magazine Der Spiegel summed it all up with a cover this week superimposing a picture of Ms. Merkel on an old photograph of Nazi commanders at the Parthenon in Athens under the headline, “The German Übermacht.” In an accompanying article, it argued that fellow Europeans increasingly see Germany, which is Europe’s biggest economy, and its leaders as dominant. “Yet they are rather a weak than a strong hegemon,” Der Spiegel said of the Germans.

In bad news for Greece, Smale reports that Mario Draghi, head of the European Central Bank, refuses to allow Greek banks to issue new loans based on short-term Greek government debt: "In a blow to hard-pressed Greek banks, Mario Draghi, the president of the European Central Bank, said on Monday that Greece had not yet met conditions that would allow its debt to again be used to secure central bank loans."

Patience with Syriza-troika impasse, both from the right and the left, appears to be near its end. An unsigned Gray Lady editorial over the weekend, "The Greece Issue Breeds Brinkmanship in the Eurozone," marked this growing testiness among the few tepid Syriza advocates in the mainstream:

There is no doubt that Mr. Tsipras needs to move quickly to reform the Greek economy, which is running low on cash. Tax collections have fallen since his left-wing party, Syriza, took power in January; Greek businesses are complaining that they are not being paid for work they’ve done for the government; and some bigger companies have started moving cash to London. But pushing Greece into default by withholding the short-term financing it needs to pay its bills would be courting disaster.

The rumor is that Tsipras is in Berlin to secure better terms for the privatization of state assets, a red line he promised not to cross.

The fact is that the right is in ascent. The U.S. 2014 midterms, the recent elections in Israel and France, a decent but nonetheless modest showing for Podemos in Spain's Andalusia, all point to an estranged public tacking to the right. Syriza is carrying the weight of not only Greece but the entire global electoral left. A misstep by Tsipras will continue the complete hollowing out of social democracy.

Such high stakes mean that there is little chance of Germany or the troika loosening its chokehold. Syriza will be crushed at all costs in order to leave the field free for the neoliberals to continue a decades-long orgy of looting and pillaging.

Given that, Tsipras must soon realize there is no alternative to a Grexit.

Maybe Not a Grexit but a Default: Naked Capitalism's Yves Smith on Greece's Efforts to Free Itself From Bloodsucking Austerity

With recent moves by the European Central Bank to force Greece's Syriza government to accept the same neoliberal austerity program that it was elected to reject, the one that has led to 25% unemployment and a 25% reduction in the size of the Greek economy, and to accept it quickly it seems to me that the only option available to Varoufakis and Tsipras is to default.

Naked Capitalism's Yves Smith's writing on Syriza's efforts to beat back austerity, though pessimistic, has been superb. Her "Will the Cavalry Ride Over the Hill in Time for Greece?" is a must read:

We’ve cautioned readers that Greece is in a very weak bargaining position relative to its financial overlords in the Troika. As much as Finance Minister Yanis Varoufakis is making sound, logical arguments and presenting proposals that if anything are too accommodating, despite initial cool reactions, many of Greece’s soi disantpartners are diehard neoliberals and/or are politically constrained. Varoufakis is approaching them as if they can deal in good faith, when their idea of “good faith” comes from a punitive parallel universe.

While Varoufakis and presumably Tsipras are unwilling to deploy the one realpolitik tool at their disposal, a threat of Grexit, other parties who have influence on the recalcitrant actors are more sensitive to the fact that much more is at issue than just the fate of Greece. The ongoing game of extend and pretend has managed to forestall what amounts to an existential crisis for the Eurozone. Its founders knew its structure was incomplete and imperfect, but they believed the logic of preventing future wars was so compelling that the inevitable future crises would be resolved by further integration. 

Unfortunately, as we’ve been chronicling off and on since 2010, the northern bloc, and most important, Germany, have not wanted to give up its catbird seat. It has influence in excess of its population, continues to run trade surpluses with the rest of the Eurozone, which is tantamount to stealing demand, yet it is unwilling to accept the inevitable consequence of running sustained trade surpluses, which is that you must finance your trade partners (or to put it in the terms of petrostates, recycle your surpluses). Moving toward integration, particularly more powerful governance at the Eurozone level, and having more fiscal transfers to allow countries like Greece to have enough demand to have manageable levels of production and employment, means that Germany will have to cede power. And Europe still has strong nationalistic impulses, another obstacle to cementing the alliance. 

But it has also been clear, with the rise of ultra-right, anti-Eurozone parties, and to a lesser degree, anti-austerity parties like Syriza and Spain’s Podemos, that this unsustainable status quo is if anything past its sell-by date. Thus for the more forward-thinking technocrats and politicians, Greece’s efforts to free itself from failed austerity policies serve as a focus point for their own agendas to move away from anti-growth, anti-democratic policies. 

The problem for Varoufakis and Syriza generally is that the magnitude of the task before them, of negotiating what they hope is a deal with significant new components, is already difficult to accomplish by June, the longest time frame they are likely to have, even if their interlocutors were more receptive. With limited knowledge of the power structures in the key governments with which they are dealing, it’s well nigh impossible for them to find, let alone work with, mid level and senior level figures who are their natural allies. 

Thus Varoufakis (at least for now) is forced to broadcast his messages when narrowcasting would be better. Broadcasting means he will almost inevitably offend some key audience, given if nothing else how far apart Syriza’s voters and German officials are in their expectations for the negotiations. But the broadcasting is critical to communicating and rallying both insider allies as well as voters in periphery countries, since shifts in poll results increase pressure on the Eurozone reactionaries. Perversely, the best thing for Syriza’s chances were the Hebdo murders, since the boost it gave to anti-Eurozone Front National leader Marine Le Pen is a big wake-up call for the Eurozone elites.

Today, after ECB announced that it will not accept Greek government debt as collateral for new loans, Smith writes in "ECB to Greece: Drop Dead":

Even by the standards of bank thuggishness, the move by the ECB against Greece last night was a stunner. Americans have become used to banks taking houses under dubious pretexts when both the investors and borrowers would do better with a writedown. But to see the ECB try take a country is another matter entirely. As one seasoned pro said, “If anyone had tried something like this against a country with a decent sized military, the tanks would be rolling.” 

The ECB’s bombshell was to put Greece at risk of an intensification of its ongoing bank run in order to pressure it to agree to a deal with the Troika under an impossibly tight timetable, even shorter than the February 28 pre-existing deadline that Greece Finance Minister Yanis Varoufakis had planned to extend until June. As we’ve discussed at length previously, a longer negotiation timetable would be necessary to meet Greece’s objective of restructuring of the relationship with the Troika. Greece wanted that to be based on the recognition that Greece could never pay off its debts and that it was in both side’s interest to let Greece implement more growth-oriented policies. But the message from the enforcers at the ECB was unambiguous: Greece has no rights and needs to accept its debtcropper status. 

The ECB has thus also effectively said that it would rather have fascists like Golden Dawn running Greece, which is what will eventually occur if it succeeds in breaking Syriza. It also just handed France’s Marine Le Pen, head of the nationalistic, anti-Eurozone Front National fantastic fodder for her campaign. 

The February 28 date was the result of Greece presumably needing access to so-called bailout funds to pay off an IMF obligation coming due. Varoufakis said he would refuse those funds, and could get by until June, when more loans came due, by relying on existing tax receipts and getting what he regarded as minor waivers from the central bank. He also had some creative ideas for restructuring Greece’s debts and said that he wanted the OECD rather than the Troika to provide auditors on behalf of the lenders. 

Even though we warned that the ECB was likely to use its control over liquidity facilities to stymie Syriza’s plans and force Greece to the negotiating table sooner rather than later, the smackdown was even more brutal than we imagined possible.

***

As we have said before, Greece is in a weak bargaining position. It may be able to go beyond February 28, but probably not very long. Some readers have suggested appealing to Russia, but not only would that unleash even more brutal treatment from the Troika, but the German press has also reported that Russia is not interested. 

Varoufakis has ruled out a Grexit as ultimately hugely detrimental to Greece. Even if the Tsipras government were to decide to reverse course (likely leading Varoufakis to resign), he would probably want a referendum to make sure it had popular support. Most governments have procedures that don’t allow for them to be launched on short order. So even with this averse development, a Grexit seems unlikely. 

The Greek government can implement emergency measures, like capital controls and restrictions on daily bank withdrawals, to reduce the bank run. Measures like nationalizing all domestic banks and implementing a plan to allow foreign banks to leave the country in an orderly manner works only if the Greek central bank can backstop the domestic banks, and that in turn works only in the event of a Grexit, since the central bank needs to be a currency issuer. 

And of course, Greece can default. 

In response to an e-mail tonight, Varoufakis wrote, “One thing we will not do is capitulate.” I hope readers will wish him and his fellow citizens good luck. But the Troika seems determined to destroy Greece if that is what it takes to show that their authority remains unchallenged. But the cost of discipling Greece is likely to be far greater than they imagine, not just in financial terms, but to the Eurozone project itself. 

ECB's QE: Too Little, Too Late

Proof that Mario Draghi has the votes he needs to launch a European Central Bank (ECB) version of the U.S Federal Reserve's quantitative easing (bond buying) program when bank governors next meet on January 22 is David Jolly's "Swiss National Bank Abandons Minimum Exchange Rate Against Euro":

The Swiss National Bank said in a statement that it was giving up the minimum exchange rate of 1.20 Swiss francs per euro, less than a month after it had reiterated a pledge to continue to support that floor by buying the euro in “unlimited quantities” if needed.

***

The euro, used by 19 nations, has been a one-way bet since last May, falling about 15 percent against the dollar to a nine-year low, partly because of expectations that the European Central Bank would announce its intention next week to combat economic weakness and deflationary pressures by buying eurozone government bonds on a large scale. 

In that policy, known as quantitative easing, the central bank would effectively be printing money, increasing the supply of euros relative to other currencies and driving down its market price. 

Phyllis Papadavid, foreign exchange strategist at BNP Paribas in London, said after the Swiss central bank action that monetary authorities were “still sensitive” to the overvaluation of the franc, but that they had adapted to changed conditions — particularly the dollar’s recent rise — by changing course.

With prices dropping 0.2 percent in December, deflation has come to Europe. This, along with a favorable appeals court opinion yesterday supporting the ECB's earlier 2012 announcement that it would purchase government bonds of eurozone member states on the open market, has strengthened Draghi against the German naysayers. For an excellent summary of the ECB's planned foray into quantitative easing (QE) see Jack Ewing's "Devil May Be in the Details on European Central Bank Bond-Buying":

A solid majority on the central bank’s 25-member Governing Council appears, based on recent public statements, to favor broad bond-buying. Their position was strengthened by the opinion submitted to the highest European appeals court on Wednesday in response to a lawsuit by German citizens seeking to block a previously planned bond-buying program that Mr. Draghi announced in 2012 but never deployed.

The ECB's QE is already being criticized as too little, too late. Analysts doubt that purchasing €1-trillion worth of government bonds will cure deflation which has to do with withered demand. Plus, the Governing Council will most likely not act until March; it will only make a commitment to a QE program at its January meeting, but details won't be available until it reconvenes in March.

From now until then the ECB will have to figure out a formula for which bonds to buy. There are no "eurozone" bonds, only bonds issued by member nations. As Ewing clearly summarizes:

Because of the large number of unanswered questions, the European Central Bank may not be ready to announce details of a bond-buying program next week.

“It’s almost impossible for the E.C.B. in this environment not to act,” said Mujtaba Rahman, an analyst at Eurasia Group. But, he said, “We think it’s a two-step move — announcement in January, further details in March.”

Some elements of such a program are a given. The central bank would buy bonds on the open market — not directly from governments, which would be a violation of its charter.

But the bank will have to figure out how to deal with the lack of Pan-European assets comparable to the United States Treasury bonds that the Fed purchased in its quantitative easing program.

The simplest and most likely option would be to buy bonds in proportion to each eurozone country’s share of the central bank’s capital, which is calculated according to each member state’s population and gross domestic product.

The drawback to this method is that it would mean buying large quantities of German government bonds, which are already in heavy demand — so much so that on Wednesday the yield on the 10-year German bond reached a new low. 

Germany accounts for 18 percent of the European Central Bank’s capital, more than any other country. (Malta, with 0.65 percent of the central bank’s capital, has the smallest share.) Market interest rates on some other German government bonds are already below zero. So it is not clear what purpose, if any, would be served by pushing the rates even lower, as would happen if the European Central Bank started buying.

A second option would be to buy only highly rated government bonds — those of France, Finland and Germany, say, while avoiding the bonds of governments with riskier finances, like Portugal or Greece. That approach would answer German concerns that taxpayers could be stuck with the bill if some eurozone governments were to default on their debt.

In theory, if the European Central Bank drove up the prices of highly rated bonds, private investors would turn to the bonds of weaker countries instead. But it is not certain that would happen. If not, the E.C.B. would not achieve its goal of providing relief in heavily indebted countries like Italy.

A third option would be to buy bonds in proportion to the outstanding debt of each eurozone country — the higher the debt level, the more bonds the central bank would buy. This alternative would favor countries that are the most deeply in debt and need the most help, like Italy. But conservative critics in Germany would probably complain that these countries were being rewarded for irresponsibly running up huge debts.

It is hard to imagine a situation where Germany would green-light option three, the only option that Ewing brutes that might have a meaningful impact. So Draghi's QE will not be enough to arrest eurozone deflation.

Draghi has made clear that he wants no part in any candidacy for the Italian presidency (Elisabetta Povoledo, "Resignation of President Will Test Italy’s Premier"). Hopefully this augurs ill for the fresh-faced neoliberal PM Matteo Renzi.

Neoliberalism has to be torn down. Syriza is maintaining its narrow lead going into Greece's January 25 parliamentary elections. If elections were held today in Spain, Podemos would gain a majority (see Vicente Navarro's excellent "What is Going On in Spain? The End of an Era and the Beginning of Podemos").

The mainstream parties of the big three -- Germany, France and the UK -- are under assault from the Right. That is not going to change. The left-hand of the mainstream political duopolies will rush to defend the right, which will have the effect of further disillusioning voters in each nation. Maybe out of this disillusionment real Leftist parties will arise in the big three.

If Hillary is nominated, a similar hopeful possibility will confront voters in the U.S.

The answer to European deflation is obvious. Why not a continent-wide building program similar to China's massive investment in infrastructure?

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.

Bank Run in Cyprus

A bank run has begun in Cyprus. This is important because Cyprus is a member of the eurozone. Cyprus is tiny; but if it goes down and scraps the euro, it could well be the beginning of the end. The issue is a decision by the Eurogroup to make a Cyprus bailout contingent on all depositors absorbing some losses. This is from today's Liz Alderman and Landon Thomas Jr. story, "Turmoil in Cyprus Over a Bailout Rattles Europe":

By size, Cyprus’s economy represents not even half a percent of the combined output of the 17 euro zone countries. Yet the impact of this weekend’s decision by European leaders to impose across-the-board losses on bank depositors — from the richest Russian oligarchs, who have increasingly deposited their money in Cyprus’s banks, to the poorest Cypriot pensioners — in return for 10 billion euros, or $13 billion, in bailout money could not be more far-reaching. 

After five years of bailouts financed largely by European taxpayers, wealthy European nations have decreed that when a bank or country goes broke, bond investors and perhaps even bank depositors will pay a significant portion of the bill.

This is how naked capitalism describes the situation today:

The cheery view that Europe had moves past its crisis now looks to have been a tad premature. The astonishing weekend revelation that Cyprus had struck a deal for a Eurozone rescue of the island nations banks that hinged on a deposit grab, um, tax, of 6.75% of deposits below €100,000 and 9.9% for those above €100,000, sends a message that anyone in a weak bank in a periphery country, particularly a large deposit holder, is at risk. The one thing that America learned in the Great Depression is that to prevent debilitating bank runs, depositors need to be sure their holdings are safe. And if you need to extend government guarantees to provide that reassurance, then government bloody well better keep the banks on a short leash to make sure you dont have to pay out on those guarantees all that often. The recklessness of letting financiers talk governments out of constraining bank activities is coming home to roost. 

But currently there aren't the votes in Cyprus' Parliament to accept the bailout terms. So Cypriot banks are closed until Friday and this morning markets are all down. The lengthy, detailed naked capitalism analysis concludes by saying that unless treated German schizophrenia -- wanting to maintain its huge trade surpluses without funding its eurozone partners -- will destroy the financial system:

Over the weekend, colleagues who are normally of the calm, cool and collected sort have been stunned by this development, although the Eurocrats had been muttering about a deposit haircut in Cyprus in recent months. And the message could not be clearer: you are at risk if you hold money in a shaky bank or country in the Eurozone. One reader’s reaction: “I thought I’d put a prediction on the record: starting tomorrow, the euro payment system really starts to unravel.” 

After the PR barrage that accompanied the launch of the OMT, which was a brilliant exercise in smoke and mirrors (all it did was repackage and rebrand existing ECB powers), the quiet deposit run out of periphery countries to banks in the core nations slowed and had even reversed in recent months. Expect it to pick up with renewed vigor. Even if we don’t see hot bank runs of people lined up trying to empty their accounts, anyone who has more than €100,000 on deposit in a periphery country, particularly Spain, has to recognize he is in danger. However, many of the people own businesses (a payroll of meaningful size means you’ll have large deposits at least when you are about to pay staff, and unless you manage cash very aggressively, much of the rest of the time too) will need some time to switch to safer (presumably German or maybe even Swiss) banks, since selecting a new bank and moving a large, multi-serivces account is a big undertaking. And this sort of hidden-to-the-public big deposit run has felled banks; it was the proximate cause of the resolution of WaMu. 

Now the EU officials could easily calm nervous depositors by announcing an ECB-backstopped deposit guarantee, instead of the current national system which depends on not-exactly-credible central banks. Germany and its fellow surplus countries have hesitated about proceeding with the necessary steps to further economic integration (notice how the plan to implement eurozone wide bank supervision, which Germany insisted was a precondition to Eurozone-level deposit guarantees, has languished?). Germany is trying to maintain policies that are contradictory: it wants to continue to have large trade surpluses, yet not fund its trade partners; its wants debtors to meet their obligations, yet refuses to allow either enough in the way of fiscal deficits or monetary easing to keep debtor countries from falling into deflationary spirals, which assure default. Germany’s failure to relent on any of these conditions means that what breaks will be the financial system.

Negotiations are underway no doubt to rejigger the tax formula for Cypriot depositors, reducing it for small fry. But, barring some authoritative pronouncement from Mario Draghi of the ECB that guarantees deposits at eurozone banks, the damage is done. Is this the beginning of the end for the euro?