Any Courage in Cyprus?

Cyprus, as it turns out, has the ability to block the bailout deal with the troika. This from a story today by Liz Alderman and James Kanter about the resignation of finance minister Michalis Sarris, "Cyprus Chief of Finance Quits Post":

But the Cypriot Parliament must still vote on a memorandum of understanding with the so-called troika of international organizations — the European Central Bank, the European Commission and the International Monetary Fund — that agreed to the bailout. 

That memorandum, still being drafted, will outline the budget cuts and other conditions Cyprus will have to meet to receive its allotments of money. A parliamentary vote is expected in coming weeks. The governments of Germany and Finland, under their national rules on bailout loans, are also expected to seek the approval of their Parliaments. 

The memorandum will probably be the subject of heated debate in Nicosia. Many lawmakers, already unhappy with the tough capital controls that have been slapped on bank accounts for the better part of a month, are dismayed by what they see as harsh terms that will tip Cyprus’s already enfeebled economy over the edge. 

But Mr. Sarris’s resignation should “help the Cypriot government win approval for the bailout program in the Cypriot Parliament,” said Mr. Rahman, the analyst.

The Cypriot Parliament has all the evidence it needs to scrap the deal. This is from today's story by David Jolly, "Unemployment in Euro Zone Reaches 12%":

The jobless crisis is hitting hardest in the south of Europe. Eurostat said Greece, with its economy in free fall, had the euro zone’s highest unemployment rate ,at 26.4 percent in December, the latest month for which data are available. Among Greek youth, the jobless rate has hit a staggering level, 58.4 percent. 

Spain, where the economy has contracted sharply after the collapse of the global credit bubble, posted the second-highest unemployment rate in the euro zone in February, at 26.3 percent. 

Cyprus’s jobless rate, at 14.0 percent, is almost certain to rise because the country’s recently negotiated bailout deal will crimp the economy for years to come, said Mr. Cliffe, of ING. “We’ve already seen how this story plays out in Greece,” he said. “We’re about to see it play out again in Cyprus.”

The question is do the elected leaders of Cyprus have the courage to leave the eurozone and go their own way. In the short term such a move would likely cause a drop in the markets, but in the long run Cyprus would be doing all of us an enormous favor by driving a stake through the zombie brain that can think only of bigger being better and that austerity somehow magically generates growth. Sadly, politicians, whether east or west or north or south, have a consistent track record of cowardice and plutocratic capture; so to expect emancipatory leadership is naive. But there is always hope. Hope is the anchor.

Ben Judah has an article on the Opinion page, "Did Putin Sink Cyprus?," that argues that Putin's failed promise to bring law and order to Russia along with the cultivation of his cult of personality has led to billions in capital flight. Judah concludes the piece by casting some blame the EU's way:

Whatever remains of the Russian fortunes in Nicosia seems sure to flee again — but not back to Russia. It may go to other European havens, like the Dutch Antilles and the British Virgin Islands. Malta and Luxembourg are possibilities, but analysts have both on bailout watch. 

Meanwhile, Brussels is not impotent. The European Union must clamp down on offshore havens, insist on transparent banking and toughen up on money laundering. This is austerity Europe — and bloated tax havens not only put Europe at risk but also make its financial system complicit with offshore corruption. 

But it cannot erase the truths exposed by the Nicosia bust. Europe, it turns out, is studded with vulnerable, contagious tax islands, and their availability only compounds Russia’s deeper problem: it is both too corrupt and too paranoid to keep its billions at home.

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.