The Cypriot Gambit

Cyprus’s parliament quite wisely voted no on the plan to seize deposits and force savers to participate in a “bail in.” Banks will remain closed until Thursday and possibly into next week as Cyprus sorts out its next step.

To briefly recap, Cyprus is in need of approximately €17 billion to cover existing debts. The troika agreed ... so long as Cyprus puts skin in the game to the tune of €5.8 billion. Not wanting to hit taxpayers to support bank deposits that, somewhat deservedly, are viewed as including a healthy chunk of laundered Russian cash, the idea was floated to instead tax bank deposits. Cyprus’s parliament ran with the idea, putting it to a vote—for the first time endangering deposits, which had previously been viewed as sacrosanct.

The troika and extended EU officials then all claimed to be perplexed, saying the “bail in” deposit seizure was all Cyprus’s idea. And maybe it was! Just 24 hours ago, it seemed certain to pass parliament, albeit narrowly. Yet, on Wednesday, the plan got nary a single “yes” vote.

Did Cyprus see the light? Possibly. First, the plan flies in the face of EU law, which requires EU-member banks to insure deposits up to €100,000. Second, this would surely spark a bank run, which would unnecessarily imperil Cyprus’s banking system—and likely require still more bailout funds.

Or could it be Cyprus officials don’t really want to pony up their €5.8 billion? Instead, they dreamt up a deposit-seizure poison pill they had no intention of taking to give themselves some leverage at the negotiation table. They’ve witnessed the proceedings over the past 3 or so years. They’ve watched as European officials have moved, glacially, to provide funds where needed. And they’ve watched the “rules” evolve, near constantly. Deadlines have been moved and moved again. Bailout funds extended and increased. Terms changed. Vows to never intervene directly in banks got tossed. Cyprus’s politicians know there is little will—at home or abroad—to make Cypriot taxpayers pay to backstop possibly ill-gotten funds from an occasionally hostile non-EU member. Are they so crazy to think the troika may eventually cave and offer the full €17 billion sans collateral? Or with otherwise radically easier terms? The troika may view that as throwing good money after bad, but they’ve already done it a fair bit—why get religion now?

Then, too, a state-owned Russian energy behemoth is rumored to be considering a private bailout—buying rights to explore gas deposits off Cyprus’s shores. Makes sense for Russia—they can protect their foreign depositors and solidify a friendship with Cyprus. This half a tiny rock would be valuable for its pleasant weather and favorable tax regime alone—rather like the Eastern Hemisphere’s Cayman Islands—if it weren’t also a toehold in the Mediterranean between uneasy neighbors Turkey and Greece. If you’ve got geographical import, the game changes. And Cyprus doesn’t mind having leverage with Russia—they’ve got a €2.5 billion loan due to Russia in June. Cyprus no doubt would very much like to increase that note with an extended term and favorable rates.

It’s not unreasonable to imagine the troika ultimately views seizing deposits as distasteful, but a growing Russian influence in Cyprus as an even worse option. Cyprus could very well end up with a very long bank holiday indeed as the troika gets creative once more.