The Future for Cyprus, the Mouse that Roared

     You have to at least tip your hat to them, though it's not clear what their next move will be. It wasn't really shocking that the deposit tax bill failed, but it is quite jarring that it didn't get a single vote. On the one hand this is a nice case of democracy in action. However, the banking system is still teetering on collapse. So what's next?

     Of course, the EU continues to urge them to pass the bill.

     "Wolfgang Schaeuble, Germany's finance minister, said he regretted the Cyprus parliament's decision to reject the bank-deposit levy, warning that the country must act quickly to stave off insolvency. He said in a statement that the Eurogroup offer to provide aid to the island nation still stands."

     "The European Central Bank, meanwhile, reaffirmed its commitment to "provide liquidity as needed within the existing rules," it said in a statement."

     http://www.cnbc.com/id/100565902

      One way they could go about it would be to change the distribution of the tax: the rates for yesterday's failed bill was a 9.9% tax on deposits over $100,000-actually it's in euros not dollars but I don't have the symbol for euros on my keyboard-and 6.75% for those under $100,000. The Wall Street Journal had argued-rightly I think-that it should be no tax on those below $100,000 and say a 20% tax on those above. Not only would this be a more progressive way to do it but it would have the advantage of not violating the rule of law-deposit insurance is supposed to cover the first $100,000.  Initially the EU had urged just this:

      "The rates could be different and could protect deposits under 100,000 euros, we are waiting for that and we are ready for that," French Finance Minister Pierre Moscovici told CNBC on Tuesday.

      Some are also arguing that this vote was necessary for lawmakers to make a point to the EU. Ie, like the first TARP it will eventually pass. 

      "This is not the end of the process, but instead kicks off a further round of negotiation with Moscow and Berlin," JPMorgan economist Alex White wrote in a research note. "The Cypriot authorities wanted to conduct the vote so that they could reaffirm the extent of their difficulties to the Europeans." 

       Certainly lawmakers have some tough words for the EU and international lenders:

       "Politicians in Cyprus had some harsh words for international lenders.

       "At this point in time, we are saying that if you think that by doing this you are fixing things, by actually destroying our economy and one of the biggest and strongest financial sectors we had on this island, then we have to say 'no'," Efi Xanthou, international relations secretary of the Cyprus Green Party told CNBC.

        "We do not want to have this island in the throttle of these organizations for the next ten to fifteen years," Xanthou, who also sits on the parliamentary finance committee, said in the Cypriot capital of Nicosia on Tuesday.

         "Efi Xanthou said that whatever decision was made, as soon as the banks opened, there would be a "stampede" of investors rushing to withdraw their money. "No depositor, no matter how big or small their accounts, will feel safe," Xanthou added.

        Another option is Russia where there are reports that more than a loan deal is being sought. 

         Cyprus's finance minister, Michael Sarris, has told CNBC that Russia has been very supportive about the terms of the 2.5 billion euro ($3.2 billion) loan that Cyprus has already received from Russia and that talks were now "looking beyond that," adding to speculation that Russia could come to Cyprus's financial aid.

"We had a very good first meeting, very constructive and very honest discussion. We underscored how difficult the situation is and we will now continue our discussions to find a solution by which we hope we will be getting some support from Russia," Sarris told CNBC in Moscow.

Asked whether this meant an extension to the existing loan, Sarris said: "No, we are looking at things beyond that."

"We don't have any details but we'll continue discussions. We will be here until we get some agreement," Sarris added.

Sarris would not offer any further details as to whether this would include Russian purchases of banking assets in Cyprus, where an estimated 20 percent of all deposits are held by Russian businesses or individuals.

     http://www.cnbc.com/id/100571759

     There is concern, however, that the Russians could drive a hard bargain effectively leaving Cyprus the "slave of Rusia."

       http://www.cnbc.com/id/100571759

       Yves Smith over at Naked Capitalism makes the point-pretty well known-that Cyrus is not in this position due to any fiscal profligacy-debt to GDP ratio is only 70%-nor is it due to "over exuberance" in the Cyprian banking sector but most of all because it's been infected by Greece. 

       http://www.nakedcapitalism.com/2013/03/cyprus-bailout-stupidity-short-sightedness-something-else.html