Last Updated : 22 March 2013 at 17:30 IST
The moment Vladimir Putin termed the Cyprus bank deposit levy as unjust, unprofessional and dangerous, it was clear that Cyprus would incur the wrath of Russia. It fell on Michael Sarris, the Finance Minister of Cyprus to travel 2000 plus km to Russia and take it.
“Cyprus's finance minister left Moscow empty-handed on Friday after Russia turned down appeals for aid, leaving the island to strike a bailout deal with the European Union before Tuesday or face the collapse of its financial system.” reported Reuters.
The Finance Minister took the humiliating blow on behalf of Cypriots. Earlier his resolve was to stay as long as a deal is clinched with Russia.
"The talks have ended as far as the Russian side is concerned," Russian Finance Minister Anton Siluanov told reporters after two days of crisis talks...Siluanov said Russian investors were not interested in Cypriot gas and that the talks had ended without result.” the Reuters report added.
Cyprus had a joker up their sleeves and that was natural gas. Russians, by refusing to take the same has made it a joke. Cypriots so far laundered the dirty money of Russians and this is what they got in return.
Meanwhile, the Eurogroup Monday ultimatum holds:
The Governing Council of the European Central Bank had decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013 for Cyprus. Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks in the island nation.
This means Cyprus, now on a ventilator would see the oxygen pipe pipped on Monday, if they are unable to find 5.8 billion Euros. And where would they go? What would they do?
Most probably Cyprus would exit Euro. They would now think of re-starting their mints.
There are reports that Cyprus would actually mandate up to 40% hair cut on deposits above 1,00,000 Euros. This would probably enrage Russia and the consequences would be unpredictable.
In a report in Guardian, Larry Elliot has portrayed what could be in store for Cyprus:
“The moment the ECB pulls the plug, Cyprus's banks will go bust. They have a €17bn cash shortfall, no equity and could raise only perhaps €2bn from forcing bondholders to take a haircut. The banks would shut and deposits would be worthless.” he said.
Stage 2: Cypriot pound is re-introduced as legal tender. But this would cause difficulties as Euro has been prevalent all through the years making pound unavailable, “unless the government has stashed away piles of the old currency when it joined the euro five years ago”. The mints will have to be re-started. But since this would take time, the government would use Euro notes re-denominated as Cypriot pounds through an act of over-printing.
Stage 3: A new exchange rate against Dollar has to be set that would most probably begin at the level that existed before Cyprus entered the single currency. “If the authorities set a fixed exchange rate, the official value of the currency would bear not the slightest resemblance to its black market value.” Elliot noted. “A plunging currency would lead to dearer imports, rising inflation and sharp cuts in living standards.” he added.
Stage 3: A new exchange rate against Dollar has to be set that would most probably begin at the level that existed before Cyprus entered the single currency. “If the authorities set a fixed exchange rate, the official value of the currency would bear not the slightest resemblance to its black market value.” Elliot noted. “A plunging currency would lead to dearer imports, rising inflation and sharp cuts in living standards.” he added.
Euro transactions would come to a grinding halt even as the “Euro – along with other hard currencies such as the dollar – would circulate on the black market.”
But how would contracts agreed in Euros would be honoured? Obviously, “in Cypriot pounds and settled at an exchange rate decided by the government in Nicosia.” Elliot said.
May be things are not as bad as they sound, right?
What would Eurzone do?
If Cyprus exits the Eurozone and start to print its own currency, Eurozone would not be harmed as Cyprus debt is nothing more than 17 billion Euros. Or so you think? There would not be any bank run contagion as Cyprus would be treated as a standalone case. Or so you think?
It all depends on just another factor. The people of Eurozone economies.
While the Cypriot leadership had all the confidence in the world that a levy could be charged on deposits of ordinary citizens, it took no more than a day or two for the picture to undergo a paradigm shift. There were protests, there were heated discussions and debates and the govt proposal was defeated by the people in no time.
Now, this is an act of mob winning over the system: a moment when people find that they are more of Cypriots and less of Europeans.
The Cypriots may starve, but they would not give themselves to Eurozone diktats, or at least that is the mood there as gathered from news reports.
What if this begins to find some resonance in Eurozone nations like Greece, Spain, Portugal? It will not, one may say. It is not that easy, one may say. But less than a week ago we all believed in the solidarity of Eurozone which now lies in tatters.
The game changer would be when some nation in the Eurozone seek a bail out. Such a possibility cannot be ruled out given the sorry state of Eurozone economy. And people would recall Cyprus as a prime example of frozen bank accounts denying services as a consequence of a bail out request . The rest would be history as a pan-Eurozone bank run would follow.
When sovereignty is re-asserted by people as they may do in Greece or other Eurozone nation which has been humiliated; when complex economic affairs spark a bail out request, both can combine to form a lethal cocktail which is poisonous for the entire Eurozone.
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