Last Updated : 20 March 2013 at 13:25 IST
Cyprus is in deep deep trouble.
Its Parliament has rejected the proposal to tax deposits in the banks of Cyprus in exchange for a bail out package worth 10 billion Euros from international lenders that include Germany.
The question is what next for Cyprus.
The lenders have already communicated their stand loud and clear:
“Along with the International Monetary Fund and the European Central Bank, the Germans are sticking to the principle that countries that mismanage their banks and government finances must endure pain as the price of financial help — even if ordinary citizens are the ones who suffer.” a report in New York Times said.
Christine Lagarde, the IMF President said Cyprus would still need to find $7.5 billion to the bank rescue, as promised, though she favoured a change of package so that ordinary depositors are taxed less.
It is crystal clear that the lenders would not soften their stand particularly because it would send out a wrong signal to other nations in the periphery as those nations too would expect lenient terms when it comes to their respective packages.
Cyprus, thus cannot hope for a bailout from Eurozone system.
So what is the alternative before Cyprus?
If Cyprus is not bailed out, it would not be able to service its debt and thus may have to default. To avoid that possibility either Cypriots will have to float a currency of their own thereby exiting the Euro. That would be catastrophic and may prove to be tempting for nations like Greece and who knows, Italy and Spain! But this being an empty-gains-to-drains-scenario would be unthinkable for Germany and other nations.
In short, they cannot bail out Cyprus. But they cannot afford not to bail out. Now, that is a dilemma and a deadlock. Matters complicate as there is no exit route from Euro; no formal mechanism for an exit from Euro.
The stakes being high, Cyprus would possibly approach Russia before they may think of introducing their currency.
“One option would be to ask Russia for much more support than simply improving the terms of its existing loan. Russians account for about a third of all deposits in Cypriot banks, and Russian banks have lent heavily to businesses on the island. But help would come at a price -- possibly a stake in Cyprus' undeveloped offshore gas reserves.” said CNN Money in a report.
But is this what Russia wants?
What if Russia decides not to help Cyprus?
What would Germany and other lenders do in such a scenario?
What if Russia decides not to help Cyprus?
What would Germany and other lenders do in such a scenario?
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