This was not surprising.
After a couple of delays, Cyprus’s 56-member House of Representatives (Βουλή των Αντιπροσώπων) has rejected the European Union-led bailout of Cyprus’s banks by a vote of 0 to 36, with 19 abstaining and one not present.
As I wrote yesterday, the parliamentary rejection became increasingly likely as the vote became delayed.
So where do things stand now?
The crisis continues to unfold in real time — although the bailout terms ( €10 billion loan to Cyprus, with an additional €5.8 billion to be raised by means of a haircut on all Cypriot depositors) were announced Friday night, Cypriot banks are now closed through at least Thursday while everyone scrambles for a Plan B.
The European Central Bank has, for now, agreed to continue ‘its commitment to provide liquidity as needed within the existing rules,’ but who know what that means? The current crisis started over the weekend when the ECB threatened to pull that support.
Obviously, EU leaders and the International Monetary Fund will probably go back to the negotiating table with newly inaugurated Cypriot president Nicos Anastasiades to determine a new approach — the EU position now seems to be that they don’t care how Cyprus raises the €5.8 billion, so long as they raise it. Essentially, that means some kind of rebalancing of the burden to be shared by depositors in Cyprus — that means perhaps raising the 9.9% levy on deposits over €100,000 and lowering the 6.75% levy on deposits under €100,000.
Meanwhile, there’s word that Cyprus and Russia are now in talks over, potentially, either a solution that involves Russia or Gazprom — Cypriot finance minister Michael Sarris actually flew to Moscow Tuesday, which indicates that the Cypriots and the Russians are extremely serious.
In this regard, today’s vote probably bought some crucial time to come up with a credible counter-offer from Moscow. Russian president Vladimir Putin is, in particular, upset about the approach because around 22% of deposits in Cypriot banks are held by Russian citizens. That, in fact, is one of the reasons why the EU was so wary of providing a full bailout to Cyprus over the weekend. Russia has designs on future exploration of natural gas deposits in Cyprus, and it could also well have designs on a greater military presence in Cyprus as well. All of this has profound geopolitical security implications — for the EU and Greek Cypriots, but also for Turkish Cypriots, the United States, and its NATO allies, including Turkey.
Whether Anastasiades is serious or not about the Russian alternative, it certainly gives him more negotiation leverage with the EU and the IMF, which could conceivably revert back to a full €17 billion bailout, via the ‘troika’ or through the European Stability Mechanism, as Open Europe notes in a great post.
We’re also in such uncharted territory that if ‘EU Plan B’ or ‘Russia Plan B’ don’t work, then Plan C is pretty much a disorderly default that finds Cyprus tumbling out of the eurozone, with even greater pain for Cypriot savers, Russians depositors, and all of the holders of private and public Cypriot debt, to say nothing of the costs to the eurozone — now that EU minds from Brussels to Berlin to Helsinki have escalated the bailout into an international crisis, it could catalyze an entirely self-inflicted domino effect that would pretty rapidly bring the eurozone to 2008-crisis levels.
So let’s hope we don’t get to that, though with the United Kingdom airlifting €1 million in cash to Cyprus to cover military personnel unable to access their own funds and with Russian ultranationalist Vladimir Zhirinovsky mock-eulogizing private property in the EU, the Cypriot situation has already reached a pretty high crisis mode.
One question that I haven’t heard asked in the past 72 hours, and one I wish I had an answer: why hasn’t Moscow been involved in the Cypriot bailout talks from last June onward? It’s clear that there’s a Russian interest in an orderly bailout (or even selective default) for Cyprus and its debt-bloated banks.
Russia has already extended a €2.5 billion loan to Cyprus, and Cyprus and the EU are dependent on Russia’s rolling over than loan soon if the current EU-led bailout to have any chance of working.
Are the channels of communication between Brussels and Moscow really so poor?
All of this was predictable nine months ago.
Even if the EU ultimately blinks, it’s already done a lot of damage that it can’t well undo — it’s still the case that the EU has undermined Anastasiades just days into his administration, pretty much destroyed the short-term future of the Cypriot finance sector, undermined the concept of deposit insurance throughout the eurozone, given every euroskeptic on the continent a prime example of the anti-democratic nature of the EU project.
Above all, the Cypriot crisis has undermined global confidence in EU leaders at a time when most everyone was certain that the worst of the eurozone crisis was behind us.
The good news? No word of significant bank runs in Italy or Spain, though I’d love to see how much capital quietly leaves those two countries electronically in the two weeks following March 15.
Photo credit to Yorgos Karahalis of Reuters.