Tag Archives: christofias

United States

Why Menendez is such an awful Senate Foreign Relations Committee chair

4 Comments

bobmenendez

Was Jesse Helms a better chair of the Senate Foreign Relations Committee than Bob Menendez?  USflag

Menendez, who took over the committee earlier this year when former senator John Kerry was appointed as US secretary of state, is making headlines this week for a bill that would largely derail a still delicate US-Iranian rapprochement.  He introduced a Senate bill yesterday that, if enacted, would mark a serious setback in the nuclear negotiations between the United States (and the other members of the ‘P5 + 1’ team that includes the five permanent members of the United Nations Security Council, plus Germany) and Iran.  The bill would institute a new round of punitive economic sanctions on Iran on the heels of a six-month deal between negotiators and the administration of Iran’s new moderate president Hassan Rowhani that all parties hope could lead to a more permanent accord.  On Thursday, ten Democratic committee chairs sent a letter to Senate majority leader Harry Reid in opposition to Menendez’s bill, and the White House has warned Menendez that his legislative efforts aren’t helping negotiations.

Though Menendez’s bill, co-sponsored with Republican senator Mark Kirk of Illinois, is called the ‘Nuclear Weapon Free Iran Act,’ there’s no firm evidence that Iran even wants to build a nuclear weapon, though plenty of US policymakers suspect that Iran has secret designs on building one.  Rowhani and his foreign minister Javad Zarif have disclaimed interest in nuclear weapons, and Iran’s supreme leader Ali Khamenei has argued that nuclear weapons are a violation of Islamic law.

The bill would introduce new sanctions if Iran violates the terms of the current agreement or fails to come to a permanent agreement with the ‘P5 + 1’ team.  In essence, it would put an economic sanctions gun to Iran’s head — the bill demonstrates no respect for a process of negotiation between two sovereign states.  It seems more designed to score low-hanging political points for conservative Democrats than to engage seriously on finding a mutually acceptable path for Iran’s energy program that also makes the Middle East more stable.  Menendez, a longtime ally of the American Israel Public Affairs Committee (AIPAC), is siding with Israeli prime minister Benjamin Netanyahu, who has attempted to derail the Iran deal at every turn.

As James Traub wrote in Foreign Policy earlier this week:

 The reason why Menendez and others really are marching on a path to war is that they are demanding an outcome which Iran manifestly will not accept: zero enrichment. As Daryl Kimball, director of the Arms Control Association, puts it, “This is a strategy based upon hope that is not supported by the evidence of Iranian actions over the past decade, its past statements, or common sense.”….

I have no idea why Menendez and other Democrats believe that more pressure will make Iran abandon a core tenet of the revolution and thus undermine their claim to rule. (I asked for an interview, but the New Jersey senator was not available.) Maybe they believe it because [Netanyahu] has made zero enrichment his own bottom line.

So who is Menendez, and how did he rise to become the preeminent foreign policy official in the legislative branch of US government?

Menendez is the son of Cuban immigrants who came to the United States in 1953 for economic opportunity (not, as you might believe, to flee Fidel Castro, who was in 1953 still six years away from overthrowing the US-supported dictatorship of Fulgencio Batista).  Menendez spent his childhood in New Jersey and rose to political prominence in the Democratic machine politics of Union City, which was once known as ’10 Percent City,’ and not because its residents were tithing Christians.  Initially a protégé of Union City mayor and New Jersey political powerbroker William Musto, Menendez broke with his mentor only after Musto’s indictment for skimming.  Though Musto was ultimately convicted and served five years in prison, he still managed to defeat Menendez when the future senator challenged him for the mayorship in 1982.  But Menendez eventually won the office in 1986, then became a member of the New Jersey State Assembly, the New Jersey State Senate and in 1993, a member of the US House of Representatives.

For nearly as long as he’s chaired the Senate Foreign Relations Committee, Menendez has been under investigation by a Florida grand jury in connection with potential misconduct with respect to one of Menendez’s top donors, Salomen Melgen, a Miami eye surgeon who moved to Florida from the Dominican Republic in 1980.  Though the nastiest rumors about Melgen and Menendez cavorting with underage prostitutes were probably false, Menendez admitted to violating Senate ethics rules when he forgot to reimburse Melgen for two private jet flights to the Dominican Republic in 2010.  Other accusations are less salacious but potentially illegal — Menendez is accused of intervening on Melgen’s behalf in respect of a billing dispute between Melgen and the federal government’s Medicare offices and in favor of a port security contract in the Dominican Republic that would have benefitted Melgen financially.  

The grand jury hasn’t issued any charges against Menendez, and prosecutors may ultimately choose to drop the matter, but it’s not best practices for the Senate’s top foreign policy voice to be implicated in an abuse of power scandal that involves, in part, international contracts.

The Iran bill follows Menendez’s push earlier this autumn to goad US president Barack Obama into a more hawkish position on Syria that would have seen US military attack on Bashar al-Assad.  Menendez actually made the following analogy in his push to win support for an attack earlier this year: Continue reading Why Menendez is such an awful Senate Foreign Relations Committee chair →

Bulgaria, Cyprus, European Union, France, Germany, Greece, Italy, Spain, United Kingdom

What Iceland’s election tells us about post-crisis European politics

Leave a comment

dusseldorf

Iceland was supposed to be different.Iceland Flag IconEuropean_Union

In allowing its banks to fail, neo-Keynesian economists have argued, Iceland avoided the fate of Ireland, which nationalized its banks and now faces a future with a very large public debt.  By devaluing its currency, the krónur, Iceland avoided the fate of countries like Estonia and others in southern Europe trapped in the eurozone and a one-size-fits all monetary policy, allowing for a rapid return to economic growth and rapidly falling unemployment.  Neoclassical economists counter that Iceland’s currency controls mean that it’s still essentially shut out from foreign investment, and the accompanying inflation has eroded many of the gains of Iceland’s return to GDP growth and, besides, Iceland’s households are still struggling under mortgage and other debt instruments that are linked to inflation or denominated in foreign currencies.

But Iceland’s weekend parliamentary election shows that both schools of economic thought are right.

Elections are rarely won on the slogan, ‘it could have been worse.’ Just ask U.S. president Barack Obama, whose efforts to implement $800 billion in stimulus programs in his first term in office went barely mentioned in his 2012 reelection campaign.

Iceland, as it turns out, is hardly so different at all — and it’s now virtually a case study in an electoral pattern that’s become increasingly pronounced in Europe that began when the 2008 global financial crisis took hold, through the 2010 sovereign debt crisis in the eurozone and through the current European-wide recession that’s seen unemployment rise to the sharpest levels in decades.

Call it the European three-step.

In the first step, a center-right government, like the one led by Sjálfstæðisflokkurinn (Independence Party) in Iceland in 2008, took the blame for the initial crisis.

In the second step, a center-left government, like the one led by Jóhanna Sigurðardóttir and the Samfylkingin (Social Democratic Alliance) in Iceland, replaced it, only to find that it would be forced to implement harsh austerity measures, including budget cuts, tax increases and, in Iceland’s case, even more extreme measures, such as currency controls and inflation-inducing devaluations.  That leads to further voter disenchantment, now with the center-left.

The third step is the return of the initial center-right party (or parties) to power, as the Independence Party and their traditional allies, the Framsóknarflokkurinn (Progressive Party) will do following Iceland’s latest election, at the expense of the more newly discredited center-left.  In addition, with both the mainstream center-left and center-right now associated with economic pain, there’s increasing support for new parties, some of them merely protest vehicles and others sometimes more radical, on both the left and the right.  In Iceland, that means that two new parties, Björt framtíð (Bright Future) and the Píratar (Pirate Party of Iceland) will now hold one-seventh of the seats in Iceland’s Alþingi.

This is essentially what happened last year in Greece, too.  Greece Flag IconIn the first step, Kostas Karamanlis and the center-right New Democracy (Νέα Δημοκρατία) initially took the blame for the initial financial crisis.  In the second step, George Papandreou and the center-left PASOK (Panhellenic Socialist Movement – Πανελλήνιο Σοσιαλιστικό Κίνημα) overwhelming won the October 2009 elections, only to find itself forced to accept a bailout deal with the European Commission, the European Central Bank and the International Monetary Fund.  In the third step, after two grueling rounds of election, Antonis Samaras and New Democracy returned to power in June 2012.

By that time, however, PASOK was so compromised that it was essentially forced into a minor subsidiary role supporting Samaras’s center-right, pro-bailout government.  A more radical leftist force, SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς), led by the young, charismatic Alexis Tsipras, now vies for the lead routinely in polls, and on the far right, the noxious neo-nazi Golden Dawn (Χρυσή Αυγή) now attracts a small, but significant enough portion of the Greek electorate to put it in third place.

The process seems well under way in other countries, too.  In France, for examFrance Flag Iconple, center-right president Nicolas Sarkozy lost reelection in May 2012 amid great hopes for the incoming Parti socialiste (PS, Socialist Party) administration of François Hollande, but his popularity is sinking to ever lower levels as France trudges through its own austerity, and polls show Sarkozy would now lead Hollande if another presidential election were held today.

It’s not just right-left-right, though. The European three-step comes in a different flavor, too: left-right-left, and you can spot the trend in country after country across Europe — richer and poorer, western and eastern, northern and southern. Continue reading What Iceland’s election tells us about post-crisis European politics →

Cyprus, European Union

What comes next for Cyprus and the EU following Friday’s haircut ‘bail-in’?

2 Comments

cyprus

nicenic

So much for ‘nice Nic’ — it’s not that he’s reverted back to ‘nasty Nic’ so much as ‘nonessential Nic.’European_Unioncyprus_world_flag

Fifteen days after his inauguration as Cyprus’s new president, Nicos Anastasiades (pictured above, bottom), was forced into what’s now become a growing domestic, eurozone and international crisis when European Union and International Monetary Fund leaders presented Anastasiades with a €10 billion bailout package.

The catch, of which you’re almost certainly aware at this point, is that an additional €5.8 billion of savings will come in the form of a one-time levy on all bank accounts in Cyprus — deposits of  €100,000 will pay a 9.9% levy and deposits of under €100,000 will pay a 6.75% levy, even those deposits are insured by a system similar to the FDIC guarantee in the United States.  Senior bondholders won’t take a haircut.

So if you’re a hedge fund, for now at least, you’ll receive fully 100% of the face value of any debt you hold in Cypriot banks.  If you’re, say, a widowed Cypriot pensioner with €30,000 saved in a Cypriot bank, you’ll wake up Tuesday morning to find that you now have just €27,975.

It’s impossible to overstate just how politically explosive the plan was — in one fell swoop, Europe’s leaders have single-handedly done all of the following:

  • undermined the Cypriot presidential administration just days after it was elected with the support of those same European leaders and a promise by Anastasiades that any bailout would not include deposit haircuts;
  • provided ammunition to every euroskeptic in Europe from Beppe Grillo in Italy to Nigel Farage in the United Kingdom by reinforcing the notion that European institutions suffer from a lack of democratic legitimacy and gratuitously trample national sovereignty;
  • pulled the rug out from under the financial industry in Cyprus, essentially the only growing sector in the Cypriot economy;
  • handed to Cyprus’s parliament — where Anastasiades’s center-right Democratic Rally (DISY, Δημοκρατικός Συναγερμός or Dimokratikós Sinayermós), controls just 20 out of 56 seats — a strong reason to vote against the deal, thereby exacerbating the uncertainty throughout the week;
  • undermined the concept of deposit insurance throughout the entire eurozone;
  • by Europeanizing — or even internationalizing — what should have been a small matter in a country with a GDP ten times smaller than Greece’s, potentially initiated bank runs in Italy, Spain, and who knows where else throughout Europe;
  • needlessly antagonized Russia in the process, and may have provoked Russia into making a politically explosive counter-offer to Cyprus; and
  • probably did nothing to help Cyprus’s long-term economic outlook, because if the levy weren’t enough to depress Cypriot growth and undermine its banking industry, further austerity designed to reduce Cyprus’s public debt is certain to send Cyprus’s GDP swooning for some time to come.

That’s right — the first major decision of the Eurogroup of eurozone finance ministers since choosing as its president Jeroen Dijsselbloem, a center-left finance minister newly elected in the Netherlands just last autumn, is to demand an increase in the Cypriot corporate tax rate from 10% to 12.5% and a further increase on Cyprus’s savings tax.

That’s in addition to the deposit haircut that everyone’s mostly focused upon.

Anastasiades seems to have had very little option but to accept the deal, despite the fact that European leaders, including German chancellor Angela Merkel, actively supported his presidential bid in last month’s election:

[Anastasiades] spoke on Saturday of a ready-made decision imposed on Nicosia in the form of a blackmail: Take it or have the eurozone crumble….

In a written statement he issued on Saturday afternoon, Anastasiades said “Cyprus came across a previously made decision, a fait accompli.” In his defense he said that the emergency situation “did not arise in the last 15 days that we have undertaken the country’s administration.”

In the February 24 presidential runoff, Anastasiades won a landslide victory, with 57.48% of the vote to just 42.52% for health minister Stavros Malas, the candidate of the socialist Progressive Party of Working People (AKEL, Aνορθωτικό Κόμμα Εργαζόμενου Λαού or Anorthotikó Kómma Ergazómenou Laoú).  

Anastasiades, in an address to the nation Sunday night, meekly argued that depositors would nonetheless receive bank shares in return for the one-time assessment and remained optimistic that recently discovered natural gas deposits in Cyprus might well boost Cyprus’s banks in the near future.

ATM Cyprus

The political fallout for Cyprus 

To the extent domestic politics is to blame for the current Cypriot crisis, AKEL is far from blameless — it’s unclear whether Cypriots will fault Anastasiades less than half a month into his administration more than his predecessor, Demetris Christofias, the country’s president from 2008 until last month.

Christofias and European leaders opened talks in June 2012 to secure a bailout, and Christofias even began to implement some small reforms, including a 5% VAT on food and drugs and an increase in the bank levy and tobacco taxes, but fell far short of European demands to reform public employment, the public pension system, and privatization of state-run industries in a country where unemployment has now risen to 14.7%.

In addition, the bailout talks were particular complex for other factors, including the outsized amount of the Cypriot banking sector’s debt, tied in large part to the Greek debt crisis.  In addition, many Russian oligarchs have deposited money in Cyprus’s banks, and Cyprus has been scolded in the past for the facilitation of money laundering from less-than-pristine Russian sources.

With Merkel up for reelection in September, it would have hardly been palatable for her to push through a German-funded bailout of dodgy Russian depositors, which was apparent enough in the latest round:

Merkel’s Finance Minister Wolfgang Schäuble had gone to Brussels with a firm mandate from Berlin: “no bail-in, no bailout”, said a member of her government. That meant: unless depositors took a hit, there would be no agreement and Germany would not contribute towards a package for Cyprus.

So talks never quite progressed, and with Cyprus facing imminent sovereign default, Anastasiades came rather easily to office with a plan to renew those talks, though he repeatedly refused to accept a deposit haircut of the kind now being implemented.

Although today was a bank holiday in Cyprus, banks were initially set to close on Tuesday, but will now be closed until Thursday as well, as the Cypriot parliament has repeatedly delayed taking up debate on the Cypriot package.

Anastasiades’s DISY, as noted above, controls just 20 out of 56 elected seats in the Cypriot House of Representatives (Βουλή των Αντιπροσώπων) and AKEL controls 19.  The centrist Democratic Party (DIKO, Δημοκρατικό Κόμμα or Dimokratikó Kómma), which backed Anastasiades in the presidential race, controls another nine seats.  Three additional parties that largely supported the center-left, independent Giorgos Lillikas in the presidential election control an addition eight seats, including five by the Movement for Social Democracy (EDEK, Κίνημα Σοσιαλδημοκρατών or Kinima Sosialdimokraton).

That means that if AKEL, EDEK and other small parties oppose the deal, DISY and DIKO hold just of 29 votes, just enough to pass the Cypriot package without any defections.

Moreover, DIKO’s leader has already called for changes to the bailout legislation, and it looks increasingly like Anastasiades lacks the support to win a vote in parliament, which means that European leaders will have to renegotiate the previous deal.  It’s not clear how much time Cyprus has before its banks (or its government) become insolvent.

Cold War redux?

Meanwhile, Russian president Vladimir Putin denounced the decision as ‘unfair, unprofessional and dangerous.’

Russia hasn’t indicated whether it will extend or otherwise change the terms of an existing €2.5 billion loan to Cyprus — if Russia refuses to extend the loan for another five years, the Cypriot bailout will need to be even larger.  So there’s that.

I wouldn’t be surprised if Anastasiades and members of the Russian government are discussing an alternative to the current European-IMF plan — the Republic of Cyprus, which occupies the southern half of the island of Cyprus, is not a member of the North Atlantic Treaty Organization, and a €17 billion bailout would be a small price for Russia to pay in exchange for closer military ties or a Russian naval base on the island.

Perhaps even more tantalizing for Russia, and its state-owned natural gas company Gazprom, are newly discovered natural gas deposits that Cyprus hopes will fuel future economic growth.  Indeed, there are already vague reports of a Russian counteroffer — the official Russian news agency seems to indicate that emergency talks have now been initiated:

Russia’s Gazprom has not offered the Republic of Cyprus financial assistance in restructuring the country’s banks in exchange for the right to gas production in the exclusive economic zone of Cyprus. Gazprombank initiated this offer, a spokesman for the gas giant told Tass.

That result would cause dismay among the United States and its European and NATO allies which, by the way, includes Turkey.  Turkey has occupied the northern half of the island of Cyprus since the 1970s — the Turkish Republic of Northern Cyprus declared its independence from the Greek Cypriot republic to the south in 1983, and the two have remained divided ever since.  So what’s an economic crisis and a domestic political crisis could also become a geopolitical security crisis soon enough.

The economic and political fallout for the eurozone

Reaction from economic commentators has been essentially universally negative since news broke early last weekend. Continue reading What comes next for Cyprus and the EU following Friday’s haircut ‘bail-in’? →

Cyprus

Cyprus votes for ‘Nice Nic’ as Anastasiades sweeps to victory pledging bailout talks

3 Comments

nikos

Cypriot voters have selected a new president in today’s runoff, finishing the business they started last weekend in the first round of the presidential election.cyprus_world_flag

Nicos Anastasiades, the candidate of the center-right Democratic Rally (DISY, Δημοκρατικός Συναγερμός or Dimokratikós Sinayermós) has won 57.48% of the vote to just 42.52% for health minister Stavros Malas, the candidate of the governing, leftist Progressive Party of Working People (AKEL, Aνορθωτικό Κόμμα Εργαζόμενου Λαού or Anorthotikó Kómma Ergazómenou Laoú), which will likely jumpstart talks between Cyprus and the European Union over a potential bailout.

Anastasiades nearly won the election outright last Sunday, when he garnered 45.46%, with just 26.91% for Malas and 24.93% for the independent, center-left anti-austerity Giorgos Lillikas.

Once derided as ‘nasty Nic’ for his hot-tempered manner — he is alleged to have once hurled an ashtray at an associate — he’s been all ‘nice Nic’ throughout the campaign.  The leader of DISY since 1997, Anastasiades was on the wrong side of a 2004 referendum when he supported the ‘Annan Plan’ to reunite the Greek and Turkish sides of the island; a majority of his own party and 76% of the Greek Cypriot electorate opposed the plan.  His election today, however, marks a triumphant personal comeback.

So what does Anastasiades’s victory mean?

First and foremost, Cyprus has chosen a new president who is much keener on securing a €17 billion Cypriot bailout for a government whose finances are on the brink of default, ironically, perhaps, due in part to the stage-managed default of Greek sovereign debt, which has had a disproportionately adverse effect on Nicosia (though the potential Cypriot bailout would dwarf the €245.6 billion Greek bailout).  Continue reading Cyprus votes for ‘Nice Nic’ as Anastasiades sweeps to victory pledging bailout talks →

Armenia, Cyprus, Ecuador

Two days, three presidential elections: Cyprus, Ecuador and Armenia

Leave a comment

Sunday kicks off the first of two days of presidential elections in three very different regions of the world.

Unlike throughout, say, much of parliamentary-based Europe, each of the presidents elected in the next 48 hours will wield significant power, as each functions both as a head of state and as a head of government.cyprus_world_flagecuador flag icon newarmenia flag

Cyprus

The most contested of the three elections is in Cyprus, where Demetris Christofias is leaving office after a four-year term and where the European Union is set to push hard for bailout (or default) terms shortly following election season after previous talks have failed, due to Christofias’s refusal to privatize much of Cyprus’s public economy.  The frontrunner to win Sunday’s vote is Nicos Anastasiades, candidate of the center-right Democratic Rally (DISY, Δημοκρατικός Συναγερμός or Dimokratikós Sinayermós), and many European leaders seem keen on his election, which would certainly accelerate reform and austerity in Cyprus.

But his lead comes in large part from a split among leftist voters, who are supporting both Stavros Malas, minister of health, the candidate of the governing Progressive Party of Working People (AKEL, Aνορθωτικό Κόμμα Εργαζόμενου Λαού or Anorthotikó Kómma Ergazómenou Laoú) and Giorgos Lillikas, another center-left candidate and former foreign minister.

Although Anastasiades will likely win the first round, he’s not likely to win the 50% support necessary to avoid a runoff, which will be held, if necessary, a week later on February 24 when either Malas or Lillikas would have a clear-cut shot at defeating Anastasiades.

A failure to contain the Cypriot financial contagion, which brings with it the politically unpopular move of bailing out Russian oligarchs who have funded and deposited money into Cyprus’s banks, could exacerbate the still-tenuous Greek bailout or even jumpstart anew the eurozone sovereign debt crisis, so the outcome is more important to Europe than you might expect for an island nation of 1.2 million.

Ecuador

Less suspenseful is the presidential election in South America, where incumbent Rafael Correa is a prohibitive favorite to a third term by one of the largest margins in recent Ecuadorian political history — and certainly since the end of military rule in 1979.

Correa, whose governing Movimiento Patria Altiva i Soberana or Alianza PAIS (Proud and Sovereign Fatherland, or ‘PAIS’) is also looking to retain control of the 137-seat, unicameral Asamblea Nacional (National Assembly), has benefitted from an oil-backed economic boom, the proceeds of which he’s spent on massive infrastructural improvements, especially roads, as well as for direct cash grants that have helped cut Ecuador’s poverty rate from around 67% to between 25% and 30%.  In the tradition of the populist Latin American left, Correa defaulted on the country’s government bonds in 2008 and picked diplomatic fights with the United States.  Critics charge that his administration has become increasingly authoritarian, and his government has made the climate for Ecuador’s media somewhat less free.

His opposition includes Álvaro Noboa, banana magnate and one of Ecuador’s wealthiest businessmen; Guillermo Lasso, a former head of the Banco de Guayaquil; Lucio Gutiérrez, a former president who left office in 2005 after massive protests; and Alberto Acosta, Correa’s former oil and mining minister and co-founder of the Alianza PAIS.

None of those opponents has broken through, however, and Correa holds a lead well above 50% in most polls, meaning that he’s likely to win reelection without resorting to an April 7 runoff.

Armenia

Finally, in the South Caucasus, Armenian president Serzh Sargsyan (Սերժ Սարգսյան) is seeking reelection after taking office in 2008.

Despite a high-profile assassination attempt against opponent Paruyr Hayrikyan (Պարոյր Հայրիկեան) two weeks ago, Sargsyan is almost certain to win reelection — he faces only minor opposition, given that former president Levon Ter-Petrosyan (Լևոն Տեր-Պետրոսյան) ruled out a presidential bid, as did wealthy oligarch Gagik Tsarukian (Գագիկ Ծառուկյան), the leader of the largest Armenian opposition party, Prosperous Armenia (BHK, Բարգավաճ Հայաստան Կուսակցություն).

Sargsyan’s party, the Republican Party of Armenia (HHK, Հայաստանի Հանրապետական Կուսակցություն), currently holds control of the Armenian National Assembly after last year’s May parliamentary elections, and has held power since the election of Sargsyan’s predecessor and benefactor, Robert Kocharyan (Ռոբերտ Քոչարյան) in 1998.

After the election, Armenia’s president will face an economy that’s still recovering from recession and slow growth, balancing good relations with both Europe and the United States, on one hand, and Russia, on the other hand, the 100th anniversary of the Armenian genocide and dicey diplomatic relations with Turkey, and three decades of ongoing hostility with neighboring Azerbaijan, largely due to the unsettled status of the breakaway region of disputed region of Nagorno-Karabakh, over which Azerbaijan and Armenia went to war from 1988 to 1994.

Cyprus, European Union, Greece

Europe concedes Cyprus default less than a month before presidential election

6 Comments

bankofcyprus

Felix Salmon has a tantalizing tidbit about Olli Rehn, European commissioner for economic and monetary affairs, apparently conceding that a Cypriot default is now virtually inevitable, less than a month before the Cypriot presidential election:European_UnionGreece Flag Iconcyprus_world_flag

EU economics commissioner Olli Rehn went on the record telling him that Cyprus is going to have to restructure its debt — just two weeks after ruling such a thing out.

That might come as little surprise, given that Cypriot banks were loaded up to the gills with Greek debt, and Greek debt suffered a 70% haircut. Cyprus is tiny, and could never afford the €17 billion needed to bail out the banks and the government — especially since that would bring the country’s debt load up to more than 140% of GDP.

Salmon cites a report from The Wall Street Journal‘s Stephen Fidler reporting from Davos.

The Republic of Cyprus, with just over 800,000 people, is the third-smallest member of the eurozone (after Malta and Luxembourg), and it’s a relative newcomer to the single currency, having replaced the Cypriot pound for the euro only in January 2008, although the Turkish-controlled northern part of the island still uses the Turkish lira.

The country accounts for just 0.2% of the eurozone economy, though its GDP per capita is a relatively wealthy $29,000, and it’s been in negotiations for a bailout for some time now.  That hasn’t yet been successful, in part because of the unique legal, political and financial complexity of the negotiations.

Rehn’s statement, if true, is essentially a declaration that time has run out — Moody’s downgraded Cypriot debt in July 2011 to junk status.

Nonetheless, a €17 billion bailout would be dwarfed by the Greek bailout (€245.6 billion), the Spanish bailout in July 2012 to provide liquidity to Bankia (€41 billion), and even the bailout provided by the ‘troika’ of the European Commission, the European Central Bank and the International Monetary Fund of Romania that began in 2009 (around €20 billion).

In many ways, a Cypriot default will be a key test for the European Union, given that it would be the first default since the treaty establishing the European Stability Mechanism formally came into effect at the end of September 2012.

Unlike in Greece, where much of its debt is governed by Greek law, much of Cypriot debt is governed under various international law, which will make it a messier restructuring.

Keep in mind, also, that the island of Cyprus remains split between the Republic of Cyprus (largely populated by Greek Cypriots) and the Turkish-occupied northern half of the island, the Turkish Republic of Northern Cyprus (largely populated by Turkish Cypriots).  The island has been divided since a 1974 coup, Greece’s attempt to annex the entire island, and Turkey’s subsequent invasion, and the formal declaration of Northern Cyprus’s independence in 1983.

Add to that the fact that Cyprus is seen as a hub for worldwide money laundering, especially with respect to illicit funds from Russia, despite the protestations of Panicos Demetriades, president of the Central Bank of Cyprus, earlier this week.

That means bailout proceeds could go directly into the pockets of some of Russia’s wealthiest oligarchs, a position that’s unlikely to go down well politically throughout the rest of the eurozone, especially as Germany gears up for federal elections later this year — German officials have even demanded that Russia contribute to any Cypriot bailout.

Meanwhile, Cyprus will go to the polls in less than a month to replace Demetris Christofias, the country’s left-wing president since 2008.  Unlike in many European countries with parliamentary systems, Cyprus’s president is both head of state and head of government.

With a default (orderly or otherwise) on the horizon, Cyprus now faces a presidential election on February 17 — with a runoff, if necessary, a week later on February 24 — in the midst of a financial crisis and perhaps in the midst of bank runs.

Christofias, who has presided over economic turmoil and an unemployment rate that’s now at 14%, has so far refused to engage in massive privatizations of state-run industries as a condition for a potential bailout.

Add all of those factors together — the size of the Cypriot banking sector’s debt, the legal complexity of the debt, the Russian laundering issue, the complexity of the Turkish political reality with Northern Cyprus, and the leftism of the Christofias administration — and you start to understand why Cyprus is now allegedly headed to a default.

Continue reading Europe concedes Cyprus default less than a month before presidential election →