Cyprus matters

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So as I spoke about on Monday Cyprus is the latest country to receive a EU bailout. It’s been a while coming but Cyprus has been slowing going down the gurgler since joining the euro and the problems of its big sister, Greece , were always going to take out the country in the end.

Trapped in a non-compatible and non-sovereign currency Cyprus, like the other struggling nations of the Eurozone , is set to suffer the wrath of Brussels and the IMF with yet another misguided scheme to “rescue” the country. In reality, however, what this means strong-arming the countries government into forcing massive economic retrenchment on the local populous in order to keep the euro experiment alive.

Overnight the Bank of Spain reminded us of the outcomes of these policies as bad loans in January once again rose to 10.78% from 10.44% in December and the latest house price report from Tinsa shows clearly that private sector wealth destruction continues at pace in Spain.

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Incidentally, the Bank of Italy also reported a rise in bad loans overnight with a rise to 6.4% in January from 5.4% a year earlier.

As we’ve seen throughout the crisis, although the attention tends to be on what caused these problems in the first place, what’s always missing is a credible plan to fix them. As the crisis has worsened and contagion has spread from one nation to another it has slowly become apparent to the citizens of debtor nations that they are the ones who are paying for the architectural failings of the economic system they inherited when they joined the Euro.

What has also become apparent as time has gone on is that the sacrifices expected by the northern creditors, the technocrats in Brussels, and IMF are incompatible with the democratic processes that are still available to the citizens of these nations. Italy is the most recent example that this has now reached its limits, but large protests in Spain and Portugal were pre-cursors to the fact that the end was near. The political capital in both the southern and northern nations of the Eurozone is all but depleted, yet the desperation of the economic policy makers continues.

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Cyprus is the latest battle-ground and the plans are certainly desperate. With a election in Germany this year there is simply no way that Angela Merkel would agree to anything that involved German tax payers or effected the German economy in any way. While cypriots have a portion of their deposits confiscate in the name of financial stability, even though they are supposedly guaranteed under law, holders of sovereign paper will see no haircuts of any kind. Cyprus has a bond redemption on June 3 to the tune of $1.4 billion and at this point it will be paid in full. I’ll leave you to ponder why you think holders of sovereign paper are left untouched while retirees are stripped of their savings.

It’s no wonder that the Portuguese president says Cyprus bank deposit tax opens “very dangerous” path. He’s probably been looking at this chart and fears what’s coming next.

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But there is trouble brewing and Cyprus may well end up as another Italy in this regard. The government has already back-pedalled on the first version of the “deposit tax” and is attempting to re-calibrate the scales to lessen the burden on small depositors. But now it’s not even clear a vote can take place.

Cyprus’s parliament was set to reject a divisive tax on bank deposits in a vote scheduled for Tuesday, a government spokesman said, a move that would push the island closer to a default and banking collapse.

A weekend announcement that Cyprus would break with previous practice and impose a levy on bank accounts as part of a 10 billion euro ($13 billion) EU bailout prompted some turmoil on European financial markets on Monday.

Cypriot and euro zone officials have sought to soften the initially proposed levy of 6.75 percent on depositors of up to 100,000 euros and 9.9 percent above 100,000 to ease the burden on small savers.

But passage of the bill in the 56-member chamber, where no party has a majority, was unlikely and it was not clear if the vote would even go ahead later on Tuesday if leaders were sure it would be rejected.

No vote, no deal, and the spectre of Cyprexit rises again. I expect the ECB to demand action shortly. This may, however, be a delaying tactic as the Cypriot government looks for more support from Russia or seeks an alternative plan such as the one offered by Lee Buchheit and Mitu Gulati in the report below. I recommend you read it in full, it’s got some very good information in it.
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Obviously its all eyes on Cyprus for the rest of the week, but the step across the Rubicon on bank deposits is likely to be felt across the European south.

Walking Back From Cyprus