Cyprus: So what happens next?

The Guardian’s still live-blogging, for now, in the aftermath of Cyprus’ parliament’s rejection of an, albeit amended, EU/IMF cunning plan bail-out which included the public seizure levying of €5.8billion from private depositors in Cypriot banks – 36 votes against, 19 abstentions, none in favour.  The paper’s economics editor, Larry Elliot, answers the title question

…there are really only two plausible scenarios: somebody – be it Europe or the IMF – gives Cyprus more money, in which case there is a chance that the crisis can be contained. Or Germany and the other hardline eurozone countries can insist that the deal is non-negotiable. In which case, the banks in Cyprus will go bust, risking widespread turmoil.

Given the precarious eurozone economy and the enfeebled state of European banks, cutting Cyprus a better deal looks like the safer option. The package could be restructured so that only deposits in excess of €100,000 (£85,000) are taxed, the preferred option of Christine Lagarde at the IMF. Sparing those with savings of less than €100,000 from any pain would require the bigger depositors to pay a 15.5% tax to find the €5.8bn demanded of Cyprus. Alternatively, Europe could easily find the extra €5.8bn itself.

The problem is that both options will cause political problems. Putin will bridle at suggestions that Russian citizens – who make up a large proportion of the €100,000 depositors – should be singled out. And Merkel could expect an almighty domestic backlash if she backtracked from the tough stance she adopted at the weekend.

But the alternative is to let the banks in Cyprus go bust as soon as they are reopened after the extended bank holiday and hope that it really is a “special case”. That looks like an awfully big gamble.

Probably not the best time for Cyprus to be attempting to re-negotiate the terms of a previous €2.5billion loan from Russia…

Of the estimated 68bn euros in total held in Cypriot bank accounts about 40% belongs to foreigners – most of them thought to be Russians.

The government fears a higher levy on these larger deposits would prompt many large investors to withdraw from the island and would effectively destroy its financial sector.

Russia has also said it may reconsider the terms of a 2.5bn-euro loan it made to Cyprus in 2011, which was separate from the proposed eurozone bailout.

Cypriot Finance Minister Michalis Sarris arrived in Moscow on Tuesday to see if the repayment on that loan could be delayed until 2020, and whether the interest rate could be reduced.

Officials said he would also be looking for “further investment” in his country, correspondents report, with some speculating this might mean Russian access to Cyprus’ large undeveloped gas deposits.

Good luck untangling that political trilemma…

Pete Baker