The clock is ticking loudly for Cyprus today, as it inches ever closer to financial meltdown – if a deal for a bailout cannot be reached. Having rejected a deal from the EU which would have made savers in the ailing banks pay a one-off tax to prop them up, the island has turned to Moscow, trying to drum up some financial support from Russia. But now that has come to no avail, too.
It is a dramatic situation for Cyprus, as it is literally in a race against time to secure the money. If MPs have not secured a deal by Monday, the Emergency Liquidity Fund (provided by the IMF and EU) will be cut off and Cyprus’ entire financial sector could collapse altogether. This is a particularly dangerous prospect because Cyprus financial sector is more than eight times the size of the country’s real economy.
What started out as a kind of 'rehearsal' for the EU, dealing with Cyprus as a dry run for what might have to happen in Spain or Italy, has descended into an ill-disciplined scrabble.
The governor of the Central Bank of Cyprus, Panicos Demetriades has flagged up the possibility of winding up the second largest lender, Laiki, and break it into a ‘good’ part and a ‘bad’ part, cramming the biggest savers into the latter and forcing them to take losses as part of the restructuring. He did not specify what kind of levy they would have to take, but simply said: ‘The banking system needs restricting otherwise it will go bankrupt and it needs to be done immediately.’
Unfortunately, we don’t reckon Demetriades’ ‘get up and go’ attitude is going to wash with Russia, where there are lots of rich people who like the, ahem, ‘flexible’ tax environment on the Mediterranean island. But whatever happens, it’s looking like somebody, somewhere is going to be shafted.
So, between now and Monday, the Cypriot parliament has to debate a 61-page bill containing provisions for restructuring the financial sector, and until then, no-one is allowed to get more than around €260 in individual cash withdrawals. And the queues are long…
Watch this space.