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What Does A 'No' Vote Mean For Cyprus And The Eurozone?

Tyler Durden's picture




 

Originally posted at Open Europe,

All at sea – what does the 'No' vote mean for Cyprus and the eurozone?

19 Mar 2013

The Cypriot parliament tonight voted against a bill to introduce a tax on bank deposits, in return for a €10bn bailout offered to the country by Germany and other eurozone governments. Not a single Cypriot MP voted for the deal. The structure of the tax in the bill is shown in the table below. The vote leaves Cyprus’ place in the eurozone hanging in the balance and threatens the escalation of the crisis to a new level, though the most likely outcome is that the Cypriot parliament votes a second time, on a revised deal.   


Results of the vote
   

The governing party (DISY) abstained (with one member absent), while the junior coalition partner (DIKO) voted against – this signifies the huge political divisions at work in Cyprus. Even if a bailout deal is eventually approved the government’s position continues to look untenable.  

What does the vote against the deposit levy mean?

As we have noted before, this has the potential to be a very serious twist in the eurozone crisis. Previously, Germany and the eurozone have stressed that Cyprus has no alternatives to the deposit levy. Now, all eurozone partners are forced back into difficult negotiations.  

What timeline are Cyprus and the eurozone working on?

Cyprus will run out of cash on 3 June, when it has to repay a €1.4bn international bond. However, the decision will need to be taken long before that. Cypriot banks cannot stay closed for long but they cannot be reopened until a decision is taken, otherwise there will almost certainly be a deposit run.  While people can reportedly withdraw up to €700 per day from ATMs, businesses, large and small, cannot function without banks being open. We would expect some decision would need to be taken by early next week before the lack of liquidity and lack of economic activity begins to severely harm the Cypriot economy.  

What are the possible outcomes?

Both sides have some serious decisions to make. Below we outline the potential scenarios (as highlighted here):  

1. Cyprus votes again and approves a revised tax: The governing party pushed for the vote to be delayed and hence abstained. This may be seen as delegitimising the result, not least because they hold 36% of the seats in the Cypriot parliament. The deal could see a few small tweaks along with some additional cash (either from the eurozone or Russia – see below), which would then be put to another vote in parliament – after all, being asked to vote twice is a common practice in the EU. But such a decision and vote must come quickly. In addition to running out of government cash, banks would have to remain closed during the interim period, meaning businesses and the wider economy could not practically function. The vote would therefore have to take place by the start of next week to avoid another escalation of the crisis. In our view, this remains the most likely option (possibly in combination with part of option 2).  

2. The eurozone blinks: With the possibility of a country exiting the eurozone becoming very real and the “irreversibility” of the single currency coming under direct threat the eurozone may present Cyprus with a more palatable deal. After all the cash in question – €5.8bn – is only 0.06% of eurozone GDP. The real issue will be how to provide this cash while keeping Cypriot debt sustainable.  

Options include:   

  • providing the full €17bn loan but with very long maturity and low rates;

  • linking the repayment of the loan to future gas revenues;

  • using the ESM or another vehicle to recapitalise banks directly;

  • restructuring domestic bonds to extend maturity;

  • accepting losses on some of the official loans.

None of these is perfect but if push came to shove, one or several could be moulded to make the deal look viable – at least on paper.  

The main issue here remains political. It would be very tricky to push any increased bailout / relaxed conditions through the German, Finnish and Dutch parliaments, who don’t want to be seen to prop up a bloated Cypriot financial sector dominated by Russian interests. After all that is partly why we got here in the first place. Such a deal would be also reliant on the ECB agreeing to continue providing liquidity to Cypriot banks.  

3. Cyprus looks to ‘other plans’ (i.e. Russia):  Cypriot President Nicos Anastasiades suggested that Cyprus is considering “other plans” in case the parliament voted down the deposit levy and no new bailout deal was forthcoming. As of now, it is not clear exactly what these plans are, however, it is a decent bet that many, if not all, involve Russia in some way.  

Cypriot Finance Minister Michalis Sarris will be in Moscow tomorrow to discuss the situation with his Russian counterpart. As we have argued before, Russia has significant self interest in helping Cyprus out – it could reduce the losses for the reported €20bn in Russian deposits held in Cyprus, it could gain favourable terms for future contracts on gas exploration in Cyprus (and therefore the future revenues) and it could also improve its geopolitical foothold in the region (as we have highlighted before, there is speculation that Russia has previously sought to move its naval base from Tartus, Syria to Cyprus).  

Russia may therefore step up and provide additional financing, potentially to cover the circa €2bn which may have come from Russian depositors under the tax. Reports have also suggested that Sarris may propose a 20% tax on Russian deposits in Cyprus in exchange for a stake in a future Cypriot national gas company and board positions at Cypriot banks.  

However, the EU will not want to see one of its members become so closely intertwined with Russia, so could actually strengthen Cyprus bargaining chip.  

4. Cyprus exits the eurozone: No compromise can be found under any of the scenarios above (at least not within the necessary timeline – see above). With the largest Cypriot banks going without a recapitalisation, the ECB could be forced to follow through on its threat to withdraw liquidity from Cypriot banks – not just to reduce its risk exposure but also to ensure its threat of action remains credible to the rest of the eurozone and financial markets. If so, the ECB Governing Council would also probably promptly vote (a 2/3 majority is needed) to turn off the Emergency Liquidity Assistance to Cyprus leaving the banks illiquid and insolvent.  

This combined with the previous threat of a deposit tax would likely lead to a deposit run on the banks and their likely collapse. In the face of all this, without an ECB or eurozone backstop, Cyprus would find it impossible to bail out its banks or support the guarantee of deposits – it would be forced to exit the eurozone and print its own currency.  

The logistics are messy, but as we suggested with respect to Greece, some use of Article 50 in the EU Treaty to exit the EU would be the most likely option.  

The new Cypriot currency would have little international trust, particularly in financial markets – not least because it would have just defaulted on a significant amount of its debt, particularly foreign-held debt. This would be worsened by the Cypriot Central Bank having to print massive amounts of liquidity to keep the banks afloat and backstop deposits. It would likely also have to monetise the government deficit, which is due to be 4.5% of GDP this year, or Cyprus would have to enforce massive austerity. In any case, this scenario has all the hallmarks of an inflation spiral and collapsing GDP.  

This could be combined with option 3 to some extent. Russia could offer Cyprus a significant bailout, particularly of the banking sector. Alternatively some currency link could be envisaged. In either case this would help increase trust in the new currency and the Cypriot economy.  

Would the ECB really pull the plug on liquidity to Cypriot banks?

The key turning point here will be whether the ECB cuts off Cypriot banks. It is to some extent the vital difference between option 2 and 4, while keeping liquidity on could help facilitate option 1. To pull the plug on ELA the ECB needs a 2/3 majority (15 out of 23 votes) at the ECB Governing Council. Although the Bundesbank and maybe the Dutch and Finnish central banks might vote to turn off the ELA a 2/3 majority is not certain. In fact since Mario Draghi took over the ECB it has not been particularly hawkish. Bloomberg reports that the ECB said after the vote: “The ECB reaffirms its commitment to provide liquidity as needed within the existing rules”. The crisis has shown so far that the rules of the ECB are incredibly malleable, so what exactly that statement means is unclear, but the vote could certainly go either way.

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Tue, 03/19/2013 - 18:35 | 3349985 Crash Overide
Crash Overide's picture

5. Revolution!

Tue, 03/19/2013 - 18:37 | 3349998 Cult_of_Reason
Cult_of_Reason's picture

ECB Nowotny: Cyprus Should Not Place Hopes On Presents

"I believe one must expect from the Cypriots a realistic position, otherwise there is only the hope that somebody makes them a present, be it the Russians, be it the EU," Nowotny said. "I would not place too much hope on that."

https://mninews.marketnews.com/content/ecb-nowotny-cyprus-should-not-place-hopes-presents

Tue, 03/19/2013 - 18:53 | 3350076 WayBehind
WayBehind's picture

It doesnt mean shit! This game will go on and on and on until ...  

Tue, 03/19/2013 - 19:04 | 3350115 Cult_of_Reason
Cult_of_Reason's picture

... default and euro exit over the weekend.

Tue, 03/19/2013 - 19:08 | 3350132 Pinto Currency
Pinto Currency's picture

 

Why did the IMF do this?

There is no way for them not to have known would happen - especially when you take on the KGB.

What exactly is the IMF trying to achieve?

 

Tue, 03/19/2013 - 19:11 | 3350140 Irelevant
Irelevant's picture

War?

Tue, 03/19/2013 - 19:36 | 3350234 Pinto Currency
Pinto Currency's picture

 

D.K.

But it seems bizarre.

Tue, 03/19/2013 - 19:45 | 3350263 Poor Grogman
Poor Grogman's picture

The Euro is competition to the USD, and how is Europe helping the Global Debt Ponzi anyhow?

Tue, 03/19/2013 - 20:20 | 3350404 disabledvet
disabledvet's picture

By creating the euro. It says "hey look! We can Ponzi too!" apparently this means something different over here because we're "we're issuing trillions of debt with little to no penalty" whereas in Europe "they're pissing off the Germans again." the only real solution is of course to stop paying that ridiculously high interest rate. Since that is not mentioned by the author "as the problem" (as it obviously is) then neither is "the solution" namely CYPRUS WILL BE EJECTED. (now insert nicey nicy propaganda statement here. And don't forget to read the confession live on the air.)

Tue, 03/19/2013 - 22:29 | 3350837 Earth Ling
Earth Ling's picture

What about this:

1. Someone start a kickstarter type campaign

2. The campaign is to help support the Cyprus currency when they leave the Euro

3. Pledge a USD / EUR / GBP / Bitcoin (the most valuable!) to the campaign

4. When the Cypriot Lira is available, the pledges will be applied in a steady stream, proceeds shared equally across all accounts (takes some good programmers, but doable)

5. The Lira just might not collapse, especially if people buy BTC to pledge

6. Whoever starts this should give me 1% of transaction fee as a royalty for giving you the idea  : )

Free market BITchez!

Anyone got a better plan?!

Wed, 03/20/2013 - 06:56 | 3351408 fx
fx's picture

the analysis is incomplete: a bank run WILL occur in any case, no matter what kind of 'solution' will be agreed on. once you publicly discussed the levy tax, there is no putting the genie back into the bottle. So forget about the EUR 15 bn that WERE needed. You will now need probably at least 2-3 times that amount. well done, everybody. besdies the fact, that Cyprus' business model is now gone for good anyway. good luck, restarting that 'economy'.

Wed, 03/20/2013 - 07:05 | 3351421 Gief Gold Plox
Gief Gold Plox's picture

None of the aforementioned (article) scenarios says anything about The People, as if they don't matter. Having my savings haircut-ed by a foreign foreign power, I'd just maybe be pissed of enough to force a referendum down the throat of the political elite on leaving the EU? Some fucking "UNION" this is turning out to be.

Anyways the precedent has been set and whatever the outcome is every poor prick in the EU should at the very least go to the bank and grab their savings from the clutches of these lunatics. That said, convert the paper to something thay can't print-devaluate away in a warehouse on late friday night.

Tue, 03/19/2013 - 19:26 | 3350183 Cult_of_Reason
Cult_of_Reason's picture

They (IMF/eurocrats) want to kill Cyprus offshore banking and tax haven model. The only way to prevent this is for Cyprus to default and exit the euro.

A spokeswoman for the IMF had no immediate comment. European officials have repeated that the goal is to shrink the island's banking sector over time.

http://online.wsj.com/article/SB10001424127887323639604578370743677444984.html

 

Tue, 03/19/2013 - 19:35 | 3350230 Seer
Seer's picture

European officials have repeated that the goal is to shrink the island's banking sector over time.

No shit?!  Looking to steal money out of its banks wasn't enough of a clue?

I think that they need to aim that banking sector shrinker laser beam at their own banks, and when they are done maybe it can be imported to the US...

Tue, 03/19/2013 - 19:38 | 3350239 Pinto Currency
Pinto Currency's picture

 

This looks more like a Samson option.

Tue, 03/19/2013 - 19:56 | 3350309 Stuck on Zero
Stuck on Zero's picture

The EC is a Socialist system.  That means that every member of it wants to get more out of it than they put in to it.  Rots a ruck.

 

Tue, 03/19/2013 - 19:44 | 3350251 WallowaMountainMan
WallowaMountainMan's picture

pinto,

i think they just got careless. the outcomes now in front of them are too horrific to suggests a bigger bluff was planned.

one of the outcomes not talked about yet, and i think an elephant in a room of elephants, is that the countries that already 'settled' will now know they can regain the hammer and force bettor deals if cyprus gets good terms. any country that needs 'help' in the immediate future now knows that the ones who have it all to lose are the ones with the 'money', not the ones 'asking' for help.

as mentioned as an outcome for the fed exit by those who know much more than i, debt 'cancellation' is the only outcome that 'balances' the books, after it is on boarded to whatever they name the usb stick.

much like they will have to do to those unregulated pieces of paper. even in quantum mechanics,there just aint enough worlds' with assets to to cover that crap.

 

 

Tue, 03/19/2013 - 19:47 | 3350274 Pinto Currency
Pinto Currency's picture

 

The IMF essentially chose to take on Russia.

We will eventually know why - but it seems highly irresponsible that they would do so.

Tue, 03/19/2013 - 20:57 | 3350543 Rustysilver
Rustysilver's picture

These morons think that the Soviets of 1990's are the Russians of today. A big miscalculations.

Tue, 03/19/2013 - 21:49 | 3350722 Pinto Currency
Pinto Currency's picture

 

It looks like a JPM / Lehman Bros. moment.

Tue, 03/19/2013 - 21:18 | 3350621 King_Julian
King_Julian's picture

Interesting. Maybe this was the move to retaliate against Russia for backing Assad and protecting Iran?

Wed, 03/20/2013 - 12:12 | 3352470 WallowaMountainMan
WallowaMountainMan's picture

Pinto,

the ecb et al negotiators say they offered confiscation on over 100k and cyprius wanted no more than 10% on the over 100k. if accurate, i think the ecb et al could not force their position, shrugged, and walked away with the 'best' deal they could make.

their error was that there was no deal. the 'cypriots' could not deliver.

had the deal been done, some people in the world would squawk, but the story would go back page quickly.

why the politicals wanted the deal on limiting the over 100k seems obvious: they get contributions from the over 100k crowd. bought and paid are they, just like the rest. this provides continuity to the whole story, including the 'abstaining' by the guys who cut the deal. face saving, perhaps trying maintain influence over cypriot voters to pave the way for their contributors in the future.

much more likely than imf 'taking on' russia. makes no sense to me either.

long/short: i posted my guess for the outcome elsewhere, but it goes like this:  central bank coordination behind the scenes as no central bank wants this to go further; i.e. no help from russia; cyprus settles for original over 100k with the ecb et all; story maintains legs longer than originally calculated, but goes 'away'.

consistent with that, ecb et all has as of today let it be known that confiscation has not been ruled out in the future. my hunch is that the future proposals will be framed as coming from the nation in trouble and the ecb et all will just 'agree' to those proposals, providing face saving cover.

thanks,

wmm

Tue, 03/19/2013 - 19:46 | 3350273 newworldorder
newworldorder's picture

Their hubris has led them to take stupidity pills. There was no serf to run behind the annointed IMF princess reminding her that her glory is fleeting.

Tue, 03/19/2013 - 19:56 | 3350306 Pinto Currency
Pinto Currency's picture

 

That is the stupidity answer.

But these people are dealing with nitroglycerine and they know it.

They ain't sloppy.

Tue, 03/19/2013 - 18:39 | 3350007 Jam Akin
Jam Akin's picture

6.  Someone repeatedly presses the print key.  "Existing rules" are ignored.  (Again)

Tue, 03/19/2013 - 19:14 | 3350147 Cdad
Cdad's picture

The new Cypriot currency would have little international trust, particularly in financial markets

Ummmmm....errrrrr....is this an error?  I mean after that attempt to steal depositor cash for the purpose of bailing out some bad banks in Cyprus, are you sure you did not mean to say that the Euro dollar would have little international trust?  Come on, man.  The ECB just burst onto the world wide scene as an accounts grabber, lookin' for an easy roll in Cyprus...because their political clout has shrunk and they could not extend a measly ten billion to the island nation.  Aren't they about 400 billion into Greece right now...with continuing liabilities in the form of garbage bonds posted as collateral? 

And anyway, maybe what really matters is having a currency that works....in Cyprus!   Maybe...just maybe those folks know that you will find value in work, and perhaps that is more important than trying to find it in a levered currency swap rate?  Just thinkin' out loud here....you know...as a human being...not a large corporation.  

Tue, 03/19/2013 - 18:45 | 3350045 Croesus
Croesus's picture

The Euro, the Euro, the Euro's on Fire;

The Euro, The Euro, The Euro's on Fire......

We don't need no water, let the motherfucker burn,

Burn motherfucker, BURN.

Tue, 03/19/2013 - 19:07 | 3350129 Coke and Hookers
Coke and Hookers's picture

I think I may steal this and post on my facebook wall to piss off all my globalist friends.

Tue, 03/19/2013 - 18:50 | 3350072 markettime
markettime's picture

Why does it seem like the central banks are so afraid? Has the central banking system come to a point where if one country defaults than the whole house of cards comes down? 

Tue, 03/19/2013 - 18:52 | 3350079 IridiumRebel
IridiumRebel's picture

In a word: YES.

Tue, 03/19/2013 - 19:16 | 3350151 insanelysane
insanelysane's picture

If everyone goes to get their money, the house of cards comes down.  Even in "normal" times, banks don't have the money on hand to give to the depositors.

Tue, 03/19/2013 - 19:25 | 3350173 akak
akak's picture

"Do you hear that, Mr. Draghi?  That is the sound of inevitability.
That is the sound of euro death."

Wed, 03/20/2013 - 03:22 | 3351229 Element
Element's picture

akak,

People are missing the reality that a yes or no vote is now moot. The Banks are roadkill and the deposits are destroyed if these banks can't reopen and trade normally. A vote does not change that.

If Jim Sinclair is right the Russian financial damage is huge, if not systemic, plus the Cypriot economy is also going to be completely trashed in coming weeks and months.

The big problem is it appears to have been a preconsidered action on the part of the German Finance Minister, who was acting under the orders of his Boss, PM Merkel. And the IMF and Legarde are deeply implicated in it too. They all knew what they were about to do. But even if they claimed it was completely accidental, and unintended, first the Russians will not believe that, and they will want to make proportionate reprisals - and they probably will.

Bottom-line, it has all the indications of a calculated hit on the banks, designed to take out the Russian money - and not just 10%, but possibly 100% of it. So apart from anything else, this is now quite a problem in its own right, and I suspect we don't fully appreciate how serious this may be.

You see, if this was a deliberate financial attack, it would explain why the ECB was doing nothing, because no one can explain why this occurred, why it was let to unnravel as the ECB sat back and did nothing, and said nothing, for days.

This is not a good look.

Wed, 03/20/2013 - 04:21 | 3351275 Ghordius
Ghordius's picture

"deliberate financial attack"? it's now one bloody year that Cyprus is saying that their banks are in trouble. all that is happening is that several countries are debating who gives how much to bail them out - Germany, the Netherlands, Finnland et al - the eurozoners - are willing to chip in 10bn if Cyprus finds the other 7bn

I don't remember the eurozoners forcing Iceland or Cyprus to become great financial centers with dozens of millions of banking assets and liabilities per head of population, making them too big to bail out locally

Wed, 03/20/2013 - 05:57 | 3351342 Element
Element's picture

Germany went in high and asked for 40% levy, fully knowing in advance that such a levy would have catastrophic implications, that would have destroyed the banks anyway. That it would not save the banks, but fully tip them over the edge. And it would cause a huge disturbance in the farce, sorry, the Eurozone.

The Cypriot PM abandoned talks and walked out, twice, in disgust at the suicidal offer Germany was proposing, because he knew 40% was impossible and obviously a disingenuous offer.

Several proposals later they propose ~10% and are told even this is very unlikely to pass a vote by Monday morning. Germany ignores that warning, fully understanding that if it doesn't pass that they'll have a situation as per now, and they did nothing.

So Germany was clearly not really interested in making this work, and was willing to take a very high risk of this spiralling into a significant crisis, and of the potential for Cyprus to leave the Eurozone in a disorderly way.

So the banks are now destroyed and the Russians will probably loose all of their deposits, or a major portion of them. Germany knew this was going to happen and they let it happen and the ECB did nothing. Their rough-house game of financial chicken failed. They still could have prevented a spiral degradation of the situation and a contagion-spread towards the core, but still, they have done nothing. Fine, that's their choice.

But it sure looks a lot like it was a calculated means to destroy these banks and their deposits, not a way to save them. Many people are saying this and wondering about why nothing was done when the vote had failed. So that angle is going to be explored in detail probably by thousands of people, so get adjusted to it.

At this point there's maybe too much personality, mistrust and pride involved for resolution, so an acrimonious  divorce is looking likely. And "other plans" are being made. Frankly, it looks like this is exactly what Germany expected to occur, and they are certainly just letting it happen.

And that is a considered choice of the German Govt and ECB, and that is what Russia is going to be seeing. So even if Russia coughed up the money, the banks are still roadkill.  And that looks a lot like a calculated outcome.

Thu, 03/21/2013 - 04:02 | 3356018 Ghordius
Ghordius's picture

interesting - I get from some sources that the dynamics in those meetings was slightly different - including the Cypriot Finance Minister, the British Cypriot guy that just came back from Russia - walking out of the meeting because he felt that the big accounts were hit too hard, and was only willing to discuss further when they offered the scheme of hitting the accounts smaller than 100'000, too

only a Cypriot National Bank governor could have had the data to make such a calculation, I thought

now I hear they want to have a "Cypriot Solution" that includes the Cypriot Church. I miss the details of what they get for the money - I still understand that it's bank shares

a free alliance does mean that the members are free to leave it - it's a confederative principle - orderly or disorderly is after all a question of choice and moment

for me it looks increasingly unlikely that Cyprus will leave the eurozone. Just think what the Cypriot Pound would have done if still tradable, instead of being enbedded in the EUR

Sun, 03/24/2013 - 07:17 | 3367862 Ghordius
Ghordius's picture

re "Germany went in high and asked for 40% levy" (on the over 100k accounts) meanwhile I hear this was the IMF's position

Tue, 03/19/2013 - 19:37 | 3350238 Seer
Seer's picture

Contraction in a grow-or-die paradigm is deadly...  Think of the leverage that's out there.  Think of the nastly off-table bets (derivatives) that are propping everything up (and are MAD GROWTH-SEEKING MINES).

Tue, 03/19/2013 - 20:27 | 3350097 Banksters
Banksters's picture

A no vote means vote again-  N Sarkozy  aka the angry dwarf.

Tue, 03/19/2013 - 19:23 | 3350175 squid virtuous
squid virtuous's picture

Nein means Nein, herr Merkel!

Wed, 03/20/2013 - 08:16 | 3351545 TraderTimm
TraderTimm's picture

There are translations of bitcoin information being disseminated to Cyprians as we speak. Spain citizens have spiked the hell out of popular bitcoin apps, and we've rallied $10 bucks since the Cyprus news has broken out.

Go ahead banksters, your move.

Tue, 03/19/2013 - 18:35 | 3349988 Irelevant
Irelevant's picture

Rioting?!

Tue, 03/19/2013 - 18:53 | 3350031 Cult_of_Reason
Cult_of_Reason's picture

This guy is on the right track!

https://pbs.twimg.com/media/BFwP5JbCcAAtyJ5.jpg

Tue, 03/19/2013 - 19:06 | 3350124 permafrost
permafrost's picture

Cyprus should send this guy to Russia to negotiate. Something tells me he will get along with Putin famously.

Tue, 03/19/2013 - 18:35 | 3349991 OptionNinjaNYC
OptionNinjaNYC's picture

Tuesday Humor:

For all the players out there --

http://wallstreetfool.com/2013/03/19/financial-humor-for-all-the-players...

Tue, 03/19/2013 - 20:04 | 3350341 willwork4food
willwork4food's picture

I told that philosophy to my two boys when they were teens. One took it to heart, the other not so much.

Me? Fuck no. You should see some of the girls my smart son disses. Damn.

Wed, 03/20/2013 - 00:16 | 3351079 IrritableBowels
IrritableBowels's picture

What do you call the other son?

Wed, 03/20/2013 - 03:14 | 3351230 CompassionateFascist
CompassionateFascist's picture

brings to mind the one about a Mexican fireman with 2 sons. What did he name them?

Tue, 03/19/2013 - 18:35 | 3349993 Soda Popinski
Soda Popinski's picture

It means Goldman Sucks gets to override any Parliamentary votes and force a bailout through the barrel of a gun.  Blankfein will just install himself as the new leader of Cyprus by banker decree.

Tue, 03/19/2013 - 19:45 | 3350266 Seer
Seer's picture

Not sure if the Russians will sign on on this.

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