Cyprus Deal Is A Dangerous Game

The levy for deposits, which would have been a policy mistake, has been rejected by the Cypriot Parliament.

A deal with Russia now seems to be the most likely outcome. This may include selling rights to offshore gas deposits to Gazprom.

From a political point of view, this would be a major showdown for the EU but from a market perspective, this solution is as good as any.

The EU may be willing to improve the terms of the rescue package, so that Cyprus avoids selling strategic assets to Russia.

A deal is likely to be found before the end of the weekend. If Cyprus fails to strike a deal with Russia and/or the EU, the debt crisis will re-emerge.

Russia to the rescue
A revised version of the Eurogroup’s rescue package for Cyprus, which includes a levy on deposits was rejected by the Cypriot Parliament yesterday. To recap: deposits below EUR20,000 would be exempt. Nevertheless, no one in Parliament voted in favour of the plan.

The levy for deposits below EUR100,000 was called down as a bad idea, not only by Cyprus. It sets a bad example and increases the risk of future bank runs. In our view, it was simply a policy mistake. It is positive that the levy was rejected, even though the Cypriot Parliament’s motives are not entirely benevolent.

Following the Parliamentary vote, the President of Cyprus held constructive talks with Russia’s Putin. Russia has said that the levy looks like confiscation and seems willing to help Cyprus. After all, Russian residents comprise the biggest foreign depositor group in Cypriot banks, with USD19bn in holdings at end-2012, according to Moody. Cypriot Finance Minister Michael Sarris is currently in Moscow.

The Russian energy company Gazprom has already been in contact with Cyprus to offer an alternative solution. Gazprom seems willing to buy exploration rights to offshore gas deposits in the Mediterranean Sea. Gas deposits are of strategic importance, as they could help to improve the EU’s energy independence. From a political point of view, such a solution would be a major showdown for the European Commission (which is trying to improve EU energy security) but from a market perspective, this solution is as good as any.

The European Commission said today that it is up to the Cypriot government to put forward an alternative bailout plan, and that any new plan should respect the debt sustainability criteria and fulfil the financing parameters set by the Eurogroup.

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