The view on here is that the Cypriot euro and banking system are dead, it’s just the phony atmostphere where there is limited ATM service, planned bank closures and electronic transfers are temporarily suspended are all masking the reality that both the Cypriot euro and banking system have actually passed on. As soon as banks re-open with euros, there will be maximum withdrawals and maximum attempts to by-pass capital controls: soon an airfare from Nicosia to Athens will be justified by the prospect of large ATM withdrawals from your Cypriot debit card in Athens.
So what will Plan B for Cyprus be? Politicians are amongst the last people to face reality, so you can expect the Plan B – cobbled together under the oversight of the Cypriot president which is right now being presented to parliamentarians – to include temporary expropriation of private pension funds, a deposit levy on deposits over €100,000 and perhaps a loan from the Russians secured on the Cypriot gas fields. It won’t be enough to save the Cypriot banking system – the genie has been let out of the bottle: Cypriot politicians backed by the EuroZone of France and Germany have accepted as feasible expropriating deposits. Not until there is a new Cypriot pound and an independent central bank in Cyprus, will confidence return.
So, Plan B might provide some entertainment today but it is Plan C which will provide the meat. What will the new Cypriot pound look like (the old Cypriot pound discontinued in 2008 when Cyprus joined the euro is shown above)? How many Cypriot pounds will be exchanged for a euro? What happens to Cypriot debt denominated in euros and roubles? How does a country actually leave the euro? What will happen to the massive Cypriot offshore banking, insurance and trust industries? How unhappy will foreigners be with getting repaid their euros with a currency that may decline in value by 50% in a week?
UPDATE: 21st March, 2013. Just for some light entertainment, details of Plan B are emerging, though we are not expecting the full glory of what is likely to be a short-lived Plan B until the Cypriot parliament has examined the plan later on Thursday. There are still three components to the €17bn bailout – €10bn coming from the EU as before, and still no talk of any contribution from the IMF, and €1.4bn coming from a mix of privatization and increases to capital gains tax and the flagged increase of 2.5% from 10% to 12.5% in the corporate tax rate and there is still €5.8bn coming from other sources. It is this €5.8bn that was responsible for the current fiasco with the original intention that it be raised from levying a “tax” (ill-disguised raid) on deposits. Any tax on deposits, either less than €100,000 or more than €100,000. has now been ruled out, and the €5.8bn will come from two sources, firstly a “state investment fund” which is likely to be a loan from Russia to Cyprus secured on Cypriot gas rights in the east Mediterranean and possibly bank assets and secondly a “solidarity bond” in which ordinary Cypriots will be expected to buy bonds. There is no talk about expropriating private pension funds yet. Plan B has “fail” written all over it. Not only are the Russians lukewarm about Cyprus’s gas in a maritime area which is subject to dispute with Turkey, but there is a yawning chasm of distrust between the Cypriot body politic and its people which will not help sell “solidarity bonds”. Anyway, we should have full details later today. It will probably take a further couple of days for Plan B to crash and burn. Meanwhile Plan C is no doubt being developed in private, as a “contingency” as the diplomats would say, but by Sunday evening, you can expect to be seeing the design of the new Cypriot pound. Or at least, that’s the prediction on here. [Reporting sources BBC, Guardian, Ria Novosti]