Cyprus may be already the next Lehman Brothers

This impasse looks like the result of a hasty set of calculations on what might happen, which is, among others, the results of the recent change-of-guard in Cyprus on the one hand, and of the hardening stance of Europe on the other hand.

Cypriots initially pinned their hopes on Russia, given the fact that not only is Russia the greatest contributor to Cyprus’s financial flows, but also Cyprus is the greatest investor in Russia (which shows just how much its used as a conduit). But the hopes of Russian help were exaggerated. The Russians are very keen negotiators, and we have to clearly distinguish between the Kremlin (and the dependencies) and the Russians who invest there, who includes people not in the direct control of the Kremlin.

Putin has an agenda in terms of how to deal with Cyprus; and this agenda is partly domestic. Putin does want to protect Russian interests – but to a point. And he would like to have greater control over what’s happening in Cyprus, where his compatriots channel their money without fear of expropriation. Now, does he want to ensure that Cyprus has the same amount of freedom? No. Also, would he be incentivised to help now, and restore Cyprus as an EU member with "gratitude" from Cyprus? No. He'd rather let it all collapse and pick up the pieces later. Russia has no cash shortage; it wants control and might choose the time of its support more carefully. Consider how far your Rubles can take you then. And how much control he would get if saving Cyprus would support the status quo. The answer is clear. The interest to support is small, and also seeing that the Euro Zone is pressured wouldn’t be such a bad thing for them. Now, of course they have an interest in Gas – and that's why Gazprom Bank (not Gazprom) gave the signal.

The other issue that has caused some consternation is the hardening stance of the Europeans. Sadly, this is rational. Germans (and other northern, but also Southern Europeans), they have now realized that if they don’t force Cyprus to ensure deposits under 100,000, then the Euro Zone is dead. At the smallest crisis opportunity, depositors in a stricken country such as Spain or Italy will (rationally) fear they will be the next Cyprus, so this will rationally lead to another run-on-the-bank. The Europeans wanted to have the Cypriots guarantee the small deposits, and were baffled that Cypriots said no. They allowed them to choose to not guarantee them, and collectively woke up to the utter imbecility and risk of the idea. And now they know that NO MATTER WHAT this has to be kept. This is what’s happened yesterday night. They were and are willing to let Cyprus go and even exit the Euro provided that it is clear that deposits will be safeguarded. It’s their one and only chance to revert their damaging agreement.

Cyprus may be already the next Lehman Brothers. Things are bad – not only medium term, but also short term. The Cypriots wanted to ensure they don’t lose their money-making machine- capital coming in and especially, but not uniquely, from Russia. They also hoped for a solution from Russia, but were somewhat optimistic (perhaps a weebit naïve in terms of both feasibility and timeline for making it done). But now depositors are fleeing. Firm administrators in Cyprus are already sending emails about shifting funds from Cypriot accounts to others in Switzerland and Liechtenstein or Luxembourg. So the problem is that as the delay increases, the bank run becomes all but inevitable. In two or three days, Cyprus may be over even if they now agree to a plan - first the banks melting, then the gov't burdened with the costs, and next these becoming too large. Cypriots tried to save their business model; they may have blown the country up. It was a very difficult hand. Anyway, ECB knows this and knows that if a solution isn’t found by Monday, then that's a done deal.