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EU to Cyprus: We Are Not Impressed

What’s Greek for “up a creek without a paddle”? (Google’s answer: Μέχρι ένα κολπίσκο χωρίς ένα κουπί, though we don’t put much faith in automated translation of idioms.) Whatever it is, we suspect it’s being said a bunch in the halls of power in Nicosia.

Cyprus’s parliament yesterday afternoon voted down the EU-backed proposal to raise €5.8 billion by confiscating money from taxing savers’ accounts. As we noted yesterday, this was a predictable enough result from a democratically elected government—regular Cypriots were outraged to have to pony up from their smallish savings accounts in order to rescue a banking system that has served the interests of wealthy foreigners, in large part Russians. Indeed, the EU proposal was so politically toxic that not a single MP voted for it yesterday, with members of the ruling party choosing to abstain.

The EU and the IMF initially seemed to signal that the savings tax scheme wasn’t necessarily the only way forward. As long as the Cypriots came up with €5.8 billion, the Europeans would live up to their end of the bargain and disburse the remaining €10 billion they had agreed upon. So Cyprus set off to cobble together a Plan B.

The specifics of Plan B emerged this afternoon: Cyprus would nationalize the country’s pension fund and sell bonds against it, hoping to raise €4.2 billion that way. They’d also combine the performing assets of two of the country’s largest banks into one “good” bank, which they’d hope to sell to the Russians to make up the difference. Cyprus’s finance minister has spent the past two days in Moscow trying to get Russian banks interested in the proposal. VTB Bank was rumored to be a potential suitor.

But it appears to have been all for naught. The Wall Street Journal is now reporting that Plan B is set to be rejected by the Europeans. The pension nationalization plan would bring in money, the Journal‘s sources agreed, but it would be in the form of additional debt, which wouldn’t really solve anything past the immediate term. As for the bank plan, it doesn’t explicitly address dealing with the remaining “bad” assets left over from making the “good” bank. And in any case, the Journal claims that “VTB on Wednesday said it has no plans to take stakes in Cypriot banks.”

What now is anyone’s guess. Other schemes have been floated, from selling bonds against future shares of profits from a still unproven undersea gas field to asking the Greeks to loan them €2 billion from their own bailout fund(!!). Clever wags have even suggested that the Greek Cypriots sell their claim to the Turkish northern enclave for the €5.8 billion and call it a day. None of these are likely to work. And the more outlandish and risky the scheme, the more Cyprus looks like a desperate gambler at the casino, trying to hock every last valuable while a musclebound thug stands by the exit cracking his knuckles.

There are no heroes in this particular tragedy. As we said on Saturday, even the putative victims, Cyprus’s voters and small-time savers, have long known that their country was being used for shady financial business, and they happily looked the other way while the going was good. But the Europeans have done no better. Given the stakes involved with the ill-conceived European project, their selfish bickering, buck-passing and last-minute improvised solutions have made a nasty hash of an already difficult situation. Never mind McKayla: Via Meadia is not impressed.

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