Earlier this evening, I told BBC5 live that I felt the probability was that Cyprus would not find a proposal that could be put to eurozone finance ministers in sufficient time for them to meet, evaluate it and conclude that a deal could be done. Without that comfort, the ECB would have no alternative but to cut off emergency liquidity to insolvent Cypriot banks – precipitating an economic disaster for the island.
Reports now suggest that Cyprus may be considering something of a U-turn by proposing a 'national solidarity fund' to back an emergency bond issue. Deatails are still missing but it is not clear who will subscribe for such an issue quickly. However, finance ministers are preparing for discussions on Sunday evening. But they will have to take a tough view about what is now genuinely possible as the Cypriot Parliament’s rejection of the original plans (whatever the details of their origin) has irrevocably changed the game. Moreover, the immediate appeal to Russia must suggest substantial truth to the allegations of illicit Russian involvement in Cyprus. Thus eurozone citizens may be even less inclined to pay their taxes to support such banking activities in Cyprus.
The problem for Cyprus is that the business model for their economy is now shattered beyond repair. If debt sustainability was judged as a maximum 100 per cent debt/GDP ratio before, factoring in the collapse of the revenues from the 18 per cent of GDP devoted to financial services must raise the bar for plans to reach sustainability.
A long weekend lies ahead – but one where the risk of contagion to the rest of the eurozone is seeping away.
Rolling Blog
© Graham Bishop
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