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These Cypriots Are Crazy

The Cyprus Republic is currently facing the worst crisis in its history. Having rejected a bailout memorandum involving haircuts on deposit accounts enforced by the Euro Group at gunpoint, the tiny nation is now scrambling for alternatives.

The cheers from all around the world were many. People congratulated the mouse that roared. The banksters finally met their match.

Only life is not as simple as that. Cheers don’t pay the bills. The money to plug the hole left by the rejection of the memorandum has yet to be found. The Troika (IMF, EU, ECB) have rejected all counter-proposals by Cyprus. Russia, deeply angered by the situation (the haircuts were going to affect billions of Euros in Russian offshore accounts in Cyprus) is watching from the sidelines with patient glee. No one is stepping up to help solve the crisis.

A voluntary investment by Cypriot citizens may be asked to replace the ‘mandatory haircut.’

The Cyprus government and legislature are looking at all conceivable options. The most viable ones involve tapping into state pensions funds, which will partially plug the hole. A voluntary investment by Cypriot citizens may be asked to replace the ‘mandatory haircut.’ thus raising the rest of the money, while keeping the Russian offshore accounts untouched. State bonds and other certificates of deposit related to future natural gas sales will be given in return, which will mature in five or ten years time.

In the midst of the ensuing chaos, talks of a default give and take. Everyone fears that if no solution is found, the republic will go bankrupt. This could mean an exit from the Eurozone, a return to the Cyprus Pound, a devaluation of the currency, and prolonged political instability.

Cyprus President Nicos Anastasiades and German Chancellor Angela Merkel before the storm

To buy time, the banks have remained shut all week to avoid bank runs. ATM’s are providing depositors with limited cash flow, but credit is slowly being crunched to a halt.

The reason why all this is happening? In a nutshell, a German-Dutch-Finnish initiative won the day, enforcing austerity without being realistic. In their minds, the money had to come from deposit haircuts – something unprecedented up to now – because Cyprus banks must shrink. They also argued that sovereign debt must be brought down to 100% of GDP by 2020, something which will not happen if they loan Cyprus the 5.8 billion Euros that the deposit haircuts will provide (a logical assertion).

Others say that this is just smoke and mirrors, part of an undeclared economic war between Germany and Russia. Amid allegations of Russian money-laundering in Cyprus, this was a perfect way to tap into those funds and clean the place up.

After the storm

Of course destroying the entire Cyprus banking sector is hardly cleaning it up. Not to mention that those who live in glass houses shouldn’t throw stones. Russian offshore deposits in Germany and Luxembourg amount to about 1 trillion Euros. Surely not all of it is clean.

The crisis has reignited worries about the Eurozone, reaching the foot of Wall Street and beyond. While there have been no major adverse effects on the markets so far, tension is abound. Not resolving the problem decisively could see the Eurozone crisis flaring up again. The next few days will be crucial to the tiny island’s future as well as the entire EU.

Tonight there is an EU-Russia summit in Moscow to discuss developments.

So there you have it, the story that is rumbling beneath everyone’s feet, threatening to dislodge the global economy’s tectonic plates.

It’s also the story of David and Goliath all over again. For those of you familiar with the Asterix comic series, perhaps this will make sense.

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