ANALYST: The Market Is Afraid That The Obvious Cyprus Outcome Will Happen, And Will Result In A Brutal Short Squeeze

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The Cypriot government says the next few hours will be critical in negotiations with the “troika” of European creditors over the bailout of the Cypriot banking system.

Cyprus has to pass nine bills related to banking reform and raising funds to contribute to the bailout and send a proposal to the EU for acceptance in order to stave off a total collapse of its banking system next week.

In an email, Société Générale analyst Sebastian Galy runs through the latest developments: Germany is balking at a Cypriot plan to collateralize church assets and future natural gas revenues in order to raise funds, and a vote on the plan in parliament has been pushed back a few hours.

Galy also provides a link to The implications are fairly straightforward.

Here’s Galy (emphasis added):

It all means we have no solution, because that solution is not deemed politically viable domestically at this point. The market knows it, but is concerned that the usual last minute European deal will lead to a brutal short squeeze of bearish positions, a fair fear.

Cyprus is increasingly portrayed as a poker player in Germany, while for some reason it is displaced from the front pages in french newspapers, suggesting politically support in Europe seems weak, outside the self inflicted wound on the below 100K tax on deposit proposal.

Needless to say, this weekend should be interesting. The ECB has told Cyprus it will cut off liquidity to the tiny island nation’s troubled banking system if they don’t have a deal by Monday.

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