The big news today is that the ECB has given Cyprus a deadline.
If it doesn’t have a deal in place by Monday, then it’s over. The ECB will not be providing any emergency liquidity to its banks at that point.
Expect a busy weekend, as the government scrambles.
Still the best possibility is some kind of depositor tax.
But, there is one other alternative for Cyprus.
- It could leave the euro — or at least threaten to
- While actually leaving would do nothing to help the banking system — offshore depositors use it because it is member of the euro — it is an idea that is been openly discussed by Cypriot politicians.
- This is like Cyprus holding a gun to its own head — a paradoxical form of blackmail, to be sure. But it plays on the very real fears that any country leaving the euro area would cause a collapse of the currency.
- While we agree that such fears are very real — any country leaving would mean that any country could leave — we do not see Cyprus as being that country.
The question with this strategy is: Is threatening to leave the euro a real threat. I.E., is it a real threat that scares anyone outside of Cyprus? The financial aspect could likely be contained. But as Lorcan notes, the precedent is then created and a pathway is opened up.
Expect a very busy weekend.
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