Just a short post on one point about the recent Cyprus business. (It looks like Cyprus will impose a "one-time tax" on bank deposits rather than honour its deposit insurance.)
Governments usually provide deposit insurance to prevent bank runs.
If the banking system is too big, and the banks' losses are too big, relative to the government's capacity to pay that insurance claim, that's a problem.
But the problem is very different if the government (unlike Cyprus) can print currency to pay bank deposits that are liabilities in that same currency. If worse comes to worst, the government just prints as much currency as is needed to pay the depositors what they are owed. If that means is has to print "too much" currency, that's a problem, because it means inflation will be "too high". But that inflation will adversely affect the real value of currency and bank deposits equally. So even if people expect it might happen again, this doesn't cause a bank run, where people try to get out of bank deposits into currency.
It's a very different sort of problem in a country like Cyprus where the government cannot print money. If people see a "one-time tax" on bank deposits happen once, they might expect it to happen again. And if they expect it to happen again they will try to get out of bank deposits into currency. Which is a bank run.
The difference is that inflation from printing too much money is a tax on currency too. Cyprus cannot tax currency; it can only tax bank deposits.
If the banking sector is too big, and if bank losses are too big, relative to the country's ability to pay, deposit insurance as a way to prevent bank runs is not credible and won't work in a country that cannot print.
Next week is going to be interesting. And not just in Cyprus. People have seen it has happened once, in Cyprus. Will they expect it to happen again? In other Eurozone countries?
Update; since I can't read Greek, this article and comments in Cyprus Mail is the nearest I could find for judging local reaction. Or maybe this is better.
Worthwhile Canadian Initiative 
Mandos, Nick,
these „Bausparpläne“ trying to boost home ownership from some 40ties to the more common 60ties in the western world, are all dead by now, given the ridiculously low interest rates.
What people also realized is that distorting the real estate market with special incentives to special groups, with all the best intentions, and significant argument going for them, after a World War, 60 years ago, did in deed keep people like away from buying. We corrected that now.
Communist Wagenknecht’s proposal, as soon as you boil it down to practical, is not far away, from what we were doing in the fifties, appealing to Erhardts “social market economy” founding father themes, and much longer ago, like Iron Chancellor Bismarck’s 1885 universal health care and retirement plan, and back again in the 1990ties. We have built a lot of “social capital” over hundreds of years.
She writes in the German equivalent of the Wall Street Journal, the “Handelsblatt”, and we are listening to each other, and look carefully what folks like Bebbe Grillo really want. Greek Syriza Tsipras had an audience with Schäuble in this January 2013, too.
Where specifically do you see your “no way it would ever happen like that” , I , as a German conservative, might miss there?
Why do these discussions, like here, so often end up in discussing details of Germany? It is a Canadian blog, and Nick Rowe has very good, valid reasons to keep it this way.
Searching for what I might have done wrong here, where, I only defended the credit quality of our Austrian brothers and sisters, with precise numbers and references, not “lots of bad loans”.
My original statement, that 10-year rates are a very robust, simple indicator, is very valid.
That I am not in a bind to pay one single cent for the follies of other nations, too.
Last minute add-on, see economist view links again:
The “magic” 10% limit on haircuts comes from the old , hard bind of
http://economistsview.typepad.com/economistsview/2013/03/financial-markets-havent-freaked-out-over-cyprus-yet.html#comment-6a00d83451b33869e2017ee98b958e970d
the 15.6% comes from the IMF target of 120% GDP at 2020, if the new, but not really yet punishable hard 100% 100k deposit insurance is calculated, as simple as that.
We are not obsessed with the Russians. In the moment they gave up conquering us, and actually gave us a pretty reasonable deal on eastern Germany, we welcome them here, have 2 dozen city employees taking care of their visitors, have the menus in kyrillic, Merkel, Putin talk in Russian, Putin gives a speech in German at the Sovereign, the Bundestag, and I think I mentioned before, one of my ancestors sold a submarine to Russia. For some time the Polands worried too much, that we could becomes friends too much, too quickly : – )
The reason why is that the Eurocrisis is about imbalances within the Eurozone and who has the power to change them. Unfortunately the discussion boils down to some Northern European economies, the weightiest of which is ______?
As yet, there is no talk of such a large debt haircut as she seems to be proposing. Could be that I am not understanding the German well enough.
Nick:
“But think about the capital stock in a country with 100% reserves.”
You are implying – I assume – that it would be too small. I don’t agree. If we look at just the US, there must be a good $50-60Tn of public equity, public debt and housing stock alone, all which is way more risky than the $9Tn of senior deposit funding for bank balance sheets. Reasonable estimates I’ve seen is that the deposit insurance subsidy is worth about 80 bps, ie. equivalent to BBB corporate bond credit spreads right now. 80 bps on $10Tn is a joke compared to the total risk of the capital stock, the vast majority of which is public and private equity and housing/land. The argument that the public is just to wimpy to bear the risk without government stepping in just doesn’t add up because we are already bearing 90% of it directly. As we’ve discussed in the (distant) past, you could easily create $10Tn of bomb-proof money by just repoing the capital stock at the central bank with an 80% haircut. It just doesn’t get any more safe than that. Deposit insurance is totally unnecessary.
“when you have taken a wrong turn and found yourself in an even worse place, turning the clock back is the right thing to do?”
The important thing is to have a public deposit option. I.e. everybody should be able to keep money at the CB at the policy rate, just like the clearing banks. (No brick and mortar – just an online account plus a debit card.) And like Ralph says, require the banks to disclose that they do not keep your cash in a vault and no government guarantees it. That doesn’t sound to me like turning the clock back. Was there ever a viable public deposit/payment system?
It seems the Cyprus Parliament has rejected the plan.
Now what? Will Cyprus be able to reopen the banks? If they do, without some other plan, then there will be a very big bank run.
And if the banks stay closed, well, I wonder what that effectively does to the money supply, and the ability of people to buy and sell things? Recessions are always and everywhere a monetary phenomenon.
Nick,
This is how things are done in Cyprus (everything takes at least a week).
Banks will probably stay closed for a few more days, but ATMs are working, so the local economy is going to be OK.
As for the long-term solution, there are so many crazy ideas that nobody can predict what’s going to happen.
We’ll have to wait and see.
My take is ,
that after that the IMF will insist on a substantially higher hair cut, based on the inferior quality of the credit
K: “As we’ve discussed in the (distant) past, you could easily create $10Tn of bomb-proof money by just repoing the capital stock at the central bank with an 80% haircut.”
But (if we change “80%” to (say) 10%) isn’t that precisely (in effect) what happens with deposit insurance and commercial banks with 10% capital reserves? And it all worked fine, until the Cyprus banks went and bought a load of Greek bonds, and then the 10% haircut wasn’t enough?
I remember our old “Blue Sky” discussions.
I’m also remembering my very old post on Anglo Saxon finance.
Nick: “Third, if the haircut (conversion to equity) was limited to uninsured deposits, that would most likely give control over the banking system to non-residents (some would say money-launderers) – and nobody in the Eurozone would be happy about that.”
I could see that, although if your’re legislating willy-nilly over people anyhow, you could mandate the conversion into non-voting equity (and there was some hairbrained to give depositors a stake in future Cypriot natural gas field).
It occured to me that the other possibility is that depositors rank equally with other unsecured creditors. If you give depositors a haircut (even if the insured depositors don’t lose anything ) does that trigger all sorts of nasty covenants in in the banks’ bonds (which are, I gather, governed by UK law, so are outside of the reach of the Cypriot government)? I don’t know, but maybe (although, I’d be shocked if that ship hadn’t sailed already, surely there must be a solvency covenant in those bond indentures). That might explain why they took the “special tax” rather than “haircut” route (since I can’t see a “special tax” on depositors being a trigger for default for the banks’ bonds). That doesn’t explain why you couldn’t have a 15% tax on deposits over E100k, though.
With respect to the 10% (rather than 15%) tax, one colleague floated the idea that the Russians might be able to claim some kind of foreign tax credit up to 10%, meaning that a 10% tax would be a real cost to the Russian fisc., but maybe not to tax-paying Russians (who, no doubt, are abundant in Cyprus), whereas 15% tax would hit the Russian taxpayer. If that were the case, it would be an impressively subtle ploy by the Cypriots. My colleague thought that was far fetched, though, (at least under our foreign tax credit rules) but Russians do things differently.
Nick: “Cyprus needs a loan from Putin, and doesn’t want to piss him off too much.”
Well, if that was the thinking, it didn’t work (and really, would you be less pissed if someone told you they were only stealing 10% of your money?). On the other hand, does that go both ways? Surely they could have put it to Putin “give us a loan or we’re going to hit uninsured depositors with a 50% tax!”. What’s the line, lend a guy a buck and you’ve got a debtor, lend a guy a billion bucks and you’ve got a partner?
Very strange. All moot at this point.
Sorry if this is a stupid question, but I haven’t been able to figure out why nobody is suggesting the obvious remedy i.e. wipe out bank equity, big haircut for bondholders, nothing insured above the limit, nationalize/’euroize’ what’s left, clean it up, sell it in a few years, likely at a profit? If the rumors about shady Russians is true, then perhaps the EU authorities can make good use of the financial information they’d get access too by taking over the Cypriot banking system. They might be able to recover a few billion in laundered money, tax evasion, and generally ill gotten gains.
I can’t speak for the rest, but I think the problem with the bondholders is that the bonds are probably governed by UK (or some other foreign) law. Cyprus can do whatever it wants, but it can’t re-write those contracts, because on their own terms they’re outside of Cyprus’ jurisdiction.
I believe a similar issue has bedevilled Argentina over the last decade. At one time it issued bonds governed by US law (because no right-thinking foreign creditor puts faith in the goodwill of the Argentine judiciary, at least not without a hefty risk premium. Ditto, I’m sure, for Cyprus). When Argentina went bankrupt, and settled with creditors for pennies on the dollar, a handful of creditors refused to accept the offer and have spent the last decade chasing Argentine assets around the world on the basis that they still have good debts at face value (on which point they appear to have won a number of US cases) . Case in point, a few years ago they managed to seize an Argentine Navy training ship in Ghana. (see http://en.wikipedia.org/wiki/Argentine_debt_restructuring)
Now, Argentina is entitled to the protection of sovereign immunity, making seizing its assets tricky. A Cypriot bank probably wouldn’t be so protected and, in any event, no bank is commercially viable if bondholders are chasing it around the world looking for assets.
One might wonder if Cyprus could play some sort of silly game whereby the repay the bondholders in full, but impose a hefty withholding tax. But I suspect that that would either be prohibited under EU law or some applicable tax treaty. In any event, even if not, I would be shocked if the bond indenture didn’t have a provision requiring the bank to gross-up any payments to account for domestic tax, which would just compound the problem.
Genauer: “Let them sleep one more night about it, and everybody will find that he got a very good deal.”
Not so much.
Patrick: “How did Cypriot banks get into so much trouble …?”
Bloomberg TV had a good interview with the former Governor of the Central Bank of Cyprus earlier today where he noted that the main cause of the banking crisis was the Troika’s decision to “solve” the Greek debt crisis by imposing a haircut on the holders of Greek Govt. bonds….which had a prominent place on the balance sheets of Cyprus’s banks. Add to that the strong trading links with Greece, the fact that most of the main banks have important operations in Greece and the cratering of the Greek economy…..and you don’t really need much more to understand why their banks are trouble.
(I’m not saying that there were no domestic problems with the way some banks were run….but I’m saying that even Canadian-style bank regulation and management would probably not be up to the challenge faced by Cyprus’ banks over the past three years.)
There’s been quite a few people head-scratching about why the Troika decided to go after depositors. The math seems to be as follows.
– there’s little or no equity left in any of the banks
– there’s almost no bondholders left to wipe out
– the govt’s Debt/GDP ratio already is so high that they’ve been shut out of international capital markets and only Russia is willing to finance them (perhaps because, at the time, Cyprus had a democratically-elect “communist” government….which has just been kicked out of office.)
– yet the Troika has made clear that Cyprus must been seen to make a substantial (less than 50%) financial contribution to bailing out its banks.
– I’m guessing the IMF (or someone else) put its foot down and said that pretending to put more debt on the Cypriot Govt. would effectively be a farce in that few think they will be able to pay the existing debt load.
So when you look at a house that you’ve fully mortgaged and sold the furniture and you’re told you have to come up woth more money…..you rip out the plumbing.
Simon: that’s roughly my take on it. Given the Euro, there aren’t many good options. I blame the Euro. And as a way to promote political unity, it currently seems to be very counterproductive. They are all blaming each other, rather than the Euro itself. Like cats in a bag.
Is there going to be a WCI pool on the next Euro-zone jurisdiction to implode? You could justify it as an experiment in the predictive power of markets.
Bob Smith: “The obvious question is why the bailout of Cypriot banks didn’t just ding uninsured deposits (i.e., amounts over E100K)? ”
I’ve now read two news reports (Reuters and NYTimes) that give accounts of the last-minute negotiations prior to the deal announced Saturday night. Both accounts say that the President of Cyprus insisted that the rate on large deposits (over 100K) could not be in “double-digits.” At which point, the EU negotiators apparently took the position that the total amount Cyprus had to contribute to the deal was fixed, but they had the leeway to change the mix to make it more acceptable. (Which it seems is still the EU position tonight.) The President then decided to raise the haircut on small deposits.
As I said, that’s two often-reliable news sources that have said so. The EU position it describes seems consistent with their position throughout. I’m not aware that the Cypriot President has directly denied that he proposed higher rates on the poor to shelter the rich (anyone know otherwise?)
Nick: it’s a great way to promote political unity! All Cypriots* are now united against the Germans….and the Germans against the Cypriots!
*We’re ignoring the Turkish Cypriot state right? ‘coz no one has mentioned them yet.
A pool is a good idea (you’ve just offered to run it, right?)
I’ll put my money on small countries….EU rules seem to differ depending on your size (remember the Stability and Growth Pact?)
Simon,
That’s consistent with what I had read. If that’s the thinking it’s just mind-boggling. The Cypriot banking sector is toast for global investors with any material level of haircut (or frankly, even with the threat of a haircut – if they came back tommorrow and said “no worries, we got a huge equity injection from the Russians, we’re all good”, it would be about 15 seconds before everyone pulled out every last dime). Arguing 15 vs 10 is like bald men fighting over a comb while reorganizing deck chairs on the Titanic (to badly mix my metaphors).
Not that it isn’t totally believable.
I guess the tricky part is defining what constitutes an implosion. It kinda has a “we know it when we see it quality to it”.
I suppose we could also predict the number of months before a EU member drops out of the Eurozone or the number of months before the ECB says “screw it” and starts churning out acres of Euros. (8 for either)
We could also start taking bets on which Euro zone country elects the first fascist government. (I might take a long-shot on France. Sure Greece and Italy are the early favourites, but I like a dark horse.)
I nominate Hungary as the candidate for the first fascist government. The neo-fascist Jobbik Party (Movement for a Better Hungary) is already third with 47 seats out of 363.
Spain apparently has an unhuman ability to withstand punishment, so the next implosion will be Malta with a banking/insurance sector worth 800% of GDP.
I give the ECB ten months before they start the printing presses.
Nick,
I just read that old post on Anglo-Saxon finance. I don’t remember reading it before, but it’s really good. I especially like this comment of yours, which is basically the same as my proposal for a “bomb-proof” financial system.
“isn’t that precisely (in effect) what happens with deposit insurance and commercial banks with 10% capital reserves”
It’s the free deposit insurance that causes the huge quantity of deposits, not some kind of intrinsic money demand. Nobody would ever leverage up to that extent except to maximize the value of the government subsidy. So I think it’s not the same at all, in fact.
I’m not sure if you are still making the case that there would be less capital if banks didn’t fund from deposits? I don’t really see very much relationship between availability of risk capital and deposit funding.
Interesting, this Bloomberg piece (http://mobile.bloomberg.com/news/2013-03-19/yes-cyprus-is-different.html) suggests that at least part of the cypriot concern with protecting foreign investor relates to a desire to maintain good relations with a useful ally (Russia) in Cyprus’ ongoing conflict with Turkey.
That’s a dimension i hadn’t seen discussed yet.
New idea. Declare a bank holiday until March 25th. 2053. No haircuts, no collapse, every thing is safe and sound until the banks open. In 40 years.
Simon van Norden:
“I’m not aware that the Cypriot President has directly denied that he proposed higher rates on the poor to shelter the rich (anyone know otherwise?)”
It’s possible that he is trying to use small depositors as a shield, or he may have given some commitments to Russian clients. For depositors the practical difference between 9,9 and 15,6% is relatively small, but for a shell company this difference can be huge (e.g. not being able to pay kickbacks on time is very bad for your business).
Bob Smith:
“Interesting, this Bloomberg piece (http://mobile.bloomberg.com/news/2013-03-19/yes-cyprus-is-different.html) suggests that at least part of the cypriot concern with protecting foreign investor relates to a desire to maintain good relations with a useful ally (Russia) in Cyprus’ ongoing conflict with Turkey.”
I agree, it is a very important factor.
Today the new idea is to open the banks, but impose limits on withdrawals and transfers.
Simon,
you are right, never underestimate the potential of people under the former ottoman rule to do interesting things. Or how should I call this, stupid, crazy?
From my perspective, the entity which is now called Cyprus, killed their business model, yesterday. Every modicum of stability, legality, sanity is gone by now.
If my explorative interpretation is correct, they just killed some 25% of their GDP, possibly 50%, resulting in, according to IMF 120 % GDP debt numbers rules, to wipe out 30 – 100 % of the cash assets there, roughly. And not just some 10% fee.
Since there was repeated talk of “Russian ally” here and in other blogs too, my guess is that here is the only chance to talk this through without emotional explosions.
During the fatal parliament vote, the Cyprus Finance minister was already in Moscow to get new instructions from his owners.
There is plenty UK and Turkish NATO military on this island, covering every hamlet within 50 km (please see Google maps), and I am sure they have now all men on station to eavesdrop on everything somebody says.
All Cyprus ports shippable (http://www.worldportsource.com/ports/CYP.php) are either on NATO territory or within walking distance to them.
Some wording might now get a little dicey, so please be patient with me, and tell me, where I overstep some lines, because I will intentionally explore these lines here.
Would a Canadian “subject of the Crown” call the English “brothers and sisters”?
What do you say, what would the ruler of Akrotiri_and_Dhekelia, the UK Air Vice Marshal Graham Stacey do, if a Russian war ship (as part of a military invasion in response to a Cyprus Sovereign call for brotherly solidarity, like Afghanistan 1979), would come within Torpedo distance (10 km, half the 12 mile zone) to a UK “Sovereign Base Area”, from which the UK is staging in the moment military action in Syria?
There are actually reports that Russian leather jackets are filling all flights from Moscow to Cyprus.
Now, if you would be Putin, how far would you go with the brinkmanship?
And, as a Angela Merkel, what would you do, having elections this summer, besides sitting tight and doing precisely nothing?
genauer,
Cyprus, with its close ties to Russia and potentially huge natural gas reserves, objectively has more room for maneuver than any other periphery country.
The offer it got from the Eurogroup may be reasonable, but it was delivered in a very counterproductive way, given that the new president was elected just a few weeks ago.
Now both sides need to calm down and maybe renegotiate, rather to continue the brinkmanship.
As for the military implications of the current crisis, lets not get silly.
Genauer, let’s be honest, Cyprus’ business model (at least in the banking sector) blew up the minute people started talking about depositors (insured or otherwise) needing to take a haircut. Rejecting or accepting the proposed bailout plan wouldn’t make a different on that account. In terms of Cyprus as a holding company jurisdiction, that might have survived had depositors just taken a haircut, but when the government does it by way of confiscatory taxation, yeah, that’s not going to help.
Whether that has sunk in in Cyprus yet remains to be seen. I received an email in my inbox this morning from one the companies that helps organize and manage investments through Cyprus for foreign investors. It was tauting the virtues of Cyprus’ tax treaty network without even mentioning the fact that its financial sector was imploding or trying to cook up some story about why everything will be hunky-dory going forward. The timing of the email was unfortunate if nothing else.
If there is no cash withdrawal but you can transfer deposits from account to account, the payment system would still work. It would have been better to impose such a corralito. You would have a pure fiat currency run by the banks. Of course, after the tax , there is no fiat anymore.
The Cyprus foreign policy show how a union must be either complete or nonexistant. Youcan’t have the same curreency without fiscal union and common bank supervision,then common foreign policy and full political union ( local jurisdiction must be administrative only). Of course policies must be near-unanimous ( or at least the majorities must be shifting so that everyone has a veto sometimes). Run it like Switzerland.
In a way, NATO is a good model, it almost never went to war as NATO because you coud not get enough people on board. The only one were either solidarity no-brainer Afghanistan ( ok it turned out a no-brainer in the real sense…) or one where you could barter support. In the Kosovo war, Greece was allowed not to bomb Serbia but was told that using their ports was the price to pay for NATO forbidding Turkey to misbehave. (NATO may be the only alliance where two members joined to get protection from each other…) And Turkey was forbidden to bomb ( they could fly escort).
There should have been no Euro without comon foreigh policy.
Genauer: “my guess is that here is the only chance to talk this through without emotional explosions.”
Give your head a shake! The emotional explosions have been in the streets (and the voting booths) for all to see in several countries now. Reuters today is reporting demonstrations in Athens to pressure the govt. to “do a Cyprus.”
…and let’s not forget the emotions that would be unleashed by Merkel’s political opponents arguing that she is sending German money south to bail out lazy mediterraneans and russian oligarchs.
Simon,
maybe I should have said this differently.
I meant, that a Canadian blog, with most of the people here having no skin in the game, is pretty much the only place to discuss, without emotional explosions:
“If my explorative interpretation is correct, they just killed some 25% of their GDP, possibly 50%, resulting in, according to IMF 120 % GDP debt numbers rules, to wipe out 30 – 100 % of the cash assets there, roughly. And not just some 10% fee.
Since there was repeated talk of “Russian ally” here and in other blogs too”
What I tried to say, that
a) there is no such thing as a “Russian card” within shooting distance of NATO territory, and
b) that this has now already triggered a disorderly default of Cyprus
I should have written “NATO military bases” instead of “NATO territory”. A significant difference.
genauer,
Russia is a permanent member of the UN Security Council, and this fact alone makes it a valuable ally. There is no need to come up with crazy scenarios of Russian military intervention, for which Russia lacks the necessary capabilities anyway.
Doctor Why,
hmmm, that looks like more misunderstanding here.
How would the UN Security Council be related to any of the problems of Cyprus?
genauer,
Resolutions, sanction against Turkey?
Anyway, the main flash point now is the offshore gas fields, and Russia also can send a few ships there, if necessary, to protect joint commercial interests.
Are you aware that Turkey does not recognize the right of Cyprus to drill in Cyprus’s exclusive economic zone and that Cyprus has to build quasi-military alliances in order to be able to develop its offshore gas fields (containing reserves worth tens of billions of euros)?
What Cyprus needs today is 5.8 b Euro cash, and not as a loan, to be counted against the IMF 120% criteria.
Doctor Why, may I ask you a question : how close have you ever lived to a real military base, with signs every 20 meters, that anybody going across the fence could be shot without warning, or a “real” border with barbed wire, anti-personal mines, and lots of guns of all kind stacked on each side?
genauer,
1) “What Cyprus needs today is 5.8 b Euro cash, and not as a loan, to be counted against the IMF 120% criteria.”
One plan was to sell shares in Laiki bank to Russia in order to reduce the recapitalization requirements, so we are not talking about a loan.
2) I’m sorry, I’d rather not tell. If you are implying that I have no experience in this area – well, you are wrong.
” one plan was”. Exactly. Who buys shares of an outfit which loses 1% of revenue per quarter, has non-performing loans of 18.9% at home , and 47% abroad? Rapidly approaching 1? How do you define the NPV of something like this, to minus 5 billion, or … ?
When mainland Europe looks at Greece and Cyprus, we see people and Governments living in some parallel phantasy universe.
The mob in the street can demand as much as it wants that 2+2 = pi, and their parliaments can decide on this, it still doesn’t make it so.
genauer,
AFAIK, the deal is supposed to work something like this – a Russian bank (Gazprombank?) buys 4bln euros worth of newly issued shares of Laiki in return for natural gas development rights for GAZPROM.
So it is not a fantasy deal, but a real quid pro quo.
Well,
if Cyprus sells drilling rights, not loans, for 5.8b cash to show up in the ECB this weekend, they could have done this a little earlier, and without damaging their reputation.
They could have done a lot of things differently if they hadn’t had a crazy communist government until Feb 28.
And can somebody explain to me, why these drilling rights should be more worthful for Gazprom than for BP, Exxon, or any other western corporation.
Why a turkish soldier would have more respect for a russian 100-foot boat, they let through the bosporus, then for 2 US carrier fleets?
Cyprus chose to have good relations with Russia and less good relations with the US (I guess corruption has as much to do with this as traditional cultural ties). They may gradually change their alliances, but that’s going to be a painful process.
For example, Russia has already threatened that it may renounce their double taxation treaty with Cyprus if they (Russia) does not like the eventual shape of the bailout deal.
“For example, Russia has already threatened that it may renounce their double taxation treaty with Cyprus if they (Russia) does not like the eventual shape of the bailout deal”
Not sure that’s a winning strategy. Sure it would hoop Cyprus’ holding company business. On the other hand, Cyprus could turn around and tax the bejesus out of the existing Russian holding companies (typically tax treaties contain a non-discrimination clause). Cyprus would lose its existing business, but pay off its debts with formerly Russian money (“Hey look, we now own all Gazprom’s offshore assets” – anyone think any of their offshore investments might be run through Cyprus?).
Cyprus can have as good ties with Russia as it wants, it doesn’t help them one bit with Turkey or the ECB.
It just raises more suspicion, about their criminality and sanity, when they endlessly wriggle around, trying to play a card they just don’t have.
In most cases Russian officials (in this case it was Medvedev, I think) don’t know what they are talking about, so it’s hard to tell whether they understand the consequences of such a decision.
genauer,
It helps with Turkey to some extent.
As for the rest – yes, this may end badly.
They tried to do a similar balancing act with confiscated arms a couple of years ago and ended up destroying their main power station.
genauer: “Doctor Why, may I ask you a question : how close have you ever lived to a real military base, with signs every 20 meters, …”
You’re asking that question….of a Cypriot?!?!
Have you ever tried to fly into Nicosia? There’s an airport….but no flights since the early 70s….it is too close to the cease-fire line for aircraft to fly without possibly attracting AA fire. Instead, you fly into an airport an hour away.
I think civilians have been able to pass from one side of the capital to the other for only the past few years (“Checkpoint Charlie” style.) I asked an official what it was like on the other (Turkish) side…but he said that as an official it would not be considered proper for him to cross.