Cyprus Could Explode Before Greece

“All of the political parties rejected the troika proposals for the abolition of    
CoLA, scrapping of the 13th salary, supervision of co-op banks by the Central Bank and the privatisation of semi-governmental organisations. When it came to drawing the ‘red lines’ the political parties were unanimous. None of the parties would dare disagree, because they would be publicly crucified for supposedly adopting the anti-worker positions of the troika and serving the interests of big capital.”
----Editorial in the Cyprus Mail, Oct.21st, 2012

“We know that we will not accept terms that will destroy the popular strata; abolish working peoples’ gains and sell off for pittance public property to big capital. We shall also stand on the side of the class-based trade union movement in the mobilisations it is planning if the Troika insists on its policies. That is to say, we shall not enter into a procedure that will negate us and that will be in complete contradiction with our ideology and history.”
---Statement by AKEL, the communist party of Demetris Christofias, the Soviet-educated president of both Cyprus and the EU, at the International Meeting of Communist and Workers' Parties, Brussels, Oct. 2nd, 2012

"Cyprus plans to contact international lenders on Monday evening to invite them to the island for final talks on a comprehensive aid package for the Greece-exposed island."
--Reuters, Oct. 22nd, 2012

I admit that I have been crying “wolf!” on the eurozone crisis for almost three years now, but I will now do it again. I think that the first country to  exit the eurozone may be Cyprus, and soon. Cyprus is a an economic, financial and political mess, worse than Greece, and it may not be too big to fail.

I have been following the Cyprus situation closely because Cyprus seems like the most scary sovereign credit in the eurozone. Cyprus has always had a powerful Communist Party, and it has always had a bit of an anti-western orientation, given its peculiar history (explained in Christopher Hitchen’s history of the island). Some may recall that Archbishop Makarios was viewed by the US as the “Castro of the Mediterranean” for his leftism.

In 2008, the people of Cyprus elected Demetris Christofias as president for a four-year term. Christofias, a marxist educated in Moscow during the Soviet period, headed the Cyprus Communist Party, known as AKEL. Earlier this year, Christofias became the president of the EU, which is not a purely ceremonial role.

I dare say that the Cypriot banks were never in terrific condition, given the nature of the Cyprus economy and the close relationship with Greece which has never been the “land of good loans”. However, the recent default by Greece on its government bonds and the collapse of the Greek economy have wiped out the Cyprus banks, which are now insolvent on an intergalactic scale. The cost of bailing out the Cyrus banking system is now estimated to be in the range of 100% of GDP. Some of that is worthless Greek bonds, some of that is bad loans in Cyprus and Greece, and some of it is not to be looked at too closely. One of the banks’ deadbeats is reportedly AKEL itself. Just don’t ask.

There is indeed an irony in that Cyprus needs a bailout from Big Capital at a time when it is led by a Communist, and that the EU, which is trying to figure out a way to bailout Cyprus, is headed by...Cyprus. But that’s not the problem. The problem is that Cyprus’ government, both president and parliament, are not cooperating with the Troika. Greece has learned to go through the motions of cooperation, agreeing to preposterous conditions it has no intention of implementing. Cyprus, by contrast, isn’t agreeing to any of the Troika’s demands (see the editorial in the Cyprus Mail above).

Cyprus needs the biggest bailout in the history of sovereign credit (100% of GDP), will run out of money next month, and yet continues to stonewall the Troika, not only in private but also in public. Christofias has reportedly said that “he would be out demonstrating with the unions” if the troika insisted on abolishing automatic COLAs for Cypriot workers. This could be face-saving political posturing before capitulation:  it is hard to sell austerity when you are the anti-austerity party.

I may be proved wrong next month as the Troika’s conditions are agreed and the bailout check is ultimately wired to Nicosia. Europe has many good reasons to want to get Cyprus over with in order to focus on Greece and Spain. The current EU plan is to bundle the bailouts of Cyprus, Greece, Spain and maybe Slovenia into one package for the German and Finnish parliaments to approve.

But there are still those two big hurdles: agreement to the austerity plan by Cyprus’ government and political parties; and approval by the German and Finnish parliaments. None of those will be automatic or even easy. In fact, there are reports that the Bundestag is turning against bailouts in general.

Default, debt repudiation and deposit redenomination would an interesting maneuver, as the Cyprus banks are stuffed with Russian and Chinese deposits (in euro).