Cyprus could be first to exit Eurozone as bailout talks are in chaos

This weekend concerns are growing that Cyprus may be the first Eurozone country to be forced into exiting the Euro.  The country is in an enormous financial mess, and its leaders seem to have their heads in the sand about the size of the problem, refusing to accept EU conditions for a bailout and clinging to the naive hope that the Russians will come to their rescue with a no-strings-attached loan. 

Of course Cyprus is not the only EU country in financial difficulties at the moment, but the crucial difference is that, unlike those other countries, it is probably not too big to fail and there would be limited contagion within other EU countries if it were to do so. It is therefore entirely conceivable that it may be forced out of the Eurozone soon unless the Cypriot government takes a radical and very swift change in approach.  

Cyprus applied for a bailout from the EU and the IMF in June after its two largest banks sought state aid to help with massive losses incurred by the Greek debt write-down earlier in the year.  The island has been unable to borrow from international financial markets for more than a year and the country’s financial system is consequently hanging on a knife edge.  There is a real danger that the prolonged uncertainty and instability of the system, and the spectre of a Eurozone exit, could prompt foreign depositors to move their cash to another country, in which case the overnight collapse of the banks would appear inevitable. 

A lot of the blame for this situation, in my view, lies at the door of President Christiofas who has shown his political naivety in recent months, stalling discussions with the Troika and ultimately rejecting their conditions for an EU bailout in favour of his own set of populist leftist proposals.  He seems entirely to have failed to appreciate the size of the hole he is in. One might expect that negotiations regarding a bailout would involve a healthy debate about the size of wage reductions to be made or new taxes to be levied, but the fact that Christiofas is still sticking dogmatically, for example, to a demand that wages should continue to be index-linked shows the scale of his delusion.

Contrast the approach of Cyprus with that of Ireland, which found itself in similarly straightened circumstances but instead of sticking its head in the sand faced up to the difficult decisions that had to be made.  The Irish public undoubtedly felt the pain of harsh cuts and tax increases, but are now starting to see light at the end of the tunnel as a consequence.  Why should the Irish people, having taken their own harsh medicine, now have to subsidise the Cypriots so that they do not have to do the same?

The upshot of the Cypriot approach in recent months is that the chances of a bailout being agreed in time to save Cyprus are now rapidly receding, with it being clear that the ill-thought-out counter offer is unacceptable to the Troika and no clarity as to where the parties go from here or even when they will next meet to discuss the problems.  The deadline which had been set of 12th November to have agreed the bailout now seems a very remote, if not impossible, prospect.

For Cyprus, the future looks very frightening and it will take some heroics to bring the small country back from the brink.  Unless of course you believe that the Russians will save the day with a very large suitcase of cash........