Thursday, January 31, 2013

Cyprus will probably be bailed out

Despite the marked reluctance shown earlier to bail out Cyprus and its banking sector to the tune of €17.5 billion, it would appear that, as predicted, German opposition to that course of action is lessening.
[P]ressure to reach a deal on Cyprus had grown from euro-zone member states, the European Commission and the European Central Bank. There is concern in Brussels and across Europe that were Cyprus to be allowed to slip into bankruptcy, it could reverse the recent progress that has been made in coming to terms with the euro crisis.
Apparently, it is not a solution anyone is looking for but merely a coming to terms with, which shows some rationality in the approach and an acceptance of the fact that there can be no solution.
Still, the bailout is not without risks. Cyprus is in urgent need of up to €17.5 billion ($23.6 billion) in emergency financing, primarily to prop up its ailing and outsized banking sector. But a bailout of that size would be roughly equivalent to the country's annual gross domestic product and would increase the island nation's sovereign debt load to a potentially unsustainable level. The International Monetary Fund had even demanded in December that the aid package be paired with a significant debt haircut.

There have been recent indications that the final bailout price tag might ultimately be lower. For one, Nicosia has said that its banks do not need as much help as had originally been estimated. For another, the Associated Press reported on Tuesday that Russia will very likely take part in the bailout package, lessening the burden on Europe.
That means the Russians are softening as well or someone has explained to the Russian government that Cyprus is essential for the welfare of the oligarchs who are, in turn, supportive of Putin. (Others are either abroad or in Siberia.) German Finance Minister Schäuble remains opposed to the bailout package but he may be outvoted at the next meeting of Finance Ministers.
Still, Schäuble isn't the only one in Berlin with his doubts. The Cyprus bailout, once it is agreed to by European finance ministers in Brussels in the coming weeks, must also be rubber-stamped by German parliament. And that, particularly with a general election coming in September, is no longer a foregone conclusion. Chancellor Angela Merkel's coalition partners, the business-friendly Free Democrats, have voiced significant skepticism of a Cyprus bailout and could see a no vote as a way to sharpen the party's extremely dull profile.

There are also several rebels within Merkel's own Christian Democratic Union (CDU) who are likely to vote no. Christian von Stetten, chairman of the CDU parliamentary caucus that advocates for small- and medium-sized businesses, said he would oppose an aid package for Cyprus if it came to a vote. "Cyprus applied for aid seven months ago, and since then it has been staying afloat with payments from the Central Bank of Cyprus," Stetten told SPIEGEL ONLINE. He added that the country's actions since then have been carefully scrutinized, and that "if a majority decides to transfer money to Cyprus from the bailout fund, I wouldn't be able to understand that." He said he would vote against any motion to grant Cyprus aid in parliament.
My guess is that the deal with go through and, naturally, will solve nothing. The time for the German rebellion is not yet. Besides, they may not be able to afford it. Whether the countries that are being bailed out can afford the process is another question.

1 comment:

  1. Faced with a choice between having a limb amputated and taking painkillers and hoping it will sort itself out, a lot of people would be tempted to take the painkillers and pray, and I'd say that's what's happening.