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Did Germany Just Throw Cyprus Overboard?

“Cyprus! Who cares about Cyprus?” you say. Well, you need to start paying attention now.

To recap for the inattentive: Cyprus (full-fledged member of the eurozone and current president of the EU) needs an emergency bailout because its banks are insolvent and it is running a very large and rapidly growing budget deficit. Its finances are out of control. It has no market access and its bonds are rated close to default. The banks are temporarily living off of liquidity support from the ECB, but the ECB isn’t supposed to lend to insolvent banks, so that cannot continue for much longer.

Cyprus applied to Europe for aid in June. The Troika visited Nicosia and proposed an austerity and reform plan on July 25th. The Eurogroup made it crystal clear that, for the Cyprus bailout to be considered this year, it had to be wrapped up and ready for the eurozone finance minister’s scheduled meeting on Nov. 12th. The Cyprus government, after waiting for two months, announced in October that it had rejected the Troika’s proposals and “invited” the Troika to return to discuss its counter-proposal. (Please see my post, “Cyprus Tells The Troika To Take A Walk”, Oct. 1st, 2012.) The Troika has not yet returned, and may never return.

From the Cypriot perspective, this was supposed to be a negotiation: the Troika proposes, Cyprus “rejects” and counter-proposes, the Troika returns, and then a compromise is reached. However, it appears that Cyprus may have overplayed its hand.

Instead of saying “thank you for these constructive proposals, let us work with you to make them better”, the Cypriots inexplicably decided to raise the Red Banner and to cast its negotiations with the Troika in the context of the international class struggle. Frankly, in describing the stupidity of this move, words escape me. Were the Workers of the World really supposed to rise up and defend the 13th month salary and the COLA?

Communist President Christofias informed Europe that he would defy the Troika’s demand to rein in wages and asked the other parties to support his position. “I’m certainly ready to take to the streets with the workers,” he reportedly said. A delegate from his party told the international communist party conference in Brussels that “we will not accept terms that will abolish working peoples’ gains and sell off for pittance public property to big capital.”

Since rejecting the Troika’s proposals, the government has been “calling on” it to return to Nicosia for “further negotiations”, since the Nov. 12th deadline was rapidly approaching. But today is November 1st, and Christofias and his FM are still waiting by the phone. They say that the Troika will arrive any day now, or maybe next week.

As readers know, it has been my view that Europe will hold its nose and write the check for Cyprus because because exit from the eurozone is “unthinkable” and “impermissable” (especially for the country which is the current president of Europe).

But now, right out of the clear blue sky, German finance minister Wolfgang Schaueble told the media this morning that Cyprus has missed the November deadline, and that the next opportunity to apply would be next year.

As everyone and his brother knows, Cyprus will run out of money long before then. That suggests that Schaueble, meaning Merkel, meaning Germany, meaning Europe has decided to throw Cyprus overboard. Can this be true? We’ll undoubtedly know more tomorrow, but I doubt that Schaueble was misquoted. I think we should assume that he meant precisely what he said.

I see three reasons for this shocker: (1) Europe is furious at Cyprus and can’t stomach their communist arrogance; (2) Cyprus really has missed the Nov. 12th application deadline; and (3) even if Cyprus had met the deadline, their application would have been DOA in the Bundestag. Failure to apply on time makes it easier to reject Cyprus’ application.

The larger question is: Does this mean that Merkel can’t get the Greek bailout through the Bundestag? If so, that means we are facing another Lehman event, since I am aware of no plan for an orderly Greek exit. Grexit, in my opinion, will include default, repudiation and redenomination. That’s a Black Swan, no matter how many times it has been mooted before.

Is this the assassination of the Archduke Ferdinand? I sure hope not!