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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.