Cyprus Needs to Lay Its Hands on One-Third of Its GDP By Monday
There are lots of places you can go to get all the latest messy details about Cyprus—Felix Salmon's take is good—but the nickel version is that everyone is fed up. The Cyprus legislature has refused to approve the EU/IMF bailout plan, and so far both the EU and the IMF are refusing to sweeten the deal. Maybe Russia could help, but they probably won't. So we're in a standoff:
The euro currency union, a centerpiece European policy for a generation, edged toward a rupture on Thursday when the region’s central bank said it was ready to pull the plug on Cyprus.
The stark ultimatum came in a terse statement from the European Central Bank’s governing board that on Monday it would cut off the flow of euros to Cyprus’s financial system unless the country’s leaders reach terms with the International Monetary Fund and other European nations on an international bailout.
Just to give you an idea of what all the numbers mean, the EU/IMF plan requires Cyprus to come up with about $7.5 billion as its share of the bailout. That's roughly a third of their GDP. To put that into local terms, it would be as if the United States were being asked to pony up $5 trillion. This is about equal to all government spending—federal, state, and local—for an entire year.
No country in the world has ready access to that kind of dough, which is why the original plan relied on taxing bank deposits. There just weren't a lot of other options.
My guess is that, as usual, some kind of deal will be cobbled together and announced a few minutes before the markets open on Monday morning. But maybe not. And if not, Cyprus's banks will implode, taking Cyprus along with them. An exit from the euro would be all but certain.
If that happens, EU leaders will really have to start working overtime to convince everyone that Cyprus is still unique, and its implosion means nothing for the rest of the currency union. Maybe that will work. After all, there are some good arguments that Cyprus really is unique. It's just not clear that those arguments are quite good enough to convince everyone. And you really do have to convince everyone....