Nicosia holds a better hand in this €16bn poker game

 

Who will blink first in this €16bn poker game? The European Central Bank’s threat to withdraw emergency funding from crippled Cypriot banks looks like an attempt to play hardball: scare tactics to force the politicians who threw out a hugely unpopular raid on savings into finding €5.8bn from somewhere by Tuesday.

Without the cash – around €9bn funnelled to lenders from the ECB through the Central Bank of Cyprus – banks tottering under their exposure to Greece would collapse. The government would be forced to print money, pull out of the euro, and impose capital controls to stop cash winging out of the country.

The ECB argues that it can’t lend to insolvent banks, and that a bailout needs to be in place for the money to continue to flow. But is the ECB ready to take this ultimate sanction? Cyprus represents only 0.2 per cent of eurozone GDP and in purely financial terms the numbers are manageable. But the unpredictable consequences could ripple far beyond. The sight of depositors queuing up in Cyprus to get their cash out could trigger bank runs across Europe. For the sake of a few billion – peanuts in central banking terms – the ECB might have to step in with hundreds of billions in emergency liquidity for the financial system if banks across Europe take fright.

Interbank lending rates were little changed today because markets believe a deal will get done – but how long would the calm last in a painful exit scenario?

Cyprus’s situation is unique in the eurozone, with a banking sector swollen to seven times the size of its economy. But if Cyprus did pull out of the euro, as is being openly suggested by officials, then it underlines the fact the single currency isn’t as “irreversible” as ECB President Mario Draghi boasts. Cyprus’s politicians hold a better hand than it looks: the ECB’s ham-fisted brinkmanship risks bringing the eurozone face to face with its Lehman moment.

PROMOTED VIDEO
Latest stories from i100
Have you tried new the Independent Digital Edition apps?

Day In a Page

Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project