Nicosia holds a better hand in this €16bn poker game
Thursday 21 March 2013
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.
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Durham Free School: 'Creationism taught at' free school facing closure
Ukip would cut billions from Scottish budget to fund English tax cuts
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
End of the licence fee: BBC to back radical overhaul of how it is funded
Ukraine crisis: Top Chinese diplomat backs Putin and says West should 'abandon zero-sum mentality'
- 1 What happens to your body when you give up sugar?
- 2 Ed Miliband deemed less influential than One Direction's Louis Tomlinson by official Doncaster power list
- 3 Japanese island overrun with cats after population explodes
- 4 Delhi bus rapist blames dead victim for attack because 'girls are responsible for rape'
- 5 Have sex with your iPad thanks to the new sex toy no-one asked for