IMF takes a more critical line on Greece

The IMF  released its latest review of the Greek bailout on Wednesday. As might be expected it was a bit more critical than the version released by the European Commission and ECB a couple of days ago.

As also might be expected the press has focused on the fact that the report reveals an €11bn funding gap for Greece between 2014 and 2016 (higher than that suggested by the eurozone). The report also calls for the eurozone to consider further debt relief for Greece. Neither of these revelations is brand new, with both having been included in the leaked version of the Troika report a few weeks ago.

There are a couple of other interesting points in the 207 page report, including some concrete forecasts on the shares of Greek debt.

These amounts are pretty much as we predicted back in March 2012, where we forecast that by 2015 around 76% of Greek debt could be held by the IMF and eurozone (NB – it’s not clear how the ECB and national central banks holdings of debt [circa €40bn] are classified in the IMF figures. If they fall under private sector here, then the holdings by official creditors may well be higher in reality).

In any case, these amounts drive home that the real question facing Greece and the eurozone (after the German elections) is whether to write down these ‘official creditors’ or not – known as ‘official sector involvement’ (OSI). There will likely be a push to extend the loans further and cut their interest rates but, as the funding gap highlights, there are immediate liquidity and solvency questions facing Greece.

Other interesting points in the report include:

• The IMF warning of further social unrest: “The risk of political instability remains acute, especially in light of high unemployment and on-going social hardship. Further ambitious fiscal adjustment is needed for public sector debt to decline steadily, which exacerbates the possibility of social stress and political resistance.”

• Arrears clearance seems to be behind schedule with only €1.4bn of the targeted €4.5bn being paid off. However, Kathimerini reports that this has now been increased to €4bn according to Greek government data.

• Greece only just manages to quality for IMF assistance, with the IMF saying, “The program continues to satisfy the substantive criteria for exceptional access but with little to no margin.” The explanation involves a few stretches on the debt sustainability front, with the fund arguing, “The risk of international systemic spill overs in case of a permanent interruption of the program remains high and justifies exceptional access.” This raises an interesting question of whether, with the OMT and talk of a eurozone turnaround, the spill over effects are still significant enough to justify such IMF action?

• The comments by Paulo Nogueira Batista, the Latin American representative on the IMF board, who slammed the overly optimistic assumptions in the debt sustainability analysis and suggested the programme was flawed. He has since backtracked from his comments, while the Brazilian government has issued its support for the bailout programme. Nevertheless, the outburst is a timely reminder of the on-going disputes behind the scenes in the IMF, between the US/Europe and the emerging market countries.

Is Cyprus eyeing up an exit from its capital controls?

As expected the Cypriot government has finally reached a deal with the EU/IMF/ECB Troika over the final stage of the restructuring of the Bank of Cyprus (BoC).

As we noted in today’s press summary this was not an easy decision to reach, and has dragged on since Spring, for a couple of reasons:

• The Cypriot government was keen to limit the haircut and insisted that the BoC only had to reach a tier one capital ratio of 9% at the current point in time.
• The Troika however insisted that this 9% target applied to the end point of the bailout (2016) and therefore the bank needed a ratio of 12% currently since it will deteriorate overtime.
• As the Cyprus Mail notes the Memorandum of Understanding signed by both sides clearly fits the Troika view. Unsurprisingly it won out (as always) but the Cypriot government is still seemingly bitter about the whole affair (which doesn’t bode well for the many, many interactions between the two sides yet to come).

In the end the two sides settled on a 47.5% haircut for uninsured deposits over €100,000 – although these funds will not be completely lost but converted into shares of the bank. This is above the original target of 37.5% but below the potential limit of 60% (for the most part).

The most interesting part of this whole deal might be the following though:

“Following the recapitalisation, 12% of deposits that were previously blocked will be released (5% in total).

The balance will be split evenly into three separate time deposits of six, nine and twelve months, respectively. BoC will have the option to renew the time deposits once for the same time duration. These deposits will receive a rate of interest which will be higher than the corresponding market rates offered by the BoC.”

Of the remaining frozen deposits 12% will be released then, while the rest will first be converted to time deposits, meaning people may not have access to their money for between 6 and 24 months. There are likely a couple of motivating factors here:

1. Firstly, this eases the funding transition for the bank as it looks to return to normal operations since it locks in part of its deposit base.
2. Secondly, and more importantly, it locks in a large amount of deposits which would be liable to flee the country as soon as the capital controls are removed (not least because they tend to belong to rich and/or foreign depositors who would likely find it easier to shift their funds).

These funds are only likely to be worth around €6bn, so not a huge amount in a country with a deposit base still around €50bn and far from enough to settle the question of capital flight once the controls are removed.

But it suggests that both Cyprus and the Troika are planning for an exit from capital controls and looking for ways to stem the potential outflow. The quicker this can be done in a managed way the better for the Cypriot economy. As we have noted before, as long as the capital controls apply the hope of a recovery is slim to none in Cyprus and the euro continues to look incredibly fragmented.

(Note: the blog has been updated with new calculations. Previously it suggested the total coverted to term deposits would be €2bn, however, it is likely to be closer to €6bn). 

Portugal's Finance Minister quits: A bolt out of the blue? Not really...

A surprise development in Portugal this afternoon, as Finance Minister Vítor Gaspar has announced his resignation. The office of Portuguese President Aníbal Cavaco Silva has said in a note that Gaspar will be replaced by Maria Luís Albuquerque - one of his deputies, with a long career in the Portuguese Treasury.  

Initially, the news sounded very much as a bolt out of the blue. That was until Jornal de Negócios published Gaspar's letter of resignation on its website. The letter reveals the following:

• Gaspar had already written to Portuguese Prime Minister Pedro Passos-Coelho in October 2012, stressing "the urgency of [his] replacement as Finance Minister."

• At the time, Gaspar had decided to quit over "a series of important events". In particular, he mentions the Constitutional Court ruling that struck down the government's plan to limit extra holiday and Christmas pay for public sector workers as unconstitutional in July 2012, and "the significant erosion of public support" for the austerity measures attached to the Portuguese bailout.

• However, Gaspar was asked to stick around a bit more - at least until the 7th review of the Portuguese bailout by the EU/IMF/ECB Troika was finalised and an extension of the bailout loan maturities was secured. Incidentally, the fact he has now been allowed to leave could be seen as a vote of confidence from the government in the strength of the Portuguese economy (although Gaspar may simply have been stepping up the pressure to be allowed to exit).

• Gaspar also points out that Portugal's consistent failure to meet its deficit and debt targets under the EU/IMF bailout agreement had "undermined [his] credibility as Finance Minister." On this point, it is probably worth reminding that, on Friday, it came out that Portugal's public deficit in the first quarter of 2013 had reached 10.6% of GDP - with the target for this year set at 5.5% of GDP.

• Interestingly, Gaspar concludes his letter by saying, "It's my firm conviction that my exit will contribute to reinforce your [Prime Minister Passos-Coelho's] leadership and the cohesion of the cabinet". This seems to suggest Gaspar may have lost faith in the reform approach taken in Portugal, and may not have been willing to push ahead with it (not least for the reasons mentioned above).

In any case, the news of Gaspar's resignation hardly comes at a great time for Portugal. As we noted in a recent briefing, the country faces some tough challenges this year:

• Domestic demand, government spending and investment are contracting sharply, leaving the country heavily reliant on uncertain export growth to drive the economy. 

• By cutting wages and costs at home (internal devaluation), Portugal has in recent years improved its level of competitiveness in the eurozone relative to Germany. However, this trend actually started to reverse sharply in 2012, meaning that the divergence between countries such as Portugal and Germany has begun growing again – exactly the sort of imbalance the eurozone is seeking to close. 

• In its austerity efforts, Portugal is now coming up against serious political and constitutional limits. For the second time, the country’s constitutional court has ruled against public sector wage cuts – a key plank in the country’s EU-mandated austerity plan – while the previous political consensus in the parliament for austerity has evaporated. 

How much impact this will have remains to be seen, although in a country where the economic future remains uncertain, suprises such as this are hardly ever welcome. In practice, though, the approach is likely to continue in much the same vein, firstly because the EU/IMF/ECB Troika has shown little willingness to be flexible with Portugal, and secondly because Maria Luís Albuquerque has often voiced her support for the approach taken so far.

That said, it is an interesting reminder of the strains the bailout programme is putting on the Portuguese government, as it begins the difficult task of finding a way to smoothly exit from its reliance on external funding.

Full letter from the Cypriot President to the Troika slamming Cypriot bailout

As we reported last week in our press summary and which the FT is today reporting on (and presenting as a bit of a scoop), Cypriot President Nicos Anastasiades has sent a scathing letter to the EU/IMF/ECB Troika slamming the terms of the Cypriot bail-out/bail-in package and calling for it to potentially be re-examined.

Below we post the letter in full, courtesy of the Cypriot website StockWatch, which published it over a week ago (added emphasis ours):

I am writing to update you on the economic and banking system developments in Cyprus following the Eurogroup decisions of last March and to request your support regarding a number of very pressing issues which need to be addressed the soonest.

1. The Cypriot economy is adapting to major shocks

The Cypriot economy is adapting to major shocks. Substantial private wealth has been lost and a significant number of Cypriot firms have lost their working capital at the two systemically important financial institutions which were subject to the bail - in. Restrictive measures, including capital controls, are seriously hampering the conduct of business and confidence in the banking system has been shaken. As a result the economy is driven into a deep recession, leading to a further rise in unemployment and making fiscal consolidation all the more difficult.

2. Application of bail-in was implemented without careful preparation

It is my humble submission that the bail-in was implemented without careful preparation. Its form was changed drastically within a week. Originally designed as a general bail-in across the banking system, it eventually became focused on the two distressed banks, the Laiki Bank and the Bank of Cyprus (BOC). There was no clear understanding of how a bail-in was to be implemented, legal issues are being raised and major delays in completing the process are being observed. Moreover, no distinction was made between long-term deposits earning high returns and money flowing through current accounts, such as firms' working capital. This amounted to a significant loss of working capital for businesses. An alternative, Ionger-term, downsizing of the banking system away from publicity and without bank-runs was a credible alternative that would not have produced such a deep recession and loss of confidence in the banking system.

3. Cyprus was forced to pay the cost to ring-fence Greece but no reciprocity has been granted

Another feature of the current solution was that deposits at the branches of Laiki and Bank of Cyprus in Greece were spared from a haircut to prevent contagion. These deposits amounted to €15 billion. The wish to avoid contagion to Greece was also evident in the Eurogroup's insistence that Cypriot banks sell their Greek branches. In addition and as a result of the sale, the Cypriot banks have lost their Greek deferred tax assets. As understandable as ring-fencing may be, this was absent at the time of deciding the Greek PSI in relation to the Greek Government Bonds which cost Cyprus 25% of its GDP (€4.5 billion). The heavy burden placed on Cyprus by the restructuring of Greek debt was not taken into consideration when it was Cyprus' turn to seek help.

4. Imposition of Laiki's ELA liability to Bank of Cyprus

The implementation of the sale of the Greek branches of the Cypriot banks, as urged by the Eurogroup, resulted in Laiki selling assets that were pledged against its ELA liability to Piraeus Bank, without Piraeus assuming the corresponding ELA liability. As such, Laiki was left with the related ELA liability but without the aforementioned assets. The ELA liability which was left "unsecured" as a result of the sale amounts to around €3.8 billion and was imposed on Bank of Cyprus as a result of the Eurogroup decision. It is worth reminding that a substantial part (in excess of €4 billion) of Laiki's ELA liability was required in the first place in order to cover deposit outflows experienced by Laiki's Greek branches.

Bank of Cyprus itself has a total ELA liability of around €2 billion. By taking an additional €9 billion from Laiki, which was accumulated over the course of the last year under very questionable circumstances, BOC has substantially increased the vulnerability of its own funding structure, with its cumulative ELA liability reaching a very high €11 billion. BOC was called to pledge its own assets to cover for the collateral shortfall for the €3.8 billion liability carried over by Laiki. Such a high amount of ELA liability hinders BOC's funding sources as the room for obtaining additional ELA is limited. The imposition of Laiki's ELA liability on Bank of Cyprus is the main contributor to the liquidity strain Bank of Cyprus faces.

5. Urgent need for Troika to provide a long-term sustainable and viable solution to the liquidity issues Bank of Cyprus is facing as a result of the Eurogroup decisions

Instead of addressing the issue of severe liquidity strain on Cyprus' mega-systemic bank through a long-term sustainable and viable solution, the Troika partners seem to have chosen the path of maintaining strict capital restrictions. Artificial measures such as capital restrictions may seem to prevent a bank run in the short term but will only aggravate the depositors the longer they persist. Rather than creating confidence in the banking system they are eroding it by the day. Maintaining capital restrictions for a long period will inevitably have devastating effects on the local economy, will also affect the country's international business and will have an adverse impact on GDP. Under such scenarios spill over effects will no doubt register on other local banks through higher non-performing loans as a result of dampened economic activity. In addition, increased deposit withdrawals from other local banks, as fear of lack of liquidity of the only systemic bank will have a domino effect on the entire banking system.

I stress the systemic importance of BOC, not only in terms of the banking system but also for the entire economy. The success of the programme approved by the Eurogroup and the Troika depends upon the emergence of a strong and viable BOC. It is for this reason that I urge you to support a long-term solution to Bank of Cyprus' thin liquidity position. Such a solution will re-instate depositor confidence in the banking system and will allow the full functioning of the economy away from restrictive measures and capital controls. It will also facilitate the attraction of foreign direct investment in Cyprus.

My Finance Minister has alerted the Troika Mission Chiefs in writing on 19 May 2013, in relation to the need to implement a long-term viable solution to Bank of Cyprus' liquidity position. No response has been received yet.

A possible long-term solution could be the conversion of part of Laiki's ELA liability into long term bonds and the transfer of these bonds and corresponding assets into a separate vehicle. Another solution could be the reversal of the Eurogroup decision in relation to the merger of Good Laiki (carrying the €9 billion ELA liability) into Bank of Cyprus. In any case the BOC should exit resolution status without any further delays and should be granted eligible counter-party status by the ECB. Of course more options need to be examined. I should mention that an interim Board and an interim CEO is already in place at BOC and the final asset valuation is progressing according to schedule.

I urge you to review the possibilities in order to determine a viable prospect for Cyprus and its people. The new government of Cyprus, despite its expressed disagreements, has abided by the Eurozone decisions and remains determined to implement the programme fully and effectively. I am personally determined to lead Cyprus out of this dire situation and towards a path of sustainable growth and development. We are also fully committed to re-establishing Cyprus's stance as a credible EU partner. However, at this crucial juncture, we are calling upon you for active and tangible support.

Very strong stuff indeed. We can't imagine the Troika will take to it too kindly.

The show(down) must go on: Coalition row over closure of Greece's public broadcaster continues

Last week, we noted on this blog that the abrupt closure of Greece's public broadcaster ERT risked opening a rift in Greece's ruling coalition - as Prime Minister Antonis Samaras took the decision without the approval of his junior coalition partners, PASOK and Democratic Left.

Tensions have actually mounted within the coalition, and all eyes are now on a meeting later on today between Samaras, Evangelos Venizelos and Fotis Kouvelis (the leaders of PASOK and Democratic Left respectively). Here's a quick update of what happened over the weekend:

• After both PASOK and Democratic Left hinted at snap elections as a possible outcome of the on-going coalition row over ERT, Samaras came up with a compromise proposal: have a cross-party committee hire a small number of workers so that a basic broadcast service (mainly news bulletins) could resume as soon as possible;

• Samaras's coalition partners have both turned the offer down. They concede ERT needs restructuring, but want the state broadcaster to stay open while such a restructuring takes place;

• This makes today's meeting (scheduled for 5.30pm GMT) very interesting. Venizelos and Kouvelis are apparently not planning to make doorstep statements after the meeting with Samaras, but will wait to speak until they are back at their respective party headquarters - possibly another sign that tensions are running high;   

• German Chancellor Angela Merkel yesterday spoke to Samaras over the phone and reminded him that "it is of vital importance" for Greece to stick to all its commitments with the EU-IMF-ECB Troika, including "those relating to public sector reform." Just a coincidence? Or an invite to Samaras to stick to his guns on ERT closure? 

• Meanwhile, Alexis Tsipras, the leader of the largest opposition party, SYRIZA, is to deliver a speech in Syntagma Square this evening - right in front of the Greek parliament. No doubt he will use it to call for the government to resign.

• Finally, it's worth keeping in mind that ERT workers have appealed to the Council of State - Greece's highest administrative court. The Council of State should issue its verdict later on today, and many expect it to order that ERT be immediately re-opened. Paradoxically, the ruling could help put an end to the coalition row. However, it would almost inevitably also weaken Samaras's position - given that his initial decision to shut down ERT would be overturned.  

We will keep a close eye on any future developments, so make sure you follow us on Twitter @OpenEurope if you want to stay on top of the latest events in Greece.   

Will the closure of public broadcaster set the scene for a coalition showdown in Greece?

Imagine a Number 10 spokesperson announcing during the afternoon news bulletin that the BBC has become too expensive to run and will be shut down with immediate effect. You would be excused for thinking that the Government and the Corporation have joined efforts to take you for a ride.

Well, this is exactly what happened in Greece - and it wasn't a joke. Greek government spokesman Simos Kedikoglou went on TV yesterday afternoon to say that the country's public broadcaster ERT would go off the air a few hours later, because it had become a "refuge of poor transparency and waste."

As a result, ERT's almost 3,000 employees have been temporarily laid off. The Greek government says that a revamped and slimmed-down broadcaster (NERIT SA) will be up and running by the end of August. Protests were staged outside ERT's headquarters yesterday and are continuing today, while ERT journalists are still putting programmes on air via digital frequencies and the internet.

A couple of points are worth making at this stage:

• The decision to shut down ERT is clearly linked to Greece's commitment to firing 15,000 public sector workers by the end of next year under its EU-IMF bailout deal, although it's up to the Greek government to choose where to cut. Therefore, it's probably not entirely fair to blame the Troika for this (admittedly pretty extraordinary) decision;

• The fact that the Greek government prefers shutting down ERT altogether and then opening a brand-new company, instead of trimming the existing company down, could be seen as further evidence of how difficult it is to fire public sector workers in Greece - even in cases where inefficiency and waste are evident (at least according to what the Greek government spokesman said);

• On the domestic politics front, Greek Prime Minister Antonis Samaras has decided to go ahead with the closure of ERT despite open opposition from his coalition partners - PASOK and Democratic Left. The latter now want to submit a draft bill to scrap the decision, meaning that there is a risk of a coalition split - unless someone blinks.  

As the Troika has long suggested, it is clear that Greece's bloated public sector needs to be downsized significantly. That said, it is also clear that this situation has been poorly handled, particularly given the wider political and social tensions already at play in the country. The fallout of this story might be worrying - further splits in the governing coalition and wider public backlash against an austerity programme for which there is already very little buy-in.

We will keep monitoring the situation and give further updates on Twitter @OpenEurope.

Cypriot parliament narrowly approves bailout deal but plenty of hurdles yet to overcome

The Cypriot parliament has officially approved the bailout deal that the government agreed with its eurozone partners and the IMF. (See here for our previous thoughts on the deal).

A rejection of the deal would probably have led to a Cypriot exit from the eurozone. Given such serious consequences it was an incredibly close run vote with 29 in favour versus 27 against (often for such votes politicians shy away from risky decisions).

We’re yet to get the final breakdown of the votes but here are the early predictions (we will update this with final figures when we have them):

The government is likely to breathe a sigh of relief but it should not view this as the end – it is surely only the end of the beginning at best.

As we have noted at length before, the prospects for Cyprus are bleak. Growth is set to crumble over the next few years, while capital controls remain in place, keeping it at the edge of the eurozone (with close to a separate currency since Cypriot euros are clearly no longer worth the same as euros elsewhere). As recently as last Thursday, the controls were extended for 16 days and despite being eased at points, there is no clear plan for how or when they can be removed (strangely the responsibility for the rules seems to have switched from the Central Bank to the Ministry of Finance while the lengths of the extensions have ranged from 3 days to 16 days at random intervals – not effectively a decisive or clear policy approach).

Despite the vote being approved it is also clear that politics in Cyprus remains fractured. 29 MPs feel strongly in favour of the bailout programme and the associated actions, while 27 MPs were effectively willing to see Cyprus leave the euro rather than implementing the bailout deal. Meanwhile, the rift between the Central Bank and the government shows little signs of abating.

Surely, effective reform and governance will be tough in the future, especially as the anti-austerity feeling amongst the general public rises.

For a taste of this just see the quote from Green MP George Perdikis after the vote:

“A 'yes' from Cyprus's parliament is by far the biggest defeat in our 8,000-year history. Its democratically elected representatives have a gun to their head to agree to a deal of enslavement.” 

The Cypriot government has negotiated a large hurdle but the biggest challenges may yet be to come.

IMF sees a mixed outlook for Europe - calls for more ECB action and a fiscal union

The IMF today released its latest World Economic Outlook forecasts. As usual the forecasts are not overly different from the previous ones - published in October last year - but there are a few interesting points.

The map above gives a pretty good feeling for just how bad Europe is doing relative to the rest of the world at the moment (click to enlarge).

The IMF warns about the risks of complacency and lack of  implementation of reform and austerity measures in the eurozone, something we touched on here:

Amid reduced market pressure and very high unemployment, the near-term risks of incomplete policy implementation at both the national and European levels are significant, while events in Cyprus could lead to more sustained financial market fragmentation. Incomplete implementation could result in a reversal of financial market sentiment. A more medium term risk is a scenario of prolonged stagnation in the euro area.

This seems to be clear reference to the banking union and the creation of a cross-border resolution mechanism to deal with banking crisis such as the one seen in Cyprus. This is a valid concern - there is huge uncertainty over the banking union.

The IMF also notes that while current account adjustment has been progressing in the eurozone it is not clear whether it is simply cyclical or the result of deeper reform:

Current account balances of adjusting economies have improved significantly, and this improvement is expected to continue this year. This increasingly reflects structural improvements, including falling unit labour costs, rising productivity, and trade gains outside the euro area. But cyclical factors also play a role, notably layoffs of less productive workers, and would reverse with eventual economic recovery.

Further to that point, there is also the interesting table below showing that Greece, Ireland and Spain have had some success in reducing unit labour costs (change is difference between the dot and the diamond). Greece mainly through cutting labour costs but the others also through increasing productivity. But there is some way to go yet, while countries such as France and Italy have made little to no adjustment. It's also worth keeping in mind that, while Portuguese ULCs have fallen from their peak, the trend and some of the fall has now been reveresed.

In addition, there are continued signs of a split in policy approach between Germany and the IMF. Comments such as these are unlikely to go down well in Germany:

Room is still available for further conventional easing, as inflation is projected to fall below the European Central Bank’s target in the medium term.

Greater fiscal integration is needed to help address gaps in Economic and Monetary Union design and mitigate the transmission of country-level shocks across the euro area. Building political support will take time, but the priority should be to ensure a common fiscal backstop for the banking union.

We'd have thought, after three years of being exposed to the politics of the troika, the IMF might be a bit more sensitive to the political intracacies of the eurozone crisis. However, it does highlight that the fundamental choice facing the eurozone has not gone anywhere..

A turbulent Easter in Cyprus

Uncertainty continues to reign in Cyprus. Cypriot Finance Minister Michalis Sarris resigned this afternoon, seemingly confirming the earlier (denied) rumours that he had previously tried to resign and bringing to a close what must be one of the shortest stints as finance minister in recent history (35 days). To add fuel to the fire, initial reports suggest he resigned due to the on-going investigation into people moving funds out of Cyprus ahead of the bailout. Fortunately, unlike other aspects of the crisis, the Cypriot government has wasted no time in appointing a successor with Labour Minister Haris Georgiadis already lined up to fill the role.

Meanwhile, as we noted in today’s press summary (and have repeatedly suggested) the capital controls look set to last for much more than a week.We also highlighted some interesting comments by the President of the Cypriot Parliament Yiannakis Omirou who said:

“I would like to send a message to the Cyprus people that there is no other way, there is no alternative apart from freeing (the country) from the troika’s and the memorandum’s bonds…by leaving the troika and the EMS behind us, we will ensure our national independence, our national sovereignty, our moral integrity and our economic independence…If we remain bound by the Troika and the memorandum Cyprus’ destiny is already foretold and there will be no future.”

Clearly not one to mince his words.

Furthermore a draft version of the loan agreement between the EU/IMF/ECB Troika and Cyprus (the Memorandum of Understanding) was leaked yesterday. It drove home another point which we have flagged up before. Despite all the talk about depositors and banks, Cyprus is still getting a €10bn bailout, that will mean undergoing the fiscal consolidation and structural reforms (widely referred to as ‘austerity’) witnessed in the other bailout countries. The key points of the agreement confirm this:

• 7.25% of GDP in fiscal consolidation between 2012-2016.
• Freeze in public sector pensions and a two year increase in the retirement age.
• Implement a four-year plan as prepared by the Public Administration and Personnel Department aimed at the abolition of at least 1880 permanent posts over the period 2013-2016.
• Increase the statutory corporate income tax rate to 12.5%.
• Increase the tax rate on interest and dividend income to 30%.

These are but a few of the measures and the document remains incomplete. The impact on GDP is likely to be significant, while youth unemployment is already at 31.8% (total at 14%) – this is likely to rise substantially.

To add to all this, reports continue to abound about outflows of deposits before the bailout, while the banks were closed and people now trying to skirt the capital controls. Significant questions are being asked about the enforcement and implementation of all these rules. With a decision on whether to extend capital controls expected on Wednesday evening or Thursday morning the uncertainty is likely to continue.

The Cypriot bailout: A catalogue of farce

Having followed the twists and turns of the Cypriot bailout for the last couple of weeks we’ve been struck by how – even by the standards of eurozone crisis management – it has been spectacularly mishandled often with farcical results (FAZ's Klaus-Dieter Frankenberger described it as "hara-kiri crisis management"). Here's our highlights:

Sunday 17th – The blame game begins 
The tentative agreement between Cyprus and its creditors was only a day old when the different parties tried to shift the blame for the politically toxic levy on small insured bank deposits. German Finance Minister Wolfgang Schäuble kicked it all off by seeking to distance the German government from the decision by blaming the Cypriot government, the ECB and Commission, which in turn prompted a series of denials from everyone else. The suggestion was that it was actually the Cypriot government who opted to include small savers in order to avoid hitting wealthier depositors (mainly Russians) even harder. The blame game continued throughout the week.

Monday 18th – Gazprom steps in with an alternative bailout? 
Following the acrimony over the agreement, it was reported that Russian energy giant Gazprom approached the Cypriot government the same weekend with an offer to fund the €10bn necessary to restructure the Cypriot banking sector in exchange for rights to Cypriot gas reserves. Although the story fitted in nicely with the geo-political tension narrative, it was quickly denied. Despite that, the rumours of a Russian bailout continued to be batted around for the entire week - none of which proved to be true.

Tuesday 19th (Afternoon) – Cypriot Finance Minster’s non-resignation 
On Tuesday Cypriot Finance Minister Michalis Sarris flew out to Moscow to see if he could secure more favourable terms than those offered by the eurozone. While he was there, rumours began to fly around on twitter, seemingly substantiated by respectable news outlets like Kathimerini Cyprus, that he had resigned as he no longer enjoyed the confidence of President Nicos Anastasiades. Confusingly, further rumours began to circulate that Anastasiades had rejected his resignation. However Sarris later told Reuters that there was “no truth” to the original rumours.

Tuesday 19th (Evening) - Cypriot Parliament rejects bailout deal after days of negotiation
Originally scheduled for Monday, the Cypriot parliament’s vote on the deal negotiated by the eurozone finally took place on Tuesday evening after attempts at further postponement failed. The parliament voted overwhelmingly to reject the deal, with not a single MP voting in favour. Of course, the democratic vote is itself not the issue but it was farcical that the deal was pursued for four days before being put to a vote when it was clear it would need to be altered again. Not exactly effective crisis management, especially since the 'No' vote raised questions over Cyprus' place in the euro.

Thursday 21st - Cypriot ‘Plan B’ shot down immediately
Following the vote above, Cypriot officials sought to cobble together a ‘Plan B’ to keep their chances of a eurozone bailout alive. Options on the table included the creation of a solidarity fund securitised with social security fund reserves, state assets, Church property and expected natural gas revenues. However this was shot down immediately by the troika as it was feared that it would not lower Cypriot debt to sustainable levels. Adding to the farce, the WSJ reports that Sarris (still in Moscow at this point) wasn't returning calls from his eurozone peers. By Friday, the deposit levy was back on the table bringing negotiations full circle.

Saturday 23rd – Russia to retaliate by freezing European assets? 
With it looking inevitable that Russian interests would be badly burned however the Cypriot bailout was finally structured, the Guardian reported that former Kremlin advisor Alexander Nekrassov warned that “Moscow will be looking for ways to punish the EU. There are a number of large German companies operating in Russia. You could possibly look at freezing assets or taxing assets”. As usual, this was later denied.

Sunday 24th – Infighting within the troika
The negotiations also saw severe strains developing between different members of the EU-ECB-IMF troika with the latter (with German support) allegedly resisting attempts by the Commission to water down Cyprus’ own €5.8bn contribution to the bailout. The FT cites an IMF official as saying that “The commission keeps trying to work with [Cypriot leaders], to help them put something on the table, even if that something doesn’t add up”, although another source adds that the two sides have “kissed and made up”.

Sunday 24th – Cypriot President's resignation bluff backfires 
Unlike the non-resignation of the Cypriot Finance Minister, this really happened. Reuters cites a senior official as saying that this took place during a particularly heated exchange concerning the plans to restructure the country’s banking sector and the WSJ reports that at that point Anastasiades was calmly told by other leaders "to pack up and leave" if he wasn't ready to cooperate (he didn't).

Monday 25th (Afternoon) - Dijsselbloem's accidental honesty makes markets plunge 
You’d have been forgiven for thinking that with a deal finally having been hammered out, the situation would have settled down a bit. However, Eurogroup chief Joroen Dijsselbloem had other ideas, suggesting in an interview with Reuters and the FT that the Cypriot deal could become a template for any subsequent bailouts and bank restructuring in the eurozone. This saw markets around the world tumble for fear of further write-downs, particularly in Spain and Italy. Dijsselbloem then looked to row back from his comments reiterating that Cyprus was “specific” and that he was not even aware of the English word ‘template’ which had been widely attributed to him - although given this specific word was used by the interviewers we're not sure we entirely believe him. His comments got a mixed reaction - he was backed by the Commission and Finnish PM Jyrki Katainen - who said 'bail-ins' should be part of the eurozone's crisis management strategy - but ECB Executive Board member Benoit Coeure said that he had been "wrong" to suggest this.

Monday 25th (Evening) - Banks to stay closed even longer
It was originally announced that Cypriot banks would re-open on Tuesday with the exception of the two biggest - Bank of Cyprus and Laiki -which would re-open on Thursday. However, later that day, Cypriot authorities changed their minds and announced that all banks would remain closed until Thursday (this was just the latest of the many extensions to the bank holiday and the numerous other delays throughout the week).

Given that the final outcome of all of this was a plan which will likely slam the Cypriot economy and significantly reduce the standard of living (albeit while reducing moral hazard somewhat), it is hard to see the whole week other than an array of botched diplomacy and naive negotiations.

Cyprus update – halfway to a deal, but the biggest obstacle remains

It’s looking as if there will be a deal in Cyprus, although there are some big obstacles to be crossed to get there and it is likely to go down to the wire.

Last night the Cypriot parliament voted to approve a few bills which will make a significant bank restructuring possible and allow the government to install capital controls if it sees necessary, here are the key points of what was approved (and what was not):

• Plan to wind down Laiki bank – good assets and insured deposits below €100,000 will be shifted into a good bank which will be merged with the Bank of Cyprus. Bad assets along with uninsured depositors above €100,000 will be put into a bad bank – these depositors could lose as much as 40% of their money.
• Ability to enforce capital controls – these are wide ranging from limiting non cash transfers to turning standard current account deposits into time fixed ones, and pretty much anything else the government deems as necessary for ‘public order and safety’.
• The creation of a solidarity fund – this will not play a large role in the bailout deal, since it was already rejected by the EU/IMF/ECB Troika as an alternative to the deposit levy.
• No deal on the bank deposit levy – Eurozone finance ministers will meet on Sunday in Brussels with the Cypriot parliament only likely to vote on a deal after it has been cleared at this meeting.
• Bank of Cyprus has survived being ‘resolved’ for now.
• The Greek bank Piraeus will take control of the Greek parts of Laiki and Bank of Cyprus.

These measures are expected to raise just over €2bn (maybe more, we’re waiting on firmed details on the solidarity fund). That still leaves €3.5bn+ to be raised to meet the €5.8bn target set by the Troika – although reports yesterday suggested this may have been raised by €0.9bn due to worsening forecasts for Cyprus. Below we outline our key takeaways from the deal.

The largest obstacle to a deal remains: Clearly, this will once again come down to the deposit levy. With a smaller amount needing to be raised, it is likely to fall only on €100,000+ deposits. As we noted yesterday a levy of between 12% - 15% looks likely, although given the bank bailout plan it could hit some big Laiki depositors especially hard. Kathimerini reports that the levy could be pushed higher and focused on a smaller group of depositors. Ultimately, though, with few alternatives left now a levy on largest depositors seems the least destructive option (but still far from ideal).

This will go down to the wire: The ECB has set a Monday deadline for a bailout deal or it will cut of liquidity to Cypriot banks. The banks are due to open on Tuesday but this could be extended if no deal is found. As long as the banks stay shut (and with use of the capital controls, see below) they may be able to buy a few days to reach a deal, allowing the ECB to reverse its decision. Still, it will be a messy few days with the Cypriot parliament unlikely to vote on the deal until the it is approved by the Eurozone and assured of passing. If the deposit levy is only on large deposits, it should gain support from DIKO (the junior coalition partner), while reports suggest some opposition members could abstain or be absent from the vote to allow it to pass.

Still, this has been left very late and the decision to approve the above measures first seems to be putting the cart before the horse. This is not too surprising though (since clearly these were easier options to push through) and reminds us of other parts of the crisis – such as the decision to approve the ESM before the EFSF was revised to be fit for purpose.

The capital controls are severe: The government has significant leeway to limit the flows of capital. People have rightly been asking questions of whether this, de facto, moves Cyprus out of the single currency. Ultimately, money is no longer fungible between Cyprus and the rest of the Eurozone and, at this point in time, it’s hard to argue that a euro in Cyprus is worth the same as a euro elsewhere. The real problem though may not be imposing the controls but removing them, as WSJ Heard on the Street points out. It is hard to see how the Cypriot economy will be able to function properly with these strict controls on and at some point questions will surely begin to be asked if it would not be better off with a devalued currency outside the euro.

Why is Bank of Cyprus not being ‘resolved’? Reports suggest the Cypriot government has fought hard to stop the bank having the same fate as Laiki. This may be because it is the largest bank and a large employer in Cyprus, but it is could also be because it remains very close to the government and is the home for some of the largest Russian depositors. In any case, avoiding the tough decision to fully restructure the banking sector is likely to make things more difficult in the future.

Greek banks are getting a very good deal: The branches of Cypriot banks in Greece have around €22bn in assets and account for 8% of all deposits in Greece and 10% of loans. Clearly they are sizeable and hiving them off helps reduce the size of the Cypriot banking sector relative to GDP and reduces the cost of the bailout. It also protects the rest of Greece from contagion. That said, Piraeus is picking up a very good deal, not least because Cypriot exposure to the Greek crisis was a key driver of the current problems Cyprus faces. The purchase was done at a symbolic €1 but the cost of recap is €1.5bn. Funding will come from the Hellenic Financial Stability Fund (the Greek bank recap fund) and the Cypriot bailout programme – €950m from the former and €550m from the latter. So these banks, investors and depositors avoid any losses despite many being entangled in the Greek crisis. The fact that Piraeus bank shares were rocketing yesterday is a clear enough sign of who did better out of this deal.

The deal has come full circle and has been very poorly managed: as we noted yesterday, we are basically back to a mix of the deal proposed by the IMF (bank restructuring) and the Eurozone (deposit levy) last Friday. The impact the events of this week will have on Cyprus should not be underestimated – there will be a huge outflow of capital (or will be whenever the controls are removed) and significant political upheaval. This has been poorly handled by both sides – the Eurozone failed to listen to the Cypriot government and was complacent about the impact of Cyprus on the wider Eurozone economy. The Cypriot government has fought to hang onto an impossible business model, focused on big finance funded by foreign deposits, and has looked to play a risky geopolitical game. Unfortunately, the ones that lose from all this are the 800,000 people who live in Cyprus.

Why is the ECB threatening to pull the plug on Cyprus? And how would it work?

The ECB - which holds the key to Cyprus' future inside the euro by virtue of funding the country's banks - this morning issued a statement which essentially set Monday as the deadline for a Cypriot bailout deal. It said:

The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013. Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks.

Short but not sweet. It''s clear that Cypriot banks cannot survive without this liquidity. There either needs to be an EU/IMF bailout deal agreed by Monday or some deal with Russia to prop up Cypriot banks (although the political implications of this would be significant). Remember the four scenarios that we set out on Tuesday night following the No vote in the Cypriot parliament (which now many other analysts are echoing).

 In our flash analysis, we questioned whether the ECB might do this. We noted:

Would the ECB really pull the plug on liquidity to Cypriot banks?  

The key turning point here will be whether the ECB cuts off Cypriot banks...To pull the plug on ELA the ECB needs a 2/3 majority (15 out of 23 votes) at the ECB Governing Council. Although the Bundesbank and maybe the Dutch and Finnish central banks might vote to turn off the ELA a 2/3 majority is not certain. In fact since Mario Draghi took over the ECB it has not been particularly hawkish. Bloomberg reports that the ECB said after the vote: “The ECB reaffirms its commitment to provide liquidity as needed within the existing rules”. The crisis has shown so far that the rules of the ECB are incredibly malleable, so what exactly that statement means is unclear, but the vote could certainly go either way.

But why has the ECB taken such a tough line with Cyprus? Below we outline a few potential reasons behind its thinking (some of which were touched upon by @KarlWhelan on twitter yesterday):

• ECB rules clearly state that ELA must be provided only to solvent but illiquid banks - without recapitalisation (under a bailout deal) Cypriot banks would certainly be insolvent.
• Continuing to provide liquidity to Cypriot banks could also amount to a huge transfer of risk from depositors and investors to the ECB.
• Even if a deal is reached there are likely to be huge deposit outflows particularly from foreign depositors (even more so if the banks open without a clear deal).
• Cypriot bank ELA is currently around €9bn. Russian deposits total between €15bn and €20bn. If Russian depositors are hit hard, much of these deposits could be withdrawn.
• At almost 30% of all deposits, this would bring the solvency of Cypriot banks into question. The ECB would have to extend ELA massively to keep banks afloat – possibly by another €10bn to €15bn.
• This liquidity would therefore indirectly help fund outflows of deposits.
• Even increasing the ELA would not be sufficient if this turns into a full deposit run. This means the banks could still collapse and Cyprus could leave the eurozone. In this scenario, the Cypriot Central bank would default on its Target 2 imbalance with the Eurosystem (currently €7.5bn but it could double if the outflows are significant) leaving the ECB with a loss.
• Financially this loss would be bearable but it would hit ECB credibility hard and break the taboo of the ECB not suffering losses in the eurozone crisis, a No-No for Germany.
• If the banks collapsed but Cyprus stayed within the eurozone, the eurozone would likely have to stump up further funds to keep the country afloat. 
• Any losses from the ELA are the responsibility of the Cypriot Central Bank (and the Cypriot state which backs it), so they would not become a Eurosystem/ECB issue directly. That said, with Cyprus under a bailout programme the burden will likely fall on the eurozone since the Cypriot state would be unable to backstop the central bank alone.

So, extending the ELA without a clear deal could lead to a significant transfer of risk towards the ECB and questions over its credibility. This would be a particularly poisonous debate in Germany, something which neither the ECB nor the German government would want ahead of the German elections in September.

With this in mind, it is possible to see why the ECB has taken such a strict line here. That said, it certainly ramps up the pressure over the next few days.

Lastly, although the ECB is taking the decision based on technical considerations, it's clear the good folks in Frankfurt are now deeply embroiled in a highly political debate - precisely what the ECB wants to avoid at all costs.

What if the Cypriot parliament votes against the deposit levy?

This is the question which is now holding global financial markets on the edge - could it really happen and what would it mean, we assess the possible scenarios below.

Could the Cypriot parliament vote against the levy?

According to Reuters, Cypriot government spokesman Christos Stylianides told state radio that the vote “looks like it won’t pass”. Meanwhile, via Zerohedge:

• CYPRUS PRESIDENT: PARLIAMENT BELIEVES BAILOUT PLAN UNJUST, GOVERNMENT MAKING OTHER PLANS.
• CYPRUS PRESIDENT: PARLIAMENT WILL REJECT BAILOUT PLAN

As we were tweeting yesterday, the DIKO party (junior coalition member with 8 MPs) had said it would not vote for the deal without some improvements, although we suspect reducing the burden on small depositors could help convince them. The European Party (2 MPs) had previously said it would not support he levy, however, according to CYBC, it has now said it would support the levy if depositors are compensated with interest bearing government bonds (we assume linked to gas revenues, something which the government has already offered).

That said, according to the Cypriot press, the latest proposal sees deposits below €20,000 exempt, deposits between €20,000 and €100,000 taxed at 6.75% and deposits over €100,000 taxed at 9.9% - this is unlikely to satisfy demands to exempt smaller depositors. It also seems unlikely to raise the required €5.8bn, not least because it applies the same rate as the original to a smaller pool of deposits.

Separately, there are conflicting reports this morning on whether the vote will be delayed again. The government is unlikely to put this to a vote until it is almost near certain of getting it through.

What would the fallout be?

The fallout of voting down the package could be explosive and we can only speculate about what could happen next, but its eurozone membership would likely be brought into doubt. As we noted in our flash analysis, there are few other alternatives for Cyprus to raise the necessary cash, while the eurozone has made it clear it cannot foot the entire bill (such an option would make Cypriot debt unsustainable anyway).

The eurozone would likely give Cyprus a few days either to change its mind or come up with an alternative way of financing the €5.8bn. Another parliamentary vote could be held (the EU of course has form when it comes to demanding the 'correct' vote).

The ECB has already reportedly warned that rejecting a levy would have dire consequences. Specifically, the two largest Cypriot banks would go without recapitalisation and could see their liquidity from the ELA (sanctioned by the ECB via the Bank of Cyprus) cut off, leading to them becoming insolvent and collapsing – putting their €30bn of deposits at risk, since the government obviously cannot guarantee them. This would likely bring down most if not the entire Cypriot financial system.

With the financial sector close to or in the process of collapsing and no support forthcoming from the eurozone or ECB, since Cyprus rejected their terms, Cyprus could even be forced to leave the eurozone and begin printing its own new currency, one that would have little international trust and could lead to a spiral of hyperinflation, etc, etc (i.e. a very nasty scenario).

There is, of course, a chance that if faced with the prospect of Cyprus leaving the euro, the rest of the eurozone could blink and find an alternative way to bailout Cyprus but the politics of such a scenario would get very ugly indeed. The ECB may not follow through on its threat to withdraw liquidity for Cypriot banks but this would only be a temporary reprieve. The Cypriot government will run out of cash at the start of June when it needs to pay off a €1.4bn bond, while the banks' position could be worsened by the likely deposit outflows once banks open, even if the tax is not applied.

What are these “other plans”?

It’s not clear exactly what Cypriot President Nicos Anastasiades meant when he suggested the government is making 'other plans'. We have long noted that deeper connections to Russia remain a viable option for Cyprus. With Russia angry at the eurozone for trying to burn some of its depositors, some more financial support could be forthcoming (but maybe only for Cyprus outside the eurozone) – with significant geopolitical implications as we noted here.

Other options which have been bandied around include: a financial transaction tax and the recent proposal from Lee C. Buchheit and Mitu Gulati (the men partly behind the Greek restructuring) to convert deposits into deposit certificates with fixed long term maturities. However, the former has been widely rejected by Cyprus and may not yield sufficient funding. The latter is an interesting proposal but may only offer liquidity support rather than solvency, while the banks would still remain under-capitalised. Such a proposal would still require significant backing from the eurozone and Russia – both of which are likely to come with onerous terms – and present similar obstacles to a deal.

So, all in all a 'No' vote, however tempting to Cypriot MPs, only leaves more drastic alternatives, hence it remains a possible but not probable outcome.

Eurogroup distances itself from decision to tax small depositors in Cyprus

At some point yesterday, it became clear that Cypriot President Nicos Anastastasiades would not have sufficient support to push the deal on the deposit tax through parliament – at least not in its current form.

That led to an extension of the bank holiday to at least Thursday, the parliamentary vote being moved to 4pm GMT today (from yesterday) and the Eurogroup holding a teleconference yesterday evening.

The result of the conference was this statement, the key part being:

The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below EUR 100.000. The Cypriot authorities will introduce more progressivity in the one-off levy compared to what was agreed on 16 March, provided that it continues yielding the targeted reduction of the financing envelope and, hence, not impact the overall amount of financial assistance up to EUR 10bn.

The statement seems to be more of a hand washing exercise than a definitive end to the issues plaguing the Cypriot bailout – i.e. do whatever you need to in order to raise the €5.8bn but don’t blame us for your political troubles.

Ultimately, it is not clear that deposits below €100,000 will not be taxed. The two options on the table remain:

-          Depositors with up to €100,000, taxed at 3%; those with €100,000 to €500,000 taxed at 10%; and those with over €500,000 taxed at 15%. (This could also include an exemption of deposits below €20,000).

-          Tax deposits over €100,000 at 15.2% and exempt deposits below €100,000.

How much difference will this move make?

Well, removing the burden on smaller depositors would be a positive one, as we have suggested. That said, with the cat out of the bag as it were, this is unlikely to dial down frustrations or concerns significantly. This option is now on the table and the political divisions it has exposed are unlikely to be easily papered over.

Despite the fact that it seems the Cypriot government played a large role in the decision to structure the tax to hit smaller depositors in the first place, the anti-German feeling seems to be rising. Meanwhile, we still believe that the position of the government – which was elected on the basis of ruling out losses for any (large or small, foreign or domestic) depositors – remains precarious.

The Great Cypriot Game - How important is gas to Cyprus' economic and geopolitical future?

Update 12:00 18/03/13:

Russian Finance Minister Anton Siluanov has had some interesting things to say on the deposit levy (via Reuters):

"We had an agreement with colleagues from the euro zone that we'll coordinate our actions."

"It turns out that the euro zone actions on the introduction of the deposit levy took place without discussions with Russia, so we will consider the issue of restructurisation of the (Cyprus) loan taking into account our participation in the joint actions with the European Union to help Cyprus."

It seems Russia is none too happy with the eurozone approach, unsurprisingly. If it does refuse to ease the terms of the €2.5bn bailout loan it previously gave Cyprus, it could hit Cypriot funding requirements, although probably not by a substantial amount. Still it could result in eurozone bailout funds being used to pay off a Russian loan in the near future - something which may not sit well with German taxpayers. Again, the interesting fall out will be to see how this impacts Russia's approach to Cyprus and the EU more broadly.

***************** Original post ********************************

In the middle ages, Cyprus was a key battle ground between great powers seeking dominance in the region. Well, the country - which, remember, only accounts for 0.2% of eurozone GDP - could become a hotspot once more (though we shouldn't be over-excited about this).

According Greek Reporter, Gazprom made an offer over the weekend to the Cypriot government to fund the bank restructuring planned under the Cypriot bailout (which is set to cost up to €10bn) in exchange for exclusive exploration rights for Cypriot territorial waters. How reliable this story is remains to be seen, but it does hint at the geopolitical tension which we have been warning about.

Gazprom is known to be very close to the Russian government and despite Russian President Vladimir Putin overtly slamming the deposit tax - calling it "unfair, unprofessional and dangerous" -  it is unlikely that they would let this opportunity pass untouched. Fortunately, the Cypriot government is said to have rejected the deal off the bat, but if displeasure towards the eurozone and the EU grows, the Russian option may become increasingly appealing.

So how important is the gas element for Cyprus' economic and geopolitical future? Well, there is no denying that Cyprus could potentially be sitting on top of gas reserves worth many times its GDP. However, as a revenue stream it is far from a sure thing. Here is how we put it in our flash analysis released on Friday:

Recent exploration has suggested Cyprus may have between €18.5bn and €29.5bn (103% - 163% of GDP) in untapped gas reserves lying in its territorial waters (according to Deutsche Bank). There have been rumours that this future revenue stream could be incorporated or used to backstop the bailout somehow. Although an appealing idea, there is still a huge amount of uncertainty around the real value of these reserves and how soon they can begin producing revenue

So far, one field has been explored (known as Block 12) and estimates of its potential value go as high as €100bn. See below for a useful diagram (via Baker Tilley):

However, there are a few key points to remember when considering the impact of this on the Cypriot bailout:

• Exports from the gas fields are not expected to begin until 2019 at the earliest. Cyprus runs out of cash in June this year, a short and medium term solution is needed now. Tapping the further reserves (beyond Block 12) will take even longer.
• There needs to be significant investment, potentially up to $4bn to begin extracting the gas – the Cypriot government certainly cannot afford this. Although there is sizeable interest in the exploration rights, the FT’s Nick Butler notes that Noble Energy (which explored Block 12) is not bidding for further rights, which raises some concerns.
• Furthermore, Turkey is still contesting Cyprus’ ownership of these reserves. Although Cyprus currently has the backing of the international community, this dispute could further hold up progress in tapping these reserves. Many of the energy companies looking into Cyprus also have interests in Turkey and may not want to put those at risk.

To us then, the offer by the Cypriot government to provide Cypriot depositors with bonds linked to gas revenues sounds like a nice idea, but will not compensate these depositors for some years, at best.

But, remember with a view to Moscow, this is definitely one to watch.