Wednesday, March 20, 2013

How Cyprus can call the EU's bluff.

As you are probably aware Cyprus is now in the middle of negotiations with EU leaders over a 17 billion euro bailout needed to save the country from bankruptcy. The original plan which involved the taxing of bank deposits at up to 10% has proved unworkable and has been voted down by the Cypriot parliament. However, there is another plan that would allow Nicosia to secure a loan and not have to implement painful spending cuts (and risk becoming the new Greece/Spain/Portugal) nor impose a bank levy that would annoy foreign depositors, especially the Russians.

When Cyprus achieved independence from Great Britain in 1960 large swathes of the island were handed over to the British armed forces to be used as bases in the strategically important eastern Mediterranean. The Sovereign Bases Area are still important given their proximity to Middle Eastern hot spots and the fact they lie so close to vital shipping routes through which so much of the world's oil comes via the Suez Canal.

So here is the deal. The Cypriot parliament turns down present Eurogroup proposals and instead announces that a) they are considering re-negotiating The Sovereign  Base Area deal with a view to inviting other nations to tender bids for a long term lease or b) they say that they will allow other nations to build naval facilities on the country's territory, thus giving them a similar deal . The cost in either case to be approximately the same as the money being used by EU to blackmail (the Cypriot PM's words, not mine) Nicosia into agreement.

Now this is where things get really interesting. Given the poor shape the Assad regime is in, Russia must be wondering if its naval base in Syria will survive a regime change and therefore an alternative offer would be welcome. That it comes from a country with such close ties with USA and UK makes the idea an even more delicious irony, given NATO's encroachment on countries close to the Russian border has been so unrelenting. The fact that huge volumes of natural gas may be flowing through this part of the world soon also adds to the attraction.

Even the suggestion of such an offer to the Russians will set alarm bells ringing in London, Washington and possibly Paris and combined these countries will be able to bring a huge amount of pressure to bear in Brussels and Berlin. Does the EU really want to change the balance of power in such a sensitive region for a paltry 7 billion euros? Given the geo-political ramifications and the fact that the European nations have already pumped 1.7 trillion euros into propping up the continent's ailing banking system, a few billion more may be considered a price worth paying.

In either case, Cyprus comes out on top, it doesn't have to tax depositors, large or small, it's banking sector comes out of hiding this week intact (more or less) and it gets the money it needs to avoid bankruptcy. 


Ian Cox said...

Looks like a plan. Military expenditure is an open cheque, so a few noughts for Greece too, maybe? And with all the money saved by withdrawing from Iraq and Afghanistan, it's a winning formula. (Hoping the Argies and Mr Pope don't upset the applecart).

Anonymous said...

Cyprus will have to find not just the money that would be raised from the bank tax, but also those that the Troika would lend Cyprus; a total of 17 billions, if memory is correct.