On Tuesday, Cyprus' parliament soundly rejected a controversial $13 billion European bailout offer — the vote was 0-36, with 19 abstentions — throwing the country's future, and to a lesser extent the European Union's, into disarray. "After the vote there were jubilant scenes outside the parliament in Nicosia," the capital, says Cyprus' Famagusta Gazette. "But as the grim picture of the dire situation becomes clearer, the relief felt by many in Cyprus may be short lived."
The most contentious part of the deal — hammered out last weekend by the government of Cypriot President Nicos Anastasiades and the "troika" of the European Commission, the European Central Bank (ECB), and the International Monetary Fund — was a one-off levy of 6.75 percent on all bank deposits under 100,000 euros, even though deposits up to that amount are supposed to be guaranteed safe. Anastasiades' amendment to that plan — exempting deposits up to 20,000 euros — didn't sway lawmakers.
"Cyprus's banking system needs rescuing" still, one way or another, says Robert Samuelson in The Washington Post. And Cyprus doesn't have the resources to rescue itself. The problem is that the nation's banks "had invested heavily in Greek government bonds and loans to Greek companies," and when that debt was written down or wiped out in Greece's own crisis and subsequent EU bailout, the "banks' capital was depleted." So, what happens now?
German officials want pain. "The ECB has made it clear that without a reform program for Cyprus the aid can't continue," said German Finance Minister Wolfgang Schaeuble, referring to months of ECB backstopping Cyprus' banking system. "Someone has to explain this to the Cypriots, and I think there's a danger that they won't be able to open the banks again at all." The Cypriots have "rebuffed the outstretched hand" of its friends, said lawmaker Hans Michelbach, the head of the German parliament's finance committee. The vote is "an act of collective unreason" and "the people of Cyprus must now pay a high price."
Maybe Russia will save the day, says Peter Gumbel at TIME. After all, with the estimated $31 billion Russian companies and individuals have deposited in Cypriot banks — much of it reportedly of sketchy provenance — this is Russia's problem, too. The EU is adamant that Cyprus pony up 5.8 billion euros to get its bailout, and Cypriot media are full of speculation that Russia could step in, possibly by leasing the rights to some of Cyprus' offshore gas deposits. The Anastasiades government is doing little to tamp down that speculation: Finance Minister Michalis Sarris flew to Moscow on Tuesday night. If Russia doesn't help out, "in reality, the Cyprus government has precious few options" left.
Actually, Cyprus has quite a few options, says Dylan Matthews at The Washington Post, even if none of them are great. "The troika is clearly still worried that the Cyprus situation is spiraling out of control, and so might be amenable to a different bailout package," if Cyprus can come up with an acceptable Plan B. In theory, the U.S. could also step in and help Cyprus, as could China, India, or any other nations that "think it's worth the political risk of bailing out a tiny island in the Mediterranean which none of their constituents care about." Or, Cyprus could ditch the euro and start issuing its own currency again — which could start a "really, really, really, really bad" chain of events.
Cyprus should force Germany to accept an alternative bailout plan that is "clearly better, in every regard," than the one Cyprus just rejected, says Felix Salmon at Reuters. "And it most emphatically is workable," designed by Lee Buchheit, "the godfather of sovereign debt restructuring," and Duke University's Mitu Gulati. It's also fairly simple:
First, leave all deposits under 100,000 euros untouched.... Second, term out everybody else by five years, or 10 if they prefer. That's it! That's the whole plan, and it's kinda genius. If you have bank deposits of more than 100,000 euros, they will be converted into bank CDs, with a maturity of either five years or 10 years — your choice. If you pick the longer maturity, then your CD will be secured by future Cypriot gas revenues, which could amount to hundreds of billions of dollars. [Reuters]
"If you want to know what's going to happen with Cyprus now," says Matthew Yglesias at Slate, "don't ask me." But here's what Cyprus should do: "Sell diplomatic recognition of Northern Cyprus' secession to Turkey for the 5.8 billion euros that Cyprus needs."
When Cyprus became independent in 1960, it was mostly Greek but contained a large Turkish minority.... After several years' worth of disputes, the then-ruling military dictatorship in Greece backed a Greek Cypriot coup d'état on July 15, 1974. In response the Turkish military invaded and sponsored the creation of an independent Republic of Northern Cyprus. There was population displacement and violence, and when the dust settled, the Turks had about 40 percent of the territory and zero international legitimacy.... Why not have Turkey send some money in recognition of lost property during the war and in exchange let Cyprus renounce its claim to the lost territory? [Slate]