Cash call

The bail-out of Cyprus

Mar 22nd 2013, 14:55 by J.P. | NICOSIA

THE mood in Cyprus this weekend is both fragile and fractious. Fragile because Cypriots fear that yesterday's ultimatum from the European Central Bank to agree to a bail-out by Monday has created a serious risk, not only that Laiki Bank (and perhaps Bank of Cyprus) could go bust next week, but also that their country might fall out of the euro. They worry too that the much-hated plan of the Eurogroup (the finance ministers from the euro-zone countries) to tax all bank deposits may yet come back, despite their parliament's decisive rejection of it on March 19th.

But amid the queues in front of ATMs and in the crowds waving Russian flags in front of the parliament, the feeling is also fractious. Most Cypriots believe that this crisis has been thrust on them through no fault of their own. Unlike Greece, the budget deficit is small (indeed, it was in surplus until recently). Unlike Portugal and Italy, growth has mostly been quite robust. So why, many Cypriots wonder, has Europe suddenly decided to punish them?

Within the government the hunt is still on for a viable “Plan B” now that the Eurogroup's plan A has failed. But it is proving elusive. The finance minister, Michalis Sarris, has made little progress in Moscow trying to get a fresh loan. The idea of an emergency rescue fund that might take in property held by the Orthodox church, pension-fund assets and maybe even a contribution from Britain to make up for the non-payment of rent on its sovereign bases, is appealing, but it will be hard to organise in a few days. Splitting Laiki into a good and a bad bank is now likely, but that still may not be enough to allow it to survive. That is why the talk is that there may still have to be some tax imposed on bank deposits over €100,000 ($130,000).

Cypriots are also cross about being told by their creditors to dump their business model by shrinking their banks. Christopher Pissarides, a Nobel prize-winning economist, told an Economist conference in Nicosia on March 22nd that there was nothing wrong with relying on business services and tourism for growth instead of, say, carmaking (see Germany). Claims that Cyprus launders Russian money also cause irritation, not because they are untrue but because plenty of other places—Luxembourg, Malta, Britain—also take dodgy money.

Whatever now happens, the Cypriot economy is going to suffer. Temporary capital controls may be put in place, but one way or another a lot of capital will now flee. Fiona Mullen of Sapienta Economics told the same conference that the Cypriot economy shrank by 18% in 1974-75 before bouncing back. She fears this could happen again, with an even bigger drop if Cyprus leaves the euro.

Amid the gloom there is some hope. Cypriots believe that Mediterranean gas could not only bolster GDP but also help them to diversify out of financial services. Some also say it may now be a bit easier to reunify their divided island. Sadly, the discrediting of the new president, Nicos Anastasiades, over the euro bail-out will dent his chances of making progress on this, even though he voted in 2004 for the abortive plan negotiated by Kofi Annan to reunify Cyprus.

The biggest question Cypriots are asking is perhaps the hardest of all to answer: why are they having to resolve all this in a single weekend? After all, Cyprus asked for a bail-out last June. And a country can hardly change its business model and restructure its two biggest banks in just two days. It will be a long time before Cypriots forgive this week’s blunders of the Eurogroup and of their own parliament and government.

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