CYPRUS: Two Possibilities For What Happens Next
The bailout would have imposed a one-off levy on all bank depositors, a form of confiscation that the public is furious about, and which politicians are (understandably) not inclined to support.
Since no levy has been passed, the banks remain closed. Cyprus needs to raise several billions of euros to recap its banks, and again make them eligible for emergency liquidity assistance from the ECB.
So what happens now?
SocGen analyst Anatoli Annenkov gives two possibilities.
1) Cyprus finds alternative measures to raise the EUR 5.8 bn that the deposit levy would have raised: either through a higher haircut on deposits over EUR 100,000 and a lower on smaller deposits (or none at all, as favoured by the eurogroup), but such options seem to have been rejected, as it would damage Cyprus status as a financial centre. Or they could also sell state assets, such as gas reserves (or banks), possibly to Russian interests, or find other creditors (Russia).
2) The eurogroup shows flexibility and accepts that the debt level in Cyprus rises to 120% of GDP, similar to what was agreed for the Greek bailout, possibly in return for stricter conditionality (more banking oversight and restructuring, lower interest rates on deposits). Depending on the structure of such deal and interest rates, this could reduce the amount Cyprus would need to raise by some EUR 2.5 bn. The remaining 3.3 bn would still need to be found, either from a deposit levy (on deposits over 100,000), bondholder bail-in, other investors or selling of state assets.
There are actually three other possibilities, with lower odds attached to them.
They are: Clipping senior bank bondholders (which wouldn't get enough money, but would help), haircutting governmnet debt holders, or leaving the Eurozone, and firing up the printing presses to go back to the Cypriot pound, which is actually what one member of Parliament said tonight on BBC could theoretically happen soon if no deal is soon reached.
And mow for a really deep dive into Cyprus, check out Daniel Davies fantastic Choose Your Own Adventure guide to the bailout, which will help you understand the decision making process in this crisis better than anything you've read yet.