The Best Move For Cyprus Might Be To Hold A Gun To Its Own Head

The big news today is that the ECB has given Cyprus a deadline.

If it doesn't have a deal in place by Monday, then it's over. The ECB will not be providing any emergency liquidity to its banks at that point.

Expect a busy weekend, as the government scrambles.

Still the best possibility is some kind of depositor tax.

But Lorcan Roche Kelly, an analyst at Trend Macrolytics, argues there's another possibility.

But, there is one other alternative for Cyprus.

• It could leave the euro -- or at least threaten to
• While actually leaving would do nothing to help the banking system -- offshore depositors use it because it is member of the euro -- it is an idea that is been openly discussed by Cypriot politicians.
• This is like Cyprus holding a gun to its own head -- a paradoxical form of blackmail, to be sure. But it plays on the very real fears that any country leaving the euro area would cause a collapse of the currency.
• While we agree that such fears are very real -- any country leaving would mean that any country could leave -- we do not see Cyprus as being that country.

The question with this strategy is: Is threatening to leave the euro a real threat. I.E., is it a real threat that scares anyone outside of Cyprus? The financial aspect could likely be contained. But as Lorcan notes, the precedent is then created and a pathway is opened up.

Expect a very busy weekend.