Italian electoral results to change Eurozone climate and weight on the Cyprus issue

Mario Monti’s (on ther left) center party didn’t manage to break the Italian political stalemate. (EC Audiovisual Services).

Dr Wolfgang Schäuble, the German Federal Minister of Finance insisted yesterday that Cyprus is not a “systemic” member country of Eurozone. Given that Schäuble expresses authentically and exclusively the paymaster Eurozone and all country bailout programme in the euro area, the plan to save Cyprus from the blunders of its own banks, will be quite different from the one used for Greece, Ireland and Portugal. The problem however is what could Berlin reply, if Rome asks openly for a cheaper euro, that could be easily achieved if Eurozone satisfies all those demands. But let’s take one thing at a time.

Is Cyprus ‘systemic’?

In reality Cyprus had neither a banking nor a fiscal problem until the Eurozone decided the well-known 53.5% haircut of the Greek sovereign bonds, of which Cypriot banks held a lot. As a result Cypriot banks remained with practically no capital, if not negative.

According to the latest information the island’s lenders needed anything around €17.5 billion to re-establish their capital requirements and restore their creditworthiness. If the Cypriot government, in its efforts to safeguard the island’s banking system, decides to foot this account, Nicosia’s’ public debt will climb to the non-sustainable levels of 150% of the GDP. But it’s not only that. The Cypriot banks had a traditional close relation with the wealthy Russians. Rumours want it that this arrangement constituted a safe parking place for Russian oligarchs’ illegal money in a perfect money washing arrangement.

Not to forget that the London capital markets offer the best washing machine facilities for the Russian oligarchs or everybody with much cash. That is why many of them have made London their luxurious home. In any case Nicosia, the capital of the divided island, after the Turkish invasion, has not the political weight of Britain to protect its Russian depositors as London does. So in the case of Cyprus, Germany will try to exert all its powers to punish the easy money made by the financial paradises within the Union. Given that Berlin cannot touch the first rate ‘laundries’ in London or Luxembourg, it seems that Cyprus could pay the bill for everyone. Or now the latest developments in the Italian elections may reverse the luck of Cyprus too?

Returning to the half-finished story, if the Cypriot government tries to guarantee all deposits in the country’s banking system including those of Russian citizens, the state debt will reach non sustainable levels.

There enters Dr Wolfgang Schäuble and the Eurozone. In short the Cypriot government so far had been asking Brussels for a similar arrangement as in the cases of Greece, Portugal and Ireland. The idea is that Cyprus didn’t have a banking or fiscal problem, if it was not for the Greek haircut of all its sovereign bonds held by its banks. In this affair the Cypriot banks lost all their capital. If the Cypriot government tries to save them the country’s state debt will reach unsustainable levels as observed above.

As things develop in this Cyprus story, the world is going to learn which Eurozone country is systemic and which is not. In short which one can go bankrupt and which can’t. Obviously it will be the German minister to Finance who is to define that. Unfortunately it seems in this affair the rating agencies are following the political decisions. Soon after the German dignitary said that Cyprus is not systemic, Fitch-IBCA degraded Cyprus to the junk category. This was the first ‘gift’ to the newly elected Cypriot President Nikos Anastasiades in last Sunday’s election.

Now however with the Italian electoral results leaving the country ungoverned, the Cyprus issue may pass to a second plan. Italy will become the main issue all over the world media and markets. The burning issue now is that the critical to Germany political forces have managed to return to Italy’s main political stage. Silvio Berlusconi proved much more resistant than what Berlin would have preferred. With Italy in a rather frozen political status however Eurozone may adopt a more relaxed status and help also Cyprus out of its present misery.

In any case the results of the Italia election are a tangible proof that the too unpopular economic policies cannot be imposed just because Berlin wants it this way. If the Germans insist on this account, Italy might be the first country to tell them that the euro has to accommodate everybody and not only Germany. Even Beppe Grillo can now address ‘systemic’ criticism to Angela Merkle’s policies, without her being able to dismiss him as a joker. Not to say anything about Berlusconi who doesn’t seem to have made this impressive comeback, without a strong backing from the country’s business community. Italy needs a cheap euro to survive and Germany cannot go on denying it. To a lesser degree the same is true for France.

In short small Cyprus’s luck will now be decided in a rather more accommodative environment. Italy and France will try to remind Germany that there are seventeen member states in Eurozone.