Russia has rejected pleas by the government of Cyprus for a bailout after the island nation rejected EU demands that rich depositors in their overweight banking system share in the pain of restructuring. Cypriot officials, afraid of losing their nation’s status as an overseas banking haven, had extended the levy/tax/seizure to small depositors as well, leading the Cypriot Parliament to reject the entire bailout plan amid public protests.
Russian corporations and millionaires use Cyprus as a tax haven, holding approximately half of the total deposits in the system. Cypriot Finance Minister Michael Sarris had flown to Russia in an attempt to negotiate a bailout after the EU deal was rejected by lawmakers, offering the as-yet untapped natural gas fields off the southern coast of Cyprus as collateral, but Russia was not interested. Russian Finance Minister Anton Siluanov told reporters “The talks have ended as far as the Russian side is concerned,” stating that Russia had no interest in Cyprus’s Mediterranean gas fields.
If Cyprus cannot structure a new deal with the EU by the end of the day on Monday, the nation will go bankrupt, throwing it into chaos and likely forcing it to abandon the euro currency.
In attempt to meet one of the EU demands to trim its bloated banking sector, the three largest Cypriot banks are selling their Greek operations to three Greek banks. The Cypriot banks have 300 branches in Greece between them, and hold 10% of the total loans in Greece as well as 8% of national deposits. The branches have been closed since Monday to prevent a bank run, locking Greek depositors out of their accounts. Financial analysts have calculated that it will take €1.5 billion to recapitalize the Greek branches of the Cypriot banks, and the government of Cyprus would still be accountable for half that amount.
U.S. stocks opened higher this morning after a flat day yesterday, as investors seem to consider the events surrounding Cyprus as a case of “not my circus.” The dollar is slightly weaker on profit taking, and gold also has seen some profit taking in London and New York. Silver saw a drop of 40 cents on the COMEX open, but is almost immediately began regaining some of those losses.
Everyone seems happy that the Fed has reaffirmed continued ultra-loose monetary policy, and U.S. economic data is moderating, but still positive. These factors are helping equities, while the Cyprus troubles are providing gold with support. It will be interesting to see how this all shakes out on Monday!