As I suspected would happen, the IMF/German bailout deal was (quite understandably) rejected by the Cypriot parliament, with no votes in favour. My guess is that a naive president of the country (he was in the job just a couple of weeks) went to Brussels and the Germans and IMF tried to strong arm him into signing extremely harsh bailout terms, that he then had no chance of ever getting passed by parliament.
Again, as with Greece, I see a cultural issue at play. While the Germans might well have assumed the Cypriots would just roll over an accept it (as Germans would) that’s not how things work in Mediterranean countries. Now there is a risk of Cyprus crashing out of the Euro and setting a dangerous precedent.
Of course one could argue that the Germans are deliberately trying to make Cyprus go bankrupt. i.e. they knew damn well those terms would never be accepted and as they see it a bankruptcy of Cyprus might serve to scare the Spanish, Greek’s and Italians straight. However, if that is their game plan they are again seriously miscalculating.
There seems to be an assumption that if any country enters into default that they will calmly leave the Eurozone, no fuss, walk outside and commit hara-kiri. But will they? Opinion polls show that the majority of Cypriots, Greeks and other troubled economies what to stay in the euro. And as no exit mechanism exists, it would take sometime for them to be forced out. If Cyprus opted to simply renege on all its government’s debts and basically coming up with ways of inventing money (something they seem to be doing with plans to issue bonds with regard to as of yet unproven possible gas reserves off their shore) that would not be good for the eurozone. In all likelihood even states like Germany could loose their triple A credit rating. Furthermore, the dangerous uncertainty it would inject into the eurozone would be most unhelpful
Further as I highlighted with regard to Ireland, once a country exits the eurozone, most likely issuing a new currency, devaluing it drastically almost straight away (or allowing inflation to do its worst, so-called soft default) then you basically turn a sovereign debt or banking crisis into a much larger problem. For this will mean that savings and debts in private hands (i.e. everyone’s mortgages, pensions and savings) are also devalued (and effectively defaulted on).
To give you some idea of the impact of that, consider that while Ireland’s public debts are around 200 Billion euros or so, our private debts (i.e. everyone’s mortgages, car / student / business loans) works out at about 1.7 trillion euro’s, about 100 billion of that owed to British banks. A default of Ireland, with us exiting the eurozone could thus create a 100 billion euro hole in the finances of British banks (it took just a 40 billion pound hole to bring down RBS!).
So the danger is, that a messy bankruptcy of Cyprus could easily spread a contagion of debt to other vulnerable economies, one of those coincidentally being the UK (thanks to Osborne and Cameron), as the markets will be no doubt wondering who is next. This could set off a chain reaction where several other economies also collapse.
So in short whatever chess game Merkel and the IMF are playing it is a fairly dangerous game. As I mentioned in a prior post, this could prove to be Europe’s Lehman Brothers moment”.