Cyprus: Not Done Yet

European best practice in crisis management is on display again with a mass of leaked documents--primarily on Cyprus--ahead of today’s Eurogroup meeting.  I’d note a few things

1.  The financing gap is €5.5bn larger than previously indicated (€23bn, not €17.5bn).  The €10bn loan from EU/IMF was based on this larger number.  This isn’t a great surprise, but it further undermines the government’s credibility; we need to watch to see if there is a domestic public backlash.

2.   To fill the gap, a number of new measures are identified, including additional taxes, sale of CB gold and a “voluntary” refinancing of €1 billion in local law debt.  They seem to be hoping the ECB will open up ELA access to banks to finance this rollover, but if not we will be in a Greek situation (threat of law change may be used to force exchange, which likely would be a credit event).

3.  As of now, they are making €1.4 bn June external debt payment (EMTNs).  But the documents emphasize that this is the largest discrete, near term payment that they are still making, and I can’t help but think this is a contingency for the government should other funding fall through.  Plus the politics of paying this debt, when everyone else is being hit, aren’t great.

4.   This isn’t done yet: I see three distinct risks:  (a) Cyprus fails to pass the prior actions to get EU money (the government isn’t talking as if they have the votes wrapped up); (b) the funding/measures they have identified fail to come through at last minute; and (c) the gap widens quickly, requiring more measures, and so on, and so on.  The macro assumptions in the program still look far too rosy -- the real gap likely is much larger, setting up the program for failure.