No. of Recommendations: 6
She also issued a clear warning: Cyprus should not test the troika's patience. "We want Cyprus to remain in the euro zone," Merkel emphasized during her meeting with FDP parliamentarians. But, she said angrily according to participants, the country is "taking things further than we have ever seen before." Europe, she said, must not abandon its principles, otherwise "the whole thing" will be in doubt


Interesting you should mention that they "want Cyprus to remain in the euro zone." The fact is, Europe needs Cyprus to stay in more than Cyprus needs to stay in. Even if Cyprus stays in, their "banking center" economy is toast. That is the jewel the Cypriot politicians have been trying to save.

Now, since it is a virtual 100% certainty that every major depositor will flee Cyprus as soon as possible with as much of their cash as possible - and even reportedly 70% the local depositors have applied to remove all their cash - there is no real compelling reason for Cyprus not to simply declare it will not stand behind its obligations (outright default) and accept the inevitable expulsion or withdrawal from the euro zone.

Even if the rest of Europe were to declare war on Cyprus, what is there to gain from it? Other than untapped natural gas, possibly, the fact is one cannot get blood from a stone - and debtor's prisons are long gone from Europe. Even Germany itself was relieved from having to pay reparations after WWII.

Something that Mark J. Grant recently said has a tremendous potential impact on how all this finally goes down:

"...I have been asked, with some frequency, why the bondholders have not been tagged in the Cyprus fiasco. That answer is simple. Most of Cyprus's bonds are pledged as collateral at the ECB or in the Target2 financing program. Then one may also ask why the bonds of the two large Cypriot banks are not being hit. The answer is the same; most are held as collateral at the ECB or Target2. In both cases, remember uncounted liabilities, the government of Cyprus has guaranteed the debt.

Consequently if the two Cyprus banks default it is of small matter as the sovereign has guaranteed the debt. However if the country defaults and leaves the European Union then it will matter and matter significantly as the tiny country of Cyprus would wipe out the entire equity capital of the European Central Bank.

While it is not a matter of public record it is estimated that Cyprus has guaranteed about $11.6 billion of collateral at the ECB..."
[Emphasis added.]

If what Grant says is true, and I am pretty confident it is more likely true than not, the simple fact is this:

Europe cannot possibly allow Cyprus to leave the EU. Even if Germany, Finland and every other "financially sound" European government desires otherwise, the EU simply has no choice - it MUST bail out Cyprus.

Or face the consequences to the rest of the EU banking system.

Of course, there is also the possibility that there are a few billion of Credit Default Swaps (perhaps issued by US banks or insurance companies) that could always "save the day" - and the EU banking system, in the event of a Cyprus outright default.

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