Big Russian money out of Cyprus

Still, crisis endangers flows

By Polina Devitt and Katya Golubkova

If Russian oligarchs still have money in Cyprus, where a lot of them base their businesses, they aren't letting on.

"You must be out of your mind!" snapped tycoon Igor Zyuzin, main owner of New York-listed coal-to-steel group Mechel , as he dismissed a suggestion this week that the financial meltdown in Cyprus posed a risk to his interests.

His response is typical across the oligarch class of major corporations and super-rich individuals, reflecting the assessment of officials and bankers on the Mediterranean island who say the bulk of the billions of euros of Russian money in Cyprus comes from smaller firms and middle-class savers.

The collapse of an economy 75 times smaller than its own may not have much impact in Russia, though the crisis has strained relations with the European Union, raised questions on Russian influence over Cypriot politicians and highlighted geopolitical competition for new offshore gas fields. But some would suffer.

As much as losses likely to be sustained on deposits held in Cypriot banks, pain for the Russian economy could come from a disruption in money flows between Russians which pass through the island - transfers that dwarf Cyprus's own national income. 

Light regulation and taxes, cultural ties through Orthodox Christianity and the weather have long attracted the capital and savings of Russians - many keen to keep their wealth out of the sight of often predatory bureaucrats at home.

Yet precisely because investors can hide their wealth behind nominee structures - often held in the name of a local lawyer - it is difficult to say just how much Russian money is tied up on the Mediterranean island. Or how much has already left.

Where it is going is also unclear, though a possible rise in Russian deposits in fellow EU member Latvia, a former Soviet republic that hopes to enter the euro zone next year, has raised concerns of displacing instability northward.

Cyprus Lifts the Curtain

The Cyprus Plan Was Too Transparent To Survive In A World Dependent On Deceit

By Peter Schiff

This week financial analysts, economists, politicians, and bank depositors from around the world were outraged that European leaders, more specifically the Germans, currently calling many of the shots in Brussels and Frankfurt, could be so politically reckless, economically ignorant, and emotionally callous as to violate the sanctity of bank deposits in order to fund a bailout of Cyprus. The chorus of condemnation may have been the deciding factor in giving the Cypriot parliament the confidence to unanimously vote down the measures in hopes that Berlin will cave or Russia will swoop in with a bailout.

The decision to inflict pain on both large and small depositors was almost universally described as a historic blunder. But the mistake was to do so in a manner that was not camouflaged by financial smoke and mirrors. In truth, rank and file depositors have been paying, and will continue to pay, for all manner of bailouts and stimulus. Whether it's through lower interest payments on deposits, inflation, higher taxes, higher borrowing costs, or the accumulation of unsustainable sovereign debt, Cypriots will bear the burden of past profligacy. But the new plan for Cyprus was far too transparent, simple, and direct to survive in a world dependent on deceit and obfuscation. It was dead on arrival.

All over the world, most notably in the United States, Britain and Japan, central bankers are actively pursuing inflation targets of two to three percent. But isn't inflation, which allows governments to pay off debt through the creation of new money that transfers purchasing power from savers to borrowers, just a deposit tax in disguise? (Read more about Japan's plan to do just that). British citizens of all means have been living with such a three percent stealth tax for the past three years, and it is expected to stay that high for at least two more years. Yet a one-time tax of 6.75% in Cyprus is seen as the ultimate act of betrayal?  

Many are lamenting that Cyprus' membership in the EU prevents it from devaluing its own currency to get out of the jam. How would such a course be morally superior? Taking actual losses on deposits is no different than taking losses through devaluation and inflation. Both result in the loss of purchasing power. Asking for a depositor haircut at least deals with the problem honestly and immediately. Although it's not quite as honest, devaluation can also be effective.

The same dynamic holds true with bailout funds. Suppose the EU were to come through with more funds? All that means is that Cypriots will have to pay more in future debt and interest repayments. In so doing they would saddle future generations with a burden that they had no hand in creating. How is that fair?   

And it's not as if depositors at Cypriot banks, many of whom are reported to be Russian citizens seeking tax havens, were not complicit in the risk taking. Bloomberg reports that over the past five years euro deposits at Cyprus banks returned more than 24 percent cumulatively, almost double the returns on comparable German accounts. The banks were able to offer such returns because they were exposed to riskier assets (i.e. Greek government bonds). What's so wrong with asking those who took greater risks to earn higher returns to give something back when their decisions go bad?

Cyprus : Designed for Failure

What are the alternatives?

by Thorsten Beck

The Cypriot banking system is insolvent; it needs a large capital injection. As in several other peripheral states of the Eurozone, Cyprus cannot resolve the crisis alone. Given an already high debt-to-GDP ratio and an oversized banking system, recapitalising the banks via sovereign debt would produce unsustainable sovereign-debt levels and, ultimately, sovereign default. In short, Cyprus’s banks are too big to fail, and too big to save.

This is why Cyprus negotiated a rescue package with the Troika – ECB, European Commission and IMF. The ‘bailout’ agreement (in quotation marks, as it is not quite sure who is supposed to be bailed out here, certainly not Cypriot taxpayers and their children, to be burdened with debt for a long time) is still in the making and might even fall through. The damage, however, has already been done. There has been a complete loss of confidence, not only in the Cypriot banking system but also in the crisis-management capacity of the Eurozone.

The Saturday morning hangover

The decision taken in the early hours of last Saturday caused indignation and rejection across Europe, and rightly so. While imposing market discipline is a useful aim, and long overdue after four years of bailouts at the expense of taxpayers and future generations, the way it was originally to be imposed in the case of Cyprus has been more than counter-productive.

Economists and practitioners alike point to a couple of common principles in bank resolution. One is respect for creditor ranking:

·         Equity holders take a hit before junior debt holders;

·         Junior debt holders take a hit before senior creditors and uninsured depositors.

·         Insured depositors should take a hit last.

Such a creditor ranking is based not only on legal rules, but also on the idea that claims should be priced according to their risk and expected repayment in case of failure.

The ‘bailout’ deal with Cyprus foresees, however, a tax on deposits, originally imposed on all deposits even those covered by the EU-wide deposit insurance. Put differently, insured depositors suffer a haircut, while uninsured depositors still maintain a large share of their claims. This seems a violation of the creditor ranking, in spirit if not in the letter of the law.

In order to not violate the promise of deposit insurance of up to 100,000 euros, what the agreement calls a tax is effectively an insurance co-payment. There is nothing to be said against co-insurance, which can improve market discipline, but introducing it ex-post constitutes a clear violation of trust. And if it walks like a duck and it quacks like a duck, let’s call it a duck! This is not a tax, but an ex-post insurance co-payment and loss-sharing arrangement.

But there is more. Imposing losses on depositors is to be done in order to reduce the risk of sovereign over-indebtedness and thus guarantee repayment of current sovereign-bond holders. Imposing losses on insured bank depositors to thus guarantee repayments to sovereign-bond holders violates another political priority of putting (certainly more sophisticated) bond holders above (mostly less sophisticated) holders of small deposits.

Finally, imposing a tax on depositors of all banks, independent of the financial situation of each bank, further undermines market discipline. Yes, it seems an easier option, requiring less administrative effort, but it sends the message that investors do not have to price investments properly as the haircut is the same across banks. And it increases herding trends towards aggressive risk-taking.

Addressing the problem at its core

The Cypriot economy is in crisis, for many reasons. But the insolvency of the banking system is at the core of the current crisis, and should therefore be the focus of the resolution. The literature on resolving bank crises has pointed to several important lessons. On is that losses should be recognised early on, allocated and then managed. While the flow solution, i.e. re-establishing solvency of the banking system through retained earnings or future government earnings, seems attractive as it avoids immediate pain, it comes at high risks.

For Earth Hour, let’s celebrate electricity as a ‘gift of the gods’

The difference between the Dark Ages and the present

By mark perry

“On the evening of March 23, 1.3 billion people will go without light for the rest of the night—just like every other night of the year. With no access to electricity, darkness after sunset is a constant reality for these people. See the video above from Bjorn Lomborg’s environmental think tank - the Copenhagen Consensus Center - with a different message for this Saturday’s Earth Hour.”

According to the WUWT blog, the picture below shows a satellite view at night of North Korea, the winner for Earth Hour in every year since 2003. Odds favor them to be the winner again this year. Earth Hour has been such a stunning success in North Korea, that it’s “always Earth Hour there”, according to Alan Caruba, who comments that “electricity is truly a gift of the gods. It is the difference between the Dark Ages and the present age.”

How Do You Say “Quagmire” in French?

Embers of War: The Fall of an Empire and the Making of America’s Vietnam

President Lyndon Johnson in Vietnam with Gen. Westmoreland and South Vietnam's Lt. Gen. Nguyen Van Thieu and Prime Minister Nguyen Cao Ky

By LEON HADAR

Graham Greene’s novel The Quiet American—adapted into films in 1958 and 2002—was inspired by the author’s experiences as a war correspondent in French Indochina in the early 1950s, in particular by his conversations with American aid worker Lee Hochstetter while the two were driving back to Saigon from a tour to Ben Tre province in the countryside in October 1951.

As the Swedish-born historian and Cornell University professor Fredrik Logevall recounts in Embers of War, during their ride to the city Hochstetter, who had served as the public-affairs director for the U.S. Economic Aid Mission in Saigon, lectured Greene about the need for a “Third Force” in French-ruled Vietnam, one not beholden either to the French colonialists or to their main adversaries, the guerilla forces led by Ho Chi Minh.

Ho’s fighters—the Viet Minh, a nationalist and communist movement—operated from Hanoi in the north of the country and were resisting French attempts to re-establish control over Indochina after the end of Japanese occupation in 1945, part of a wider strategy of restoring the French empire in Southeast Asia and elsewhere.

But as Hochstetter explained to Greene, French efforts to defeat the Viet Minh militarily while denying the non-communist Vietnamese real independence were doomed to fail. The Vietnamese fighting on the side of the French against Ho had to be convinced that they were advancing the cause of democracy for their own country, the young American aid worker insisted. “The only way to make them so convinced was to build up a genuine nationalist force that was neither pro-Communist nor obligated to France and that could rally the public to its side,” writes Logevall.

In The Quiet American—set in 1952, and which Greene started writing that year in his hotel room in Saigon—the character of Alden Pyle was modeled after Hochstetter (and not, as some have speculated, after the legendary Cold War-era counterinsurgency strategist Edward Lansdale). Pyle’s views are described to the novel’s protagonist, a British war correspondent named Thomas Fowler (based on Greene himself), as follows: “There was always a Third Force to be found free from Communism and the taint of colonialism—national democracy, he called it; you only had to find a leader and keep him safe from the old colonial powers.”

The End of Innovation?

A new and unnecessary law restructures the U.S. patent system for the worse

by Richard A. Epstein 

This past week, patent lawyers were feverishly preparing reams of new patent applications to be filed under the 2011 America Invents Act (AIA), which took effect on March 16, 2013, a year and a half after Congress passed that unwise measure. The AIA replaced the old First-to-Invent standard with a First-Inventor-To-File standard. To the outsider, that shift in legal rules may seem like no big deal. But there are firms to which patent priority is worth many millions of dollars. Under the new paradigm, firms must ensure that they “file as early and as completely as [they] can!”

Structuring a patent system is no easy business, for it requires a delicate balance between two competing imperatives. The first is to give inventors the incentive to create new products; the only reliable device here is the exclusive right to market the product for a limited period of time. The second is to ensure that the invention is disseminated widely, which requires limiting the scope and duration of the inventor’s monopoly. In general, the first function is more important for it incentivizes innovation. After all, it is not possible to widely disseminate inventions that were never made.

In large measure, the huge political fight over the AIA (in which I participated for my client DataTreasury on the losing side) is over the calibration of that balance. The powerful industry coalition in favor of the AIA sought to displace the more property-protective Patent Act of 1952, which the AIA supporters denounced in these harsh terms:

Much-needed reforms to our patent system are long overdue. The last major patent re­form was nearly 60 years ago. Since then, U.S. innovators have developed cell phones and launched the Internet. And yet the laws protecting the technologies of today are stuck in the past.

Our outdated patent system has been a barrier to innovation, unnecessarily delaying American inventors from marketing new products and creating jobs for American workers. It takes over three years to get a patent approved in the U.S. American innovators are forced to wait years before they can hire workers and market their inventions. Meanwhile, our competitors are busy developing new products that expand their businesses and grow their economies. . . . We need a system that ensures patent certainty, approves good patents quickly and weeds out bad patents effectively.

This overheated rhetoric cannot withstand any scrutiny.

A Brief History of Patent Law

To see how and why the AIA will flounder, it is useful to understand the history of patent law in the United States.

The creation of a national patent law in the United States virtually coincides with the founding of the country. One of the enumerated powers that the Constitution conferred on Congress is “the power . . . To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

MIT Develops Meltdown-Proof, Nuclear Waste-Eating Reactor

A trillion dollar industrial market

By Brian Westenhaus 

Transatomic, a Massachusetts Institute of Technology spinoff is developing a nuclear reactor designed to overcome the major barriers to nuclear power.  For the anti-nuclear folks the design offers to burn up the existing spent fuel from the world’s fleet of nuclear reactors in a design that doesn’t offer a chance for a meltdown.  That should be nirvana for those alarmed about atomic energy and weapons proliferation.

For everyone else, the first offering is we would see a reduction in spent fuel containment costs and get electrical energy, lots of it, instead.  The second is the design would be factory produced cutting build costs in a huge way and the reactors would be larger than the currently trendy Small Modular Nuclear Reactors (SMNRs) offering the chance to install at existing locations saving on the generation and grid connection costs.

Transatomic, founded by a pair of very smart and innovative young nuclear engineers, has updated the molten-salt reactor, a reactor type that’s highly resistant to meltdowns. Molten-salt reactors were demonstrated in the 1960s at Oak Ridge National Lab, where one test reactor ran for six years.  What remains is raising $5 million to run five experiments to help validate the new basic design.

Russ Wilcox, Transatomic’s new CEO estimates that it will take eight years to build a prototype reactor at a cost of $200 million.  The company has already raised $1 million in seed funding, including some from Ray Rothrock, a partner at the venture capital firm Venrock.

The cofounders, Mark Massie and Leslie Dewan, who we met here in April last year, are still PhD candidates at MIT. Yet the design has attracted some top advisors, including Regis Matzie, the former CTO of the major nuclear power plant supplier Westinghouse Electric, and Richard Lester, the head of the nuclear engineering department at MIT. 

The new reactor design called the Waste-Annihilating Molten Salt Reactor (WAMSR) so far exists only on paper.  Ray Rothrock says the company will face many challenges. “The technology doesn’t bother me in the least,” he said. “I have confidence in the people. I wish someone would build this thing, because I think it would work. It’s all the other factors that make it daunting.”  We’ll get to those daunting factors in a moment.

King Coal looks set for a long, long reign

Coal Is the Fuel of the Past and the Future

By Llewellyn King 

Hal Quinn, president of the National Mining Association, says coal in 2016 will again be the world’s favorite carbon fuel, pushing out petroleum as the world's largest source of energy.

This may seem especially surprising at a time when the use of coal in the United States is in decline, edged out by cheap natural gas and increasingly strict regulations from the Environmental Protection Agency. Yet a rising tonnage of coal is being used for electric generation worldwide.

The Third World is hungry for coal, as it increases electricity production. In the developed world, nuclear setbacks -- most notably the aftereffects of the Fukushima-Daiichi nuclear power plant accident, when a tsunami wave knocked out six reactors -- have helped boost the commitment to coal. The accident has forced the Japanese to burn more coal and the Germans to begin phasing out their nuclear power plants. Other European countries are dithering, and the cost of building nuclear plants is rising.

If you do not have an abundance of natural gas, as here in the United States, then coal is your default choice. It is shipped around the world in larger and larger quantities. The more the world has resisted the burning of coal, the more it has had to fall back on it. Alternative energy, attractive in theory, is yet to make its mark.

Because coal has always had an environmental price, it has always been under attack, and at the same time it has proven stubbornly hard to replace. King Edward I of England, who reigned from 1239 to 1307, was the first known major opponent of coal. He banned it in 1306.

Tales of why he did this vary. One story goes that his mother, Queen Eleanor of Provence, when staying at Nottingham Castle, was so affected by the coal fumes from the town that she had to move out.

Wood was hard to come by in towns, and it does not heat like coal. Anyway England was a cold place and wood was in short supply, so the ban was not very effective, despite the fact that the death penalty was standard for disobeying royal orders.

Two and a half centuries later, Queen Elizabeth I tried to ban coal with not much effect. The prospect of a coal ban was even more draconian then as her father, Henry VIII, had largely denuded the English forests to build his navy and she was even more committed to sea power.

Le Monde Headline "No, France is Not Bankrupt"

Today France, tomorrow, the world!

By Mike "Mish" Shedlock

This amusing headline story by Bruno Moschetto, a professor of economics at the University of Paris in the French newspaper Le Monde has me laughing out loud this morning: "No, France is Not Bankrupt" 

 No, France is not bankrupt ... The claim is untrue economically and financially. France is not and will not bankrupt because it would then be in a state of insolvency.

A state cannot be bankrupt, in its own currency to foreigners and residents since the latter would be invited to meet its debt by an immediate increase in taxation.

In abstract, the state is its citizens, and the citizens are the guarantors of obligations of the State.

In the final analysis, "the state is us." To be in a state of suspension of payments, a state would have to be indebted in a foreign currency, unable to deal with foreign currency liabilities in that currency.

Economic Illiteracy

Economic illiteracy is nearly everywhere you look and that article is a prime example. Bruno Moschetto suggests France is not bankrupt because the state is not indebted in a foreign currency.

Actually, France does have its debts in a foreign currency, euros. Note that France cannot print euros at will to pay its debts (the very essence of a foreign currency).

Moschetto says citizens would be "invited" to help France meet its obligations. Invited? The same way citizens of Cyprus were "invited" to bail out Cypriot banks?

The ability to tax citizens to death to bail out the state is hardly a reasonable measure of non-bankruptcy. I suggest having to confiscate the wealth and savings of citizens to bail out the state is proof of bankruptcy. Greece is a nice example. 

Hollande has tried 75% taxation.  He has tried government takeover or threats of takeover of various auto manufacturers. Hollande also seeks financial transaction taxes.

Many French citizens have had enough of Hollande and his socialist policies and have fled to Belgium, the UK, and Switzerland.

The French economy is imploding as I type. 

Thought of the Day

France is Bankrupt, and it is the policies of socialist fools that put France in that state.

The thought of the day comes from reader "PTCruiser" who chimed in with "Aujourd'hui, la France. Demain, le monde entier."... Today France, tomorrow, the world! 

The Global Financial Pyramid Scheme By The Numbers

The dominoes are starting to tumble, and nobody is immune

By  Michael Snyder

Why is the global economy in so much trouble?  How can so many people be so absolutely certain that the world financial system is going to crash?  Well, the truth is that when you take a look at the cold, hard numbers it is not difficult to see why the global financial pyramid scheme is destined to fail.  In the United States today, there is approximately 56 trillion dollars of total debt in our financial system, but there is only about 9 trillion dollars in our bank accounts.  So you could take every single penny out of the banks, multiply it by six, and you still would not have enough money to pay off all of our debts.

Overall, there is about 190 trillion dollars of total debt on the planet.  But global GDP is only about 70 trillion dollars.  And the total notional value of all derivatives around the globe is somewhere between 600 trillion and 1500 trillion dollars.  So we have a gigantic problem on our hands.  The global financial system is a very shaky house of cards that has been constructed on a foundation of debt, leverage and incredibly risky derivatives.  We are living in the greatest financial bubble in world history, and it isn't going to take much to topple the entire thing.  And when it falls, it is going to be the largest financial disaster in the history of the planet.

The global financial system is more interconnected today than ever before, and a crisis at one major bank or in one area of the world can spread at lightning speed.  As I wrote about yesterday, the entire European banking system is leveraged 26 to 1 at this point.  A decline in asset values of just 4 percent would totally wipe out the equity of many of those banks, and once a financial panic begins we could potentially see major financial institutions start to go down like dominoes.

We got a small taste of what that is like back in 2008, and it is inevitable that it will happen again.

Anyone that would tell you that the current global financial system is sustainable does not know what they are talking about.  Just look at the numbers that I have posted below.

The following is the global financial pyramid scheme by the numbers...

-$9,283,000,000,000 - The total amount of all bank deposits in the United States.  The FDIC has just 25 billion dollars in the deposit insurance fund that is supposed to "guarantee" those deposits.  In other words, the ratio of total bank deposits to insurance fund money is more than 371 to 1.

-$10,012,800,000,000 - The total amount of mortgage debt in the United States.  As you can see, you could take every penny out of every bank account in America and it still would not cover it.

-$10,409,500,000,000 - The M2 money supply in the United States.  This is probably the most commonly used measure of the total amount of money in the U.S. economy.

-$15,094,000,000,000 - U.S. GDP.  It is a measure of all economic activity in the United States for a single year.

-$16,749,269,587,407.53 - The size of the U.S. national debt.  It has grown by more than 10 trillion dollars over the past ten years.

-$32,000,000,000,000 - The total amount of money that the global elite have stashed in offshore banks (that we know about).

-$50,230,844,000,000 - The total amount of government debt in the world.

-$56,280,790,000,000 - The total amount of debt (government, corporate, consumer, etc.) in the U.S. financial system.

-$61,000,000,000,000 - The combined total assets of the 50 largest banks in the world.

-$70,000,000,000,000 - The approximate size of total world GDP.

-$190,000,000,000,000 - The approximate size of the total amount of debt in the entire world.  It has nearly doubled in size over the past decade.

-$212,525,587,000,000 - According to the U.S. government, this is the notional value of the derivatives that are being held by the top 25 banks in the United States.  But those banks only have total assets of about 8.9 trillion dollars combined.  In other words, the exposure of our largest banks to derivatives outweighs their total assets by a ratio of about 24 to 1.

-$600,000,000,000,000 to $1,500,000,000,000,000 - The estimates of the total notional value of all global derivatives generally fall within this range.  At the high end of the range, the ratio of derivatives to global GDP is more than 21 to 1.

Are you starting to get the picture?

Just when you thought it was safe…

Bailing out Cyprus was always going to be tricky. But it didn’t have to be like this

By The Economist

EVEN by the standards of European policymaking, the past week has been a disaster. In the early hours of March 16th, nine months after Cyprus first requested a bail-out, euro-zone finance ministers, led by the Germans, offered a €10 billion ($13 billion) deal, well short of the €17 billion needed. Who ordered whom to do precisely what is not clear, but the Cypriots then said they would raise a further €5.8 billion by imposing a levy on depositors—of 9.9% on savings above the €100,000 insurance-guarantee limit, and 6.75% for deposits below it. Chaos ensued, not least among the many Russians (reputable or not) who have parked their money in the lightly regulated island. On March 19th, with crowds in the streets and all the banks firmly shut, the Cypriot parliament rejected the bail-out package (see article). As The Economist went to press, the scene had shifted to Moscow, where the Cypriots were trying to persuade Vladimir Putin and his cronies to contribute some money in exchange, perhaps, for future gas revenues.

Cyprus is a Mediterranean midget, with a GDP of only $23 billion. But this crisis could have poisonous long-term consequences. Eight months after the European Central Bank appeared to have restored stability by promising to do whatever it took to save the currency, the risk of a euro member being thrown out has returned. It has increased the chances of deposit runs (if Cyprus can grab your money, why not Italy or Spain?). And it has revealed the lack of progress towards a durable solution to the euro’s troubles. Ideally, all this will prompt the Europeans to push ahead with reforms, but with a German election in the autumn that seems unlikely.

Cyprus is broke. Its debt, if it took on its banks’ liabilities, would hit 145% of GDP. This newspaper suggested recapitalising Cypriot banks, on a case-by-case basis, directly through the European Stability Mechanism (ESM), thus breaking the vicious circle where weak sovereigns bail out weak banks. We also argued for depositors and senior bondholders to be spared—not out of any particular love for rich Russians, but because of the fear of bank runs in larger weak euro economies. The Europeans instead decided to lend the money directly to the Cypriot government; and the Cypriots, perhaps bullied by some creditors, then decided to clobber all the banks’ depositors, even the insured ones.

Why Europe Must Play Hardball with Cyprus

A Game of Chicken

by Christian Rickens

The Cypriot rejection on Tuesday night of the euro-zone bailout package for the country's ailing banks has triggered a power struggle between the island nation and the European Union. If Brussels gives in, future efforts to save the euro will be made more difficult. All hopes are now on Russia.

Efforts to save the euro have long been criticized for being undemocratic, with bailout packages being assembled behind closed doors in Brussels. But after Tuesday evening's vote in the Cypriot parliament, that critique will be difficult to maintain. Not a single parliamentarian in Nicosia cast a vote in favor of the bailout package, one which foresaw a mandatory levy on accounts held with Cypriot banks.

Thirty-six lawmakers voted against the deal and 19 abstained, including those belonging to President Nikos Anastasiades' center-right DISY party. With their veto of the expropriation plan, parliamentarians in the island nation showed that representatives of a small European Union member state can indeed block euro-zone efforts to save the common currency.

Anastasiades, of course, didn't exert much effort to find a majority for the deal, even though he had agreed to it in Brussels. On the contrary, even before the parliamentary debate began, he said the package was unlikely to pass -- a virtual invitation to lawmakers to reject it. The move could even be a tactical one. Anastasiades can now return to Brussels in the hopes of leveraging better conditions out of Cyprus' euro-zone partners by highlighting his country's rebellious parliament.

It could also be useful as a lever in Moscow. On Wednesday morning, all eyes were on Russia in the hopes that the country might jump in to provide Nicosia emergency aid. Russian investors have parked billions of euros in Cypriot bank accounts -- indeed the presence of Russian money is one reason why Cyprus' banking sector holds assets worth more than seven times the country's annual gross domestic product. According to media reports, Anastasiades spoke with Russian President Vladimir Putin immediately following the failed parliamentary vote and the Cypriot finance minister flew to Moscow on Tuesday night.

Bullied from Abroad

In the coming negotiations, the Euro Group must be careful as it seeks to maintain its credibility. The vote on Tuesday evening made one thing clear: The main concern in Nicosia was not in fact those who held smaller sums in Cypriot accounts. By Tuesday morning, the original deal had been changed to exempt from the bank levy those holding less than €20,000 in their savings accounts. That the parliamentary veto was nonetheless unanimous shows that lawmakers are primarily interested in maintaining Cyprus' role as a low-tax paradise and offshore business haven. It also shows that Cypriots are unwilling to be bullied from abroad, particularly not by the Germans.

Cyprus's High-Stakes ECB Gamble

A Mediterranean Jonestown

By SIMON NIXON

The euro zone is used to brinkmanship. But since the Cypriot parliament refused to sanction a tax on bank deposits, a vital condition of its proposed €10 billion ($13 billion) bailout, the currency bloc is in uncharted territory.

What happens next depends on the response of the European Central Bank. The Cypriot parliament is gambling that the ECB is bluffing when it says it will withdraw Emergency Liquidity Assistance from the country's banks, thereby precipitating their likely financial collapse.

True, the ECB has blinked before. It had originally threatened to withdraw permission for the Central Bank of Cyprus to provide ELA on Jan. 21. But it backed down because it believed that there was the prospect of a bailout deal that would recapitalize the country's broken banking system once the presidential election was out of the way in February. At that point, it said it would review its decision after two months, a deadline that expires this Thursday.

During Friday's marathon negotiations over the current bailout proposal, ECB executive board member Jörg Asmussen made clear to President Nicos Anastasiades that failure to agree on a deal that weekend would make it impossible for the ECB to provide a further extension of ELA. After all, ECB rules don't allow national central banks to lend to insolvent banks.

But any actual decision to withdraw ELA is a matter for the ECB's Governing Council, and that needs two-thirds of the council's members to vote in favor.

The Cypriot parliament may be calculating that it can count on enough Governing Council members to block any move to withdraw ELA. After all, the ECB's rules say it can only withdraw a national central bank's right to provide ELA to protect the monetary integrity of the euro zone.

If Governing Council members wanted reasons not to withdraw ELA, they could always argue that a possible Cypriot euro exit would do more damage to euro-zone monetary integrity than keeping its banks alive. Besides, even if ELA eventually replaced the entire €70 billion of Cypriot deposits, it would make little difference to overall euro-zone money supply.

But this is complacent. Even if Cyprus is small, the ECB must consider the precedent it would create if it allowed the Central Bank of Cyprus to continue providing ELA in the absence of a deal.

The more likely outcome is that the liquidity provision continues beyond Thursday, dependent on two conditions: First, that it receives credible assurances that there is a realistic prospect of an alternative deal. Second, that the banks remain shut until that deal is concluded to minimize the low-level bank run that is already under way as Cypriots continue to empty automatic cash machines.

Whether Cyprus can meet these conditions is an open question. Any deal will require Cyprus to find €6 billion from its citizens to help pay for the bank recapitalizations. That must be done to keep the cost of the euro-zone bailout below €10 billion and the government's debt sustainable—an essential condition for International Monetary Fund involvement, which is, in turn, an essential condition for the German government and parliament to agree to a deal.

So the banks will have to stay shut and the Cypriot parliament keep voting until it comes up with the "right" answer or decides to quit the euro. Sound familiar?