The Daily Parker

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Uh oh...

Via Sullivan, the European Union has given Cyprus the weekend to get itself put together...or else...

Cypriot negotiators have lots of perfectly sensible things they can tell the European purse-string holders about why this obsesssion with debt sustainability is silly. They can point to future natural-gas revenues, for instance, which give Cyprus the potential ability to pay of debts which seem huge right now. They can also point to the denominator here: if failure to reach a deal results in GDP collapsing, then the debt-to-GDP ratio will soar even if the debt level doesn’t rise at all. But the Europeans aren’t acting like impartial judges: by all indications, they’ve made up their mind.

Which leaves Cyprus in a very, very tough position. It can accept the idea of taxing bank deposits — or it can find itself tossed unceremoniously into the Mediterranean, left to fend for itself. Essentially, the EU is telling Cyprus that it can come up with any plan it likes, so long as the plan involves nothing but fiddling around with the Breakingviews deposit-tax calculator. You want to preserve all insured deposits? Fine, raise the tax on uninsured deposits to something over 15%.

In other words, the only real solution to this crisis is for the EU to go back in time and stop it from happening in the first place. And the next-best solution would be for the EU to stop being so self-defeatingly stubborn on debt ratios. But if that doesn’t happen, the Cypriot parliament is going to face an unbelievably tough vote at some point in the next few days. Will they essentially cede their sovereignty to unelected Eurocrats, and rubber-stamp a deal which looks very similar to the one they’ve already rejected once? Or, standing on principle, will they consign themselves to utter chaos and a very high probability of leaving the Eurozone altogether? Such decisions are not always made rationally.

Could Cyprus end the Euro? It's possible, and it could happen next week. Krugman has even more depressing analysis.

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