Cyprus' power is dwindling as markets cease to care

The worst thing that could happen for Cyprus right now is that the markets stabilise. Cyprus’ leverage will be based on whether the financial markets care – and it looks like they’re beginning to lose interest. Greece has been dented slightly, but Italy was up 0.5 per cent today.

Here’s Sebastien Galy from SocGen, on Cyprus’ weakening position over the last couple of days:

First, the Eurogroup blinks and provides much more funds. Second, the Eurogroup stands firm and Cyprus is eased out of the EZ with ECB liquidity support ensuring a relatively orderly exit. Third, some face-saving compromise is found but where Cyprus would still deliver the bulk of the €5.8bn in question. Fourth, Russia enters the stage as a white knight. I doubt the Eurogroup will blink, and the next 24 hours will be dominated by the negotiation between it and Cyprus. Negotiation 101 tells you the most important factor is which of the parties hold the strongest cards. My estimation is that Cyprus holds the weakest cards.

Meanwhile, there are talks going on in Russia. JP Morgan’s Alex White doubts Anastasiades will make much progress here:

He will put a renewed series of proposals to whomever will meet with him (possibly junior officials). These may include the offer of further rights over Cypriot gas deposits in return for accepting an increased depositor haircut. It is not impossible that Russia agrees, but we believe it will be harder to get a deal than people may imagine. A deal with Russia could also lead to European objections.

And with Cyprus’ dwindling power it’s looking less and less like a financial centre with a future that people want to protect.

What does Cyprus do now? Well at the moment it is coming down heavily on the side of the Russians. Here from the FT:

Andreas Charalambous, a senior finance ministry official, said raising the levy on accounts over €100,000 would have a “detrimental effect” on Cyprus as an international financial centre.

Mr Charalambous said Nicosia wanted to “explore other avenues of financing to lessen the burden of these extraordinary measures”. One option would be for Gazprombank, the lending arm of Russia’s energy giant, to take over and recapitalise Laiki, the second-largest Cypriot bank.