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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman.
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  • Both Greece And Cyprus Must Capitulate Next Week 0 comments
    Nov 2, 2012 10:35 PM

    It now appears that when the German finance minister said on Wednesday that Cyprus had not engaged in substantive negotiations and had missed the deadline for a November deal, he was making an honest observation but was not speaking officially. The word out of the Troika is that long-distance negotiations continue but with no progress. The parties are far apart and do not appear to be budging. The issues are labor law and privatization. Both issues are non-negotiable for both sides.

    Cyprus is publicly begging the Troika to come back to Nicosia for more "negotiations"; the Troika's failure to return suggests that there is nothing to talk about until Cyprus gives in and agrees to what the Troika has "proposed". As Schaueble intended, the Cypriots have become extremely nervous, but have yet to agree. They really should not call his bluff because, even if they somehow win Round One, he will make sure they lose in the end if not sooner. One can only imagine the level of his, shall we say, frustration with their attitude.

    Schaueble said that nothing substantive had been accomplished, which is true. For Cyprus to meet the deadline for the Nov. 12th eurozone finance minister meeting, she will have to capitulate to the Troika on all issues this week. I think that Schaueble's statement was calculated as a stark warning to both Cyprus and Greece that these are not as much negotiations as they are ultimata, and that Europe isn't going to blink. The marxist parties in both countries must choose between capitulation or default.

    In Greece, the wicket is just as sticky. There are three problems: (1) parliament must pass the labor reform demanded by the Troika, which it may not be able to do; (2) the labor law may be declared unconstitutional; (3) the Troika will have to come up with an additional EUR 40 billion in new loans; and (4) the additional money and time have blown a hole in the IMF's required debt stabilization plan, requiring a debt reduction scheme to offset the new debt.

    Both Greece and Cyprus are scheduled to run out of money by the end of this month, so there really is a short deadline for the conclusion of "negotiations". The next two weeks should be action-packed as (1) Greek and Cypriot politicians realize that they are no longer negotiating and pass the required legislation; (2) their bailout plans are rapidly cobbled together for the ministerial meeting on the 12th; and (3) the financing issues are resolved. Only after the plans have been approved by the Troika and the eurozone will the small matter of German and Finnish parliamentary approval have be addressed (or cleverly finessed).

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