This is just a quick note to put down my thoughts on what Cyprus could do next. Generally every time I make a list like this, what actually happens isn't on the list at all (which can be useful information!).
- Take the haircut anyway - probably least painful in the short run. In the long run it demands massive austerity, so the pain will not be short lived. The major danger on the road is that the depositors could run even after the haircut, causing the banks to fail anyway, making the exercise pointless.
- Get funding from Russia - It's not clear what strings would be attached, or if this could even be done with Cyprus still in the EU. At least the incentives are more aligned here than with #1, and full support for the depositors is possible. The strings could be nasty though. There's even one claim this was the idea all along.
- Walking back from Cyprus - this amounts to converting a portion of large deposits into CDs/bonds in the banks. With a long dated liability the banks can more easily be stabilized. This is painful for large depositors in the short run, but may be palatable in the long run; plus its good for the small depositors. In a way, this is retroactively forcing what the banks should have been doing. Bank runs are unlikely, and terms for the rest of the bailout about the same as (1).
- EU vs Russia - haircut the non-EU accounts for an aggregate 6 billion. That ends up being about triple the rate if non-EU accounts hold equal priority. This probably (?) results in a non-EU run, which destroys the bank anyway. Additionally, it removes a significant source of economic activity for Cyprus, so there goes the economy too.
- Germany nationalizes the bad banks - My new idea is to turn over the bad Cypriot banks to Germany (Deutche Bad Bank). The new DBB is bailed out by Germany, who gets all the equity. The management is fired and German management installed. This costs more for Germany, but depositors are upheld and new bank rules (anti-money-laundering, etc) which Germany has always wanted, are installed.
- Cyprus ala Iceland - Leave the Euro, convert all deposits - and local law governement debt - to Cypriot Pounds. The pound instantly devalues. Cyprus may have to default on the English-law bonds due in June, but never mind since they are out of the market anyway. This is very painful to despositors now, but gives control of the future processes back to Cyprus.
We'll see what happens.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.