In this year’s blockbuster Disney offering Oz the Great and Powerful, the curtain is lifted on how a simple circus trickster comes to fool the entire Land of Oz into letting him rule the Emerald City.
Have this week's tortured negotiations over a paltry €10 billion bailout for the tiny nation of Cyprus done the same job of lifting the veil on the all too frail and human workings of the great European Union?
As markets open today in Australia, a dangerous game of brinkmanship is still underway in Brussels.
The Cyprian president, Nicos Anastasiades, has reportedly threatened to resign in frustration with his discussions with the troika leaders – the European Commission’s Jose Manuel Barroso, the European Central Bank’s Mario Draghi and the International Monetary Fund’s Christine Lagarde – about securing their agreement for emergency funding to stop his nation’s banks from becoming insolvent.
No wonder he's frustrated.
The Cyprus bailout crisis is entirely a man-made crisis – as indeed all financial crises are. Monday’s deadline for European finance ministers to approve the terms of Cyprus’ bailout is entirely artificial. The European Central Bank could just print some more money to support Cyprus' banks.
But Germany would never allow it, the memories of hyperinflation still too raw in its mind. And so the Cypriot government is compelled to stump up €5.8 billion in savings to qualify for the bailout money it needs to keep major banks solvent come Tuesday when they are scheduled to reopen.
Without the funds, a major Cypriot bank would be immediately insolvent and the Cyprian government would have to print its own currency to keep the economy alive, meaning an exit from the euro currency block.
All the troika needs to do is agree to a €10 billion bailout – much smaller than Greece’s bailout of €240 billion – and the crisis is over.
It’s easy to wonder if the troika has toyed with the idea of making a test case out of Cyprus. If Cyprus left the euro and was forced into a rapid depreciation of its currency, the destruction of its banking system and its people’s wealth, it could serve as a timely reminder to other debt-riddled European nations just how lovely it is to be in the euro.
The imposition of capital controls has led some to speculate whether Cyprus has indeed already left the euro. A euro in Nicosia subject to capital controls is surely already worth less than a euro in Frankfurt.
For now at least Cyprus remains within the tent, but it is running out of options fast.
Russia has refused the idea of a €2.5 billion loan. And the fact that Cyprus even asked for the loan has strained relations with Germany.
The Germans have also rejected a Cyprian plan to seize money in pension funds (otherwise known as nationalisation) as it spurs too many German memories of how German war efforts were funded in both world wars.
The deal currently on the table appears to be for a 20 per cent tax on all deposits greater than €100,000 in Cyprus’ biggest and strongest bank, the Bank of Cyprus. All other banks would be subject to a smaller tax of 4 per cent on their deposits bigger than €100,000.
Cyprus’ second biggest and most shaky bank, Laiki Bank, would be restructured under the deal. Greek branches of the bank harbouring toxic assets would be closed and the bank’s good assets rolled over to the Bank of Cyprus.
Meanwhile, banks in Cyprus have been closed for a week. The Bank of Cyprus has reduced its ATM cash withdrawal limit to €120. And Laiki Bank reduced its limit to €100.
Bank runs remain a real risk not just in Cyprus, but in other troubled euro nations.
Even if small deposit holders are spared, confidence has been shaken.
Even when a last minute deal is struck between the troika and the Cyprian government – as no doubt will be done today – a key question remains.
Have European deposit holders seen too much of what lies behind the European Union’s curtain? Will they ever trust the union or its banking system again?