"It must realize its current business model is dead."
That's what Merkel said about Cyprus this morning, according to Luke Baker at Reuters.
After the ructions of this week, there's virtually no chance that the island can keep its oversized banking sector, ultra-low taxes, and massive deposits from rich Russians.
The good news is that this is key to getting a deal.
In a way, though, the background situation has got better for Cyprus in the last week. On Monday, the country was deathly afraid of the deposit tax because it could have signaled the death of Cyprus as a destination for offshore banking. That appears to have been the reason why it took the disastrous choice to "spread the pain" by hitting insured depositors with a tax on top of uninsured.
Now, it doesn't have to worry about that, because its role as an offshore banking destination is dead already. It is, bluntly, inconceivable that the "solution" to the crisis, whatever it is, won't result in deposit flight from overseas depositors. The only hope left is to ensure that it doesn't also result in Cypriots moving their money offshore.
Cyprus probably had a chance if it had agreed to the initial deposit levy right away. It would have been brutal, but it would have been over. And by taxing local depositors at 6.5%, while keeping the tax on rich depositors to just 9.9%, the government would have sent a strong message to foreign depositors that they were willing to hurt their own residents in order to protect them. That seems gone, and so is the Cypriot model.
As for other news this morning, the other headlines include Russia rejecting any real plans to invest in Cyprus. It looks like if Cyprus is going to get a deal it's going to be a deposit tax.
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