The Five Strangest Ways to Solve the Cyprus Crisis

March 22, 2013

The latest proposal to save Cyprus's economy, "Plan B," has the country nationalizing private pensions and issuing emergency bonds. But even as Cyprus's parliament considers the plan, the "troika" of the European Commission, European Central Bank and International Monetary Fund apparently opposes it. And Russia, the island's other potential savior, is now saying that it won't go for a deal that lacks support from the European Union.

Cyprus can be forgiven, then, if it's grasping at straws for ways to get out of this financial mess and stay in the euro currency zone. So, here are a couple of out-of-the-box suggestions to help Cypriot leaders forge an exit path.

1. Turn everything into CDs.


Just change what's in the banks! (Ahn Young-Joon/AP)

Okay, so compared to confiscating insured bank deposits and nationalizing pensions this may not be too crazy. Lee Buchheit and Duke law professor Mitu Gulati have developed a plan in which deposits under €100,000 ($130,000) are left alone, but all deposits in excess of that amount are converted into five- or 10-year certificates of deposit (CDs), which would pay out interest over time. That allows the banks to delay payment until Cyprus’s gas deposits start to yield fruit. Buchheit and Gulati estimate that this would raise €6.6 billion ($8.5 billion), more than the €5.8 billion ($7.5 billion) share of the bailout that Cyprus is supposed to pay for.

This idea has gotten some commentators excited. "At least in this case patient depositors will have a chance of getting all their money back in full — with interest," Felix Salmon wrote. "And, most importantly, guaranteed depositors will remain unscathed." But foreign investors may not take kindly to the huge dive in liquidity this would cause.

2. Sell recognition of Northern Cyprus.


Turkish Prime Minister Recep Tayyip Erdogan would probably like this idea. (Adam Berry/Getty Images)

In a classic case of Matt Yglesias being Matt Yglesias, the Slate columnist proposed that the Republic of Cyprus — which actually only controls the south of the island — offer to recognize the Turkish puppet state controlling the north, which currently is only recognized by Turkey, in exchange for €5.8 billion ($7.5 billion) for the bailout.

Economists love solutions like this. It brings to mind Ronald Coase's famous example of neighbors resolving a dispute around apartment noise by having the noisy neighbor pay the complaining neighbor to back off. That being said, there are plenty of issues that need to be resolved and aren't purely territorial. For example, such a deal would likely require Greek Cypriots to give up claims to property they own in the north which they lost in the 1974 Turkish invasion and subsequent ethnic cleansing of Greeks. Rights to return claims, even more so than territorial ones, are very difficult to negotiate and could enrage populations on both sides if not resolved to their liking.

The Yglesias plan, then, would probably require an unrealistic repudiation of nationalism on the part of Greek Cypriots.

3. Sell all the gas.


Frack your way to victory. (Mlanden Antonov/AFP/Getty Images)

Russia's government has ruled out a bailout of Cyprus, but not too long ago its subsidiary Gazprom was offering to bail out the country in exchange for its natural gas deposits. That offer may be off the table, but it raises the possibility that U.S. or European energy companies capable of raising €5.8 billion in capital ($7.5 billion) (or €15.8 billion/$20.5 billion if you want to cut out the E.U. entirely) could make a similar offer. Then again, the nature gas may be worth well more than this and Cypriots may come to regret handing off their riches to foreigners.

4. Issue ultra-long-term bonds.


Let these guys buy the good stuff. (Mario Tama / Getty Images)

Another upside of Cyprus's considerable natural resources is that it can probably guarantee decent returns in the very long run to investors. There's the potential to issue 30-year, 40-year or even perpetual bonds that can finance an expensive bailout today but are likely to be paid out once the economy is back on track and the gas is getting collected.

5. Just give them the money, already.


Mario Draghi, a man who literally prints money, thinks the Cyprus should really chip in as well. (AFP/Getty Images)

Seriously. €15.8 billion ($20.5 billion) is not a lot of money in the scheme of European finance. It is trivially easy for the European Central Bank, or the IMF, or the Federal Reserve, or really any central bank of any consequence to just hand it over. That the troika is already committing €10 billion ($13 billion) is evidence enough. All the troubles in the negotiations are linked to the demand that €5.8 billion ($7.5 billion) come from Cyprus' own coffers. Dropping that requirement could solve everything.

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Ezra Klein · March 22, 2013