Moody’s: Here’s what Cyprus’ exit from the euro zone would look like

Dark days.
Dark days.
Image: AP Photo / Petros Giannakouris
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Credit rating firm Moody’s is out with another quick note on the Cyprus situation, ahead of the planned reopening of the troubled island nation’s banks Thursday. The takeaway: The risks of Cyprus leaving the euro zone are on the rise. “While the risk of a euro exit by Cyprus is substantial, Moody’s does not consider it as its central scenario. Following the economic dislocation that will be caused by the restructuring of the island’s two largest banks and the imposition of capital controls in the country, it is possible that the risk of euro exit will increase further,” wrote Moody’s analysts.

And why wouldn’t the risk of the so-called Cypriout—versus the previously bandied Grexit, of neighboring Greece—be rising? While the European powers-that-be are offering to continue funding the country’s ridiculously oversized banking system that grew up to court and service a flood of shady Russian money, they’re only doing it after some of the large deposits of murky origin get taxed to help pay for the bailout.

That might be the right thing to do. But it will also deter foreign money from flowing into Cypriot banks, decimating the island’s sole growth industry. As a result, Cyprus now has the opportunity to endure years of grinding recession as it tries to payback the bailout loan. Oh, and do the Cypriot people get to vote on any of this? Hah! Of course, not. This is Europe. There will be no voting.

Given such a backdrop, Moody’s offers a nice step-by-step description of how messy a departure from Cyprus could be.

1. “An exit would result in large losses to investors due to the redenomination of government debt and private debt securities issued under Cypriot law.” (Translation: People that lent euros wouldn’t get them back. At best, they’d be repaid in some sort of rapidly deteriorating currency with far less buying power than the euro.)
2. “It would also lead to further severe disruption to the country’s banking system and additional acute dislocations in the real economy.” (Translation: People would stop lending to Cyprus. The banking system would collapse completely. And without a banking system, good luck trying to stich together an economy.)
3. “Such disruption would generally imply additional losses for holders of debt securities issued by Cypriot entities, irrespective of their governing law.” (Translation: Even if people lent money to Cypriot companies using bonds that are governed by UK law—and not subject to being paid back in a new Cypriot currency—they’d still face losses on those investments, because the economy would be collapsing. In other words, the companies just wouldn’t be able to pay.)

The great irony here is that the biggest financial ties to Cyprus come from Greece, which means an exit by Cyprus ultimately amounts to more pain for the Greek economy, and by extension more risk for the troika of the European Central Bank, European Union and International Monetary Fund that is back-stopping Greece. The European countries have to realize they’re going to pay for this one way or another. But bailing out the deposits of Russian oligarchs was just a bridge too far, which—to be frank—is understandable.