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Salmon: A Much Better Alternative for Cyprus

NEW YORK ( Reuters Blogs ) -- Andrew Ross Sorkin at The New York Times defends the Cyprus deal today, on the grounds that (a) Cyprus is “tiny”, and “largely irrelevant to the global economy”; (b) Cyprus is a genuinely unique case; (c) it would be grossly unfair not to bail in Russian depositors, who are generally losing less than they’ve made in interest over the past few years; and (d) the Greek alternative “will not work in Cyprus”; and that therefore (this last bit is only implied, never stated outright) the current plan is really the only option.

Notably, Sorkin doesn’t attempt to defend the most indefensible part of the plan -- the confiscation of wealth from depositors with sovereign deposit guarantees. Although hedge-fund bondholders will get paid their full $1.4 billion on June 3, the date of Cyprus' next coupon payment, small depositors with just a few hundred or a few thousand euros in savings will lose money which the Cypriot government had promised them was safe. Why is the government’s promise to foreign hedge funds more important than its promise to its own citizens? Sorkin never attempts an answer to that one.

And even if Cyprus is tiny and irrelevant to Andrew Ross Sorkin, it most certainly isn’t tiny and irrelevant to the hundreds of thousands of people who live there, and deserve for their government to deliver the best possible plan it can.

Which raises the single biggest question facing the Cypriot parliament as it prepares to vote today ( see this Reuters article ): should it accept the deal on the table, or should it hold out for something better? And if it chooses the latter option -- as seems likely -- should it simply fiddle with the tax-rate percentages, much as one might fiddle with the Breakingviews Cyprus calculator , or should it try to build something which is more different and more fair? Most importantly, what alternatives does Cyprus’s parliament have?

This is where Sorkin’s column is (at least in its implication) wrong: There is an alternative. It is clearly better, in every regard, than the option currently on the table. And it most emphatically is workable. We know that it’s workable because it has been put forward by none other than Lee Buchheit, the godfather of sovereign debt restructuring, and for decades, in dozens of sovereign contexts, every time that Lee Buchheit has said something can be done, he’s been absolutely right.

Here’s the short, three-page paper : it’s called Walking Back from Cyprus, and it’s authored by Buchheit and his frequent collaborator, Mitu Gulati of Duke University. Their plan is simple:

First, leave all deposits of less than 100,000 euros untouched. Hitting those deposits was by far the biggest mistake of the Cyprus plan as originally envisaged, and everybody would be extremely happy if guaranteed depositors could be kept whole.