Search on already for plan B

It is still unclear who is taking charge of talks to save Cyprus. Is it Europe or Russia, asks Mike Peacock

THEY’VE only been looking for it for few days, but Cyprus’s plan B has already taken on mythical status — but a myth it might remain.

Ideas being floated include nationalising the pension fund (back of the envelope calculations suggest that will raise less than €1bn) and issuing bonds underpinned by future natural gas revenues (but nobody is really sure how much they are worth). So to avoid default it still looks like the Cypriots may have to return to the bank levy they rejected so decisively in parliament on Tuesday, to raise the €5.8bn the eurozone is demanding in return for a bailout.

Finance minister Michael Sarris is still in Moscow hoping for some change out of the Russians and is out this morning saying discussions are ongoing about banks and natural gas.

An existing €2.5bn loan may be extended and on better terms — though there is some doubt even about that. But anything further looks much tougher to secure. Moscow will clearly adopt a “what’s in it for us” attitude, and unless it gets its hands on untapped offshore gas reserves for a knockdown price it’s hard to see much money changing hands. The idea floating around yesterday that an essentially failed Cypriot bank could be bought for a chunk of cash seems somewhat fanciful.

Sarris said any help would have to make “economic sense” for Russia. If Moscow merely offered more loans, the eurozone and IMF would presumably say that takes Nicosia’s debts to unsustainable levels so it’s not clear that would work either. After likening the EU to a “bull in a china shop”, Russian prime minister Dmitry Medvedev mused that Moscow might review the share of euro it holds in its reserves, saying what was done to Cyprus could happen to Spain or Italy. Medvedev yesterday met with a European Commission delegation headed by José Manuel Barroso. This increasingly feels like a Russian/EU powerplay with Cyprus as the pawn.

Markets still don’t seem to be overly bothered, focusing more on the US Federal Reserve’s promise to maintain aggressive monetary stimulus and a solid China PMI reading. Safe haven German bund futures have ticked lower at the open. European stock futures are pointing to a marginal fall. The uncertainty surrounding Cyprus will act as a brake on any upside.

Jeroen Dijsselbloem, the Dutch finance minister, was in front of a European Parliament committee yesterday. After criticism of his performance as head of the Eurogroup over the weekend, he was in for a rough ride.

Spain holds a scheduled auction of up to €4bn of two, five, and 10-year bonds. Madrid has already seen yields on short and long-term debt plunge since the ECB’s promise last summer to do whatever it takes to save the euro, and has made the most of investor enthusiasm for its paper by issuing over 30% of its 2013 bond target in the first 12 weeks of the year. There’s no sign of Cyprus upsetting the apple cart so far though the disconnect between bond market appetite and a deeply mired Spanish economy is stark.

On the macro side, flash PMIs for the eurozone, Germany, and France are due. The picture so far is that Germany is rebounding from a grim fourth quarter but France and others are not.