The old adage is that when you owe the bank a million dollars and cannot pay, you're in trouble. But if you owe the bank a billion dollars and cannot pay, the bank is.
Cyprus is the guy who owes a million and cannot pay, unlike Greece or Italy who were too big to fail and cut some slack. Cyprus, by contrast, is too small to bail. Its GDP is a mere 0.001% of the EU's GDP. This is why the EU and IMF, led by Germany, are pushing it around, demanding that before the country can get L10 billion, it must raise L5.8 billion by garnishing local bank accounts. Underlying this is the fact that if Cyprus leaves the EU and goes bust, it's no big deal.
The hardline is due to the electoral pressures faced by ChancellorAngela Merkel.
The subtext of this saga also involves Turkey in an unholy and coincidental alliance with Germany that has put Cyprus into a proverbial fiscal box.
Nicosia refused to garnishee its bank depositors, as proscribed by the lenders, and has scrambled since to find alternative ways to raise L5.8 billion. The EU and IMF are not budging and are unwilling to accept political IOUs for months as they did with Greece, which was
truly too big to go bust.
Cyprus' financial minister last week fled to Moscow for the money, to be secured by ownership in future natural gas production from Cyprus' vast offshore fields. That failed and now the government is scrambling to plunder its pension plans to raise the L5.8 billion.
But Moscow did not reject the plea. The gas was not available to pledge against loans because Turkey has a de facto veto over Cyprus' offshore. It controls the northern part of the island.
The south of Cyprus is the Republic of Cyprus and a member of the European Union and the North is the Turkish Republic of Northern Cyprus and a region of Turkey. People move freely across its border, but the south is in grave financial trouble, thanks to a real estate and banking bubble caused by dirty money deposits from Russians, while the north is on a sounder footing financially.
For several years, the two have fought over natural gas rights and drilling permits. This has made liens to lenders impossible, thus adding greatly to the Republic of Cyprus' fiscal woes.
But the Cypriots had to trek to Moscow because of fear of reprisals from the Russian depositors who face the prospect that 10% of their $31 billion in Cypriot banks may be confiscated as part of the bailout. Or worse.
Moscow's turndown places the island-nation between two knee-capping choices, one by international lenders and another by some very unsavory characters.
The lenders are also unwilling to bail out dirty money deposits in Cyprus, and are fed up with its non-existent banking standards.
Likewise, one American victim of Russian skullduggery has been outspoken in the media that the IMF (mostly financed by the US) should not be involved in bailing out out a dirty money haven like Cyprus.
William Browder, Hermitage Capital Management CEO, told CNBC this week that a bailout for Cyprus has become difficult because "no one wants to bail out a bunch of Russian criminals."
"About 10 years ago, Russia took over the Cypriot banking system," he said. "There's a tax treaty between the two countries, and as a result, Russian companies, Russian oligarchs keep their money in Cyprus and use Cyprus banks. Cyprus is essentially a part of Russia, not a part of Europe."
Another enforcer looming over Nicosia is Turkey which has recently threatened military action if drilling permits on the Turkish portion of the island continue to be issued by the government residing in the Greek portion.
"This resource belongs to two communities and the future of this resource can't be subject to the will of southern Cyprus alone. (We) may act against such initiatives if necessary," one of the Turkish officials told Reuters this week. "The exclusive use of this resource ... by southern Cyprus is out of question ... and unacceptable."
Germany's resolve has been further bolstered by the fact that post-war immigration from Turkey to Germany has been enormous and now 5% of Germans, or four million, hold dual citizenship because they have at least one Turkish parent. The Turks have prospered and many German actors, artists, athletes and politicians are of Turkish descent. They vote as a bloc and have influence. They side with Turkey not the Greek-Cypriots.
Germany is also captive to Russian natural gas and oil, with high prices. It also would not welcome a Russian takeover of Cypriot gas fields but would favor Turkey's involvement. This would diversify sources and the competition would lower prices throughout the European Union, now inordinately high because of Moscow's hegemony.
The natural gas issue is material. Between Cyprus, Lebanon and Israel is an estimated 122 trillion cubic feet of gas offshore. Enough has been discovered in Cypriot waters to cover 40% of the European Union's annual gas consumption.
Turkey escalated the contest for the gas this year when it warned energy companies they would lose access to its market if they negotiated drilling deals with the Republic of Cyprus.
So the Cyprus story is more than just another profligate nation begging for help. This mess may force the unification of this island, and tapping of its resources, at long last for the betterment of all its citizens. It may stop the takeover of a nation inside the EU by Russian bad guys.
Most importantly, this toughness represents the first international crackdown on the world's dirty money island havens. The Cypriots are the first to be punished and we can only hope the Caribbean will be next.
*This article previously appeared in the Financial Post
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