Over the weekend, a bailout was announced for Cyprus in which the euro zone and the International Monetary Fund agreed to give €10 billion to the Mediterranean island and, in exchange, Cyprus would raise €5.8 billion by imposing a tax on depositors in Cypriot banks. Accounts with €100,000 or less would be taxed 6.75% and those with more 9.9%. Banks in Cyprus were temporarily closed pending the approval of the deal by the Cypriot government.
On Tuesday, in response to intensely negative public outcry, the Cypriot parliament voted against the plan, which failed to receive a single favorable vote.
Banks remain closed as the parties involved returned to the bargaining table.
Hugo Dixon at The New York Times identifies Cyprus’ best alternatives to a negotiated agreement (BATNAs or “Plan Bs” as we like to call them) as follows:
…sell its soul to Russia [many Russians have significant deposits in Cyprus banks, and it is rumored Russia might offer a bailout in exchange for an interest in Cypriot oil and gas reserves], default and possibly quit the euro or patch together a new deal with the euro zone.
Why did the Cypriot parliament decline the deal? Because they determined that at least one of their Plan Bs was better than approving the deal and facing the wrath of their constituents (and possibly the wrath of the Russian mafia who reportedly make up a substantial number of the Russian depositors).
Here is our general advice:
If your Plan B is better than the deal on the table, don’t do the deal. If the deal on the table is better than your best Plan B, take it. If you can’t reach an agreement, work hard to improve your best Plan B (and possibly also work to undermine your counterpart’s).