Apparently, the proposal being put together to be presented by the Cypriot president on Thursday (when most of you will be reading this), is that the depositor haircuts are a little lower across the board, slightly more progressive (i.e. lowered more for the small deposits), and there will be an additional fund made up of — wait for it — government property, church property, contributions of citizens, and maybe some cancellation of un-securitized social spending commitments.
I’ll wait for the precise details of this “fund”. While this particular, currently rumored description of the fund sounds delusional, bordering on the ridiculous, I don’t think this matters at this stage. What matters is that, as predicted, the Cypriots could be counted on to come back with a proposal that leaves the illusion (or perhaps even the fact) intact that they are paying 5.8bn towards their own rescue, and they are not engaging Europe in a game of “chicken”, hoping for a precedent that cannot be set.
The markets should rally more on Thursday, on the back of that fact alone. Solving the “stalemate” is now a technicality: European negotiating partners will probably throw the “fund” idea back where it belongs (unless we see a different version from the rumored one, with a higher likelihood of being funded), and in that case Cyprus will (forcefully or voluntarily) restructure the value of un-secured bank debt instead. Banks re-open, no-one is happy, but life in Cyprus and abroad will go on almost as if nothing had happened.
Anyone who is still in a panic over this, anyone who seriously thinks that a 3% haircut on small deposits will make people riot in Cyprus and cause bank runs in the rest of Europe should be laughed out of the room at this stage. People are ready and mature enough to accept that the Europe-wide fiscal sins and illusions of the past have a price, and if 3% today can ameliorate some austerity tomorrow, bring it on.