Cyprus brinksmanship could spin out of control: analysts

As the EU raised the spectre of a eurozone exit for Cyprus, experts warned on Thursday of the consequences of brinksmanship from Brussels to Moscow in the race to fix new bailout terms.

"We have learnt down the years that even little problems can become intractable," said Holger Schmieding, chief economist with Germany's Berenberg Bank.

"There's just no telling what can unfold in this type of situation," he cautioned.

The chairman of the Eurogroup of finance ministers, Jeroen Dijsselbloem, told European Parliament lawmakers on Thursday that Cyprus poses a "systemic risk" that threatened to ricochet across the 17-nation eurozone.

Around the same time, Simon O'Connor, spokesman for European Union Economy and Euro Commissioner Olli Rehn suggested that a chaotic, disorderly banking meltdown was conceivable with this unprompted remark: "The European Commission is convinced that a managed and orderly way forward is still possible."

An EU source speaking on condition of anonymity underlined that Nicosia had "until Tuesday" to broker a solid deal -- suggesting that Cyprus might otherwise find itself kicked out of the eurozone.

Ramping up pressure against a background of high-level meetings in Moscow over the fate of billions in Russian investments frozen in Cypriot accounts until banks there re-open on Tuesday, the European Central Bank said it would pull the plug on emergency liquidity assistance to Cypriot banks if there was no deal in place by then.

The Cypriot economy only represents about 0.2 percent of the eurozone's total output, but Schmieding still saw a risk of "major turbulence."

A ripple of panic in Cyprus could turn into an irrepressible wave of knock-on effects in Spain, Italy and ultimately even France too.

"What we have learned since the beginning of the crisis is that beyond direct, calculable impacts, market anticipations matter," said senior economist Gilles Moec at Deutsche Bank.

According to Eric Chaney of AXA Group, 91 percent of Cypriot banking liabilities are deposits, which raises the threat of a run on the banks and prompted the Royal Air Force to send a plane with a million euros in cash to ensure that British troops based in Cyprus could sleep easy.

The EU has estimated that 10 percent of the nearly 70 billion euros now held in Cypriot bank accounts could be withdrawn as soon as the banks open again, which prompted Europe to urge capital controls be put in place.

"It is one thing to believe that the probability of (bank) runs is low," Chaney said. "It is another to know with any certainty that there will be no widespread bank runs."

An initial, failed attempt at imposing a blanket "stability levy," or tax on bank accounts, was based on an offer of part of natural gas revenues that are not due to come on-stream for the next few years at least.

According to an assessment by JP Morgan: "If Cyprus ultimately defaults and needs to leave the euro area, its dependency on Russia is likely to increase dramatically."

The EU is heavily dependent on Russia for natural gas, and the "risks of an accident resulting from brinkmanship strategies ... are significant," Chaney said.

"Until the Cyprus case is solved, it is prudent for those willing to invest in euro-denominated assets to be very circumspect, if not to stay on the sidelines," the analyst concluded.

The eurosceptic, rising English political figure Nigel Farage said it even more bluntly.

"Now the troika has approved stealing peoples' bank deposits in Cyprus, they are quite capable of doing it in Italy, Spain, Portugal and elsewhere," Farage said in reference to a trio of leading lenders, the European Union, International Monetary Fund and the European Central Bank."

"Do not invest in the eurozone ... You have to be mad to do so," he said.