Cyprus??

So a crisis in another small country threatens to take down Europe.  This time auditioning for the role of Serbia,  host country for the assassination of Archduke Ferdinand in 1914, will be Cyprus.  That's Cyprus in the highlighted box in the lower right below Turkey.   Cyprus has a bit over 1 million people and a GDP of $23.5 billion making it a bit smaller than Mozambique, but bigger than Burkina Faso and less than one tenth that of Greece.  However, by dint of being a part of the Eurozone it is certainly punching above its weight in the global economy.

 

Source: CIA World Factbook

News broke over the weekend that for the first time as part of a Eurozone bailout, depositor funds would take a hit through a so called 'bail in' (George Orwell would be proud).  Deposits under the €100,000 guarantee amount would pay a 6.75% tax and those over a 9.99% tax.  Although depositors would get equity in the bank as compensation.  (Links to several posts on the topic are at the bottom)

 

You may ask why would those in charge call all of the deposit insurance programs in the Eurozone into question by having those covered pay?  Well, Cyprus is known as an offshore banking sector with a reputation for laundering money, particularly for the Russian mafia.  As of January 2013, €20 billion of Cyprus' €68 billion in deposits were from the rest of the world, believed to be primarily from Russia. You would think those offshore accounts would be the ones to take the hit.  A German politician's remarks about burning "Russian black money" point in that direction.  So then why hit the locals and little guys?  The financial sector is huge in Cyprus and by not having outside depositors take the full brunt of the pain it appears someone would like to keep the possibility of this business alive at some point in the future.  However, even if that is the case, I am not sure how losing €2 billion will go over in Mother Russia, especially if it is money being laundered.  The Russian mafia does not have a gentle forgiving reputation. 

 

In any case, putting aside the obvious pain being suffered by smaller depositors, the big risk, as it was with Greece, is contagion.  That this idea of covered depositors paying part of the price in a bank bailout, sorry bail in, spreads to other peripheral countries.  Will depositors in Spain or Italy decide they better get their euros out while they still get them at full value?  Or will they be assuaged by the Eurocrats, that Cyprus is a one off case.  We will need to keep track.

 

 

Don't Get Too Excited About Cyprus - Humble Student of the Markets

Report From Paris - David Kotok on The Big Picture

The Cyprus File - Why it Matters Even to Americans - The Big Picture

The War on Common Sense Continues - Tim Duy's Fed Watch