Cyprus may not be important, but deposit insurance should be.

Now that the US equity market shrugged it off, the media will be saying Cyprus, shmyprus, small country, self-serving politicians, how important could that be for this recovering US economy? I think the main point is that this is about the credibility of deposit insurance.  The Cypriot government may or may not pass the proposal to “tax” deposits below the deposit insurance threshold, but the very fact that it is being considered should tell you about bailout fatigue and spook citizenry there and elsewhere. The depositors may get some kind of equity swap, the bondholders remain whole, some will pull out their money and put it under a mattress and the show will move eventually to another location. Curious that gold didn’t move more.

It is a fascinating story as it unfolds, complete with villainous Russian oligarchs laundering money in a tax-haven. Surely they’re smart enough to keep multiple accounts below the 100K Euro threshold, which is perhaps why all depositors must have got taxed.  It is a fascinating story in that this stunt was pulled over a holiday weekend, electronic transfers were banned and, I read somewhere lines outside empty ATMs!

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