Did Something Important Just Happen… in Cyprus?

If you weren’t reading ZeroHedge or wsj.com over the weekend, you might have missed Saturday’s banking news from the tiny Mediterranean island nation of Cyprus.  Just five years after joining the Eurozone, Cyprus has accepted a $13 billion bailout from the EU.

So what, you say?  No big deal – just another crazy European bailout…  Well, unlike the previous bailouts of Portugal, Ireland, Greece and Spain, Cyprus was asked by Germany and the IMF to impose a 40% haircut on bank deposits as part of the bailout.  Stop and think about that.  What if, despite FDIC insurance, you had to tell your customers that 40% of their money had been confiscated by the government to help keep JPMorgan Chase or Citigroup from failing.  Not borrowed, but confiscated.  Gone forever.

Now for the good news.  Dear customer, our government played hardball with the EU, and you only lost 6.75% of your deposits up to the €100,000 ($131,000) deposit insurance limit, plus 9.9% of all deposits over that limit.  That doesn’t hurt nearly as much, does it?  

Cypriots (and foreigners with money on deposit in Cyprian banks) lost 6.75% of their insured deposits Friday afternoon.  It happened so fast that they had no chance to start a bank run, although things might get ugly on Tuesday morning when the banks reopen (Monday is a holiday in Cyprus).  

One of the best questions asked in articles discussing the Cyprian haircut is “After Cyprus, who’s next?”  Many large banks in EU countries operate with 150% to 200% loan to deposit ratios, and there are concerns that high asset valuations are the only thing keeping some banks solvent.  How ugly would it be if Danes, Swedes, Norwegians or Finns realized that their banks and/or countries were over-levered and could face the same types of haircuts?

The Eurozone financial crisis is far from over, and the Cyprian flu may be highly contagious.  Watch the markets this week – we could all be in for a bumpy ride.

For more information, these links are a good place to start:

This Crazy Cyprus Deal Could Screw Up A Lot More Than Cyprus... (Business Insider)

After Cyprus, Who Is Next? (ZeroHedge)

For Everyone Shocked By What Just Happened... And Why This Is Just The Beginning (ZeroHedge)

Cyprus Savings Raid Crosses Financial Rubicon (Ed Conway - Sky News)