Cyprus Swamp

Hey now, hey now, don't dream it's over
Hey now, hey now, when the world comes in
They come, they come, to build a wall between us
We know that they won't win
--Crowded House

This weekend Euro-area finance ministers and officials of the Cyprus government reached tentative agreement on a rescue plan for the country. As has been the case in past EU bailouts, the focus is on bailing out insolvent banks and sovereign bondholders. The eye-opener of the plan is a proposed levy of 6-10% on depositors.

Needless to say the proposal has not sat well with Cypriot citizenry. Depositors have been hitting the ATMs to drain their bank accounts. Local media are cranking it up too:

There is also growing doubt about whether there are enough votes in Cypriot parliament to pass the plan. The specter of a thumbs down vote certainly has major banks around the world a wee bit nervous.

Perhaps this is much ado about nothing. After all, the tiny Cyprus economy is just a fraction of a percent of EU GDP.

On the other hand, it is straightforward to conjure a path to EU contagion. After all, how much money would you keep in a European bank if you know that there was potential for government to skim 10% off your balance at a moment's notice?