Juggling Dynamite

“Cyprus and the EU reached a new late-night bailout deal last night that will reduce the chance that Cyprus’s financial system and economy will completely implode.

The 10 billion euro deal requires Cyprus to drastically shrink its banking sector, which has grown to 8Xs the size of the country’s economy, by unwinding Cyprus’ second largest bank, Laiki. In doing so, bondholders and depositors with more than 100,000 euros will take a hair cut.”

Moreover capital controls have been instated to restrict the amount that depositors are able to withdraw from their bank accounts each day. All of this is likely to drive nervous depositors out of other Eurozone banks in the near term. See this direct video link for a discussion of the likely ramifications of the Cyprus bail-in.

Brookings Institution’s Domenico Lombardi discusses the questions raised by the Troika-Cyprus bailout deal. Here is a direct link.

In all of the hopes for quick fixes, the elephant in the room which is now sitting on the chest of the Eurozone is a deepening recession which will only get worse as worried capital accelerates its efforts to leave the EU banking system. Here is a direct link.

Recent turmoil in Cyprus has focused the world’s attention on the issue of deposit insurance and what portion of bank deposits can or should be held harmless in a bank insolvency. Financial author Roger Lowenstein (When Genius Failed) reminds us of the history and shortfalls of bank deposit schemes in America since the early 19th century. See: NYT: There’s a reason for deposit insurance