3/25/13 5:03 PM – Cyprus Bailout the Template for Future EU Bailouts?

So, who cares about Cyprus, other than Russian tycoons that keep their money there? Well, any investor that cares about the health of the European Union and the value of the Euro should care.

That’s because it may be, and there has been some confusion on this score, that future bailouts will be done this way – hitting depositors for some of the cost of the bailout.

To me, that sets a horrible, frightening precedent for savers in southern European countries, notably Greece, Italy and Spain. How likely would you be to keep your money in the bank if you thought some of it might be confiscated?

In this world that depends so much on debt to fuel growth, banks are of extreme importance. And, the health of banks has a lot to do with how much money is entrusted to them on deposit. When deposits shrink, the leverage of the bank increases and the safety of the bank decreases.

The last thing you want for a troubled country is a run on the banks. Remember the role that played in the start of the Great Depression?

I think if this does become a precedent it makes Europe more dangerous and fragile. I realize northern countries are more than tired of loaning money to bad risks like those countries in Southern Europe, but this is far from a great alternative. This really bears watching.

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