3/20/13 4:24 PM – Stocks and Cyprus

The U.S. stock markets followed the lead of Asia and Europe and rose today, up about 2/3%. That puts them back near the high of the year. Over the last week, stocks have sort of stalled and as I wrote a week ago, a flattening and even a slight drop was to be expected. There is probably more to come on that score.

I wrote about Cyprus recently. What is really interesting about that botched bailout proposal is that it was Christine Lagarde, the Managing Director of the International Monetary Fund, that came up with the demand that Cypriot savers bear the cost of the bailout, at least partially. That was to be accomplished by an immediate confiscatory tax grab on bank deposits, with savers having more being robbed at higher rates. Of course, the Cypriot parliament voted down a proposal to go along with that bailout demand.

That Lagarde would ask for this reflects a few things.

1. Germany and France and other northern European countries are tired of footing the bill for bailing out their Mediterranean neighbors.
2. The banks in Cyprus are full of money from Russian tycoons so much of the burden would essentially be borne by Russians.
3. It reflects a shocking naivete on Lagarde’s part in terms of igniting a bank run, the worst thing that can happen in a financial crisis. Reportedly, Lagarde had instructed German banks to be ready to literally fly Euros down to Cyprus to restock the banks’ cash reserves. Still, what was she thinking?
4. Cyprus is really the smallest of players in the Eurozone, not large enough to cause much contagion and small enough to bully.
5. Incompetence in dealing with banks and financial crises is not just an American thing; Europe also has a talent for messing things up in attempts to fix them.