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Post-Cyprus Playbook Demands Eurozone Rethink


Before this week, the world already had its share of car bombs and nuclear bombs and dirty bombs and the like. But now, thanks to a moment of unsanctioned candor in Brussels, we now can add "diesel bombs" to that list, in reference to Dutch Finance Minister Jeroen Dijsselbloem, who also happens to be the current rotating president of the 17-nation Euro Group. What Mr. Dijsselbloem said, and his peers have tried to retract, is that the hodge podge handling and depositor-lead bailout of Cyprus was going to be the template for bank crisis resolution in the future.

On the very same day this revelation was made, the Cypriot authorities delayed the re-opening of their banks for the fourth time in a week, amidst fears that depositors of all sizes (not just the €100,000+ crowd) will be seeking alternative places to keep their money the moment they're allowed to.

As my co-host Jeff Macke and I discuss in the attached video, there's growing concern that there won't be any money there once that day finally occurs, assuming at some point it has they have to re-open.

What's interesting is that this tiny island-nation has not only ruined its own economy and leveraged its future, but may have poisoned the common currency well too. As Knight Capital's Peter Kenny writes in his daily commentary, "fear or a lack of trust, once introduced into a conversation, has a way of lingering."

Related: Steve Forbes: Cyprus Isn't Over, It's Still A Disaster

Who in Spain or Portugal or Greece or Ireland today hasn't at least questioned what they used to take for granted? Sure our country has too much debt and too many IOU's, but until a week ago, few held reservations about making a simple deposit. But now that European leaders have thrown out the playbook that's been used for the past three years in terms of the hierarchy of safety of various assets classes (e.g., insured deposits, uninsured deposits, sovereign debt, bank debt) the way forward will be different, in a way that's similar to suddenly driving without headlights.

Whether future crises (and there's certain to be more) in the Eurozone are treated differently or exactly the same, there will forever more be fear and suspicion that the Eurocrats in Brussels might do something rash or random again, and therefore, need to be watched.

Even in its initial days, there was always stratification amongst the member states (Core vs. Periphery) of the Euro-region. But lately, as the core shrinks and the list of needy nations grows, there are signs that everyday Germans aren't the only ones who are growing tired of sending their cash south. The country's Finance Minister has just highlighted the "jealousy" that exists between nations, while the French press is even evoking the awakening of Europe's old ghosts, and all the ugliness that implies.

As we have said about this crisis from the earliest hours, it's not about Cyprus, just as the fallout from fixing it will fall far from its shores in the Mediterranean.