No. of Recommendations: 3
Even if Cyprus stays in, their "banking center" economy is toast. Now, since it is a virtual 100% certainty that every major depositor will flee Cyprus as soon as possible with as much of their cash as possible....there is no real compelling reason for Cyprus not to simply declare it will not stand behind its obligations and accept the inevitable expulsion or withdrawal from the euro zone.

Quite so notehound. It defies credibility that the ECB et al were unaware that even the suggestion of an arbitrary levy on Cypriot accounts would trigger an immediate capital flight from Cyprus. Cash withdrawals at the two largest banks - Bank of Cyprus and Cyprus Popular Bank have been limited to €100 as of today. But all this will do is increase the determination of investors to extract their money as soon as banks reopen. Can you imagine the chaotic scenes which will dominate the media when that happens? And obviously this has implications for all investors with exposure to PIIGS. As Flyerboys stated, expats are bound to withdraw capital:

“We’ve dodged a bullet by shifting our money out, and we’re hugely relieved,” Mr Syme added. “But this is a horrendous precedent to set. What will people in Spain, Greece, Ireland and other countries with troubled financial systems do? Already we’re hearing from friends in Spain who are going to put their cash elsewhere.”

So what were Team Brussels thinking? One theory is that contrary to maintaiing PIIGS at any cost, the new plan is to streamline the core. By shedding the periphery. An interesting hypothesis:

The conspiracy theory, however, has it that Germany knew all along that the move would cause chaos, but wanted to create precisely such impossible conditions as a pretext for allowing Cyprus to crash out of the euro. It would, in effect, be a guinea pig for exits by other troubled southern-European economies. And with a population of only 800,000, it would not be the end of the world – much less the eurozone were the subject to succumb during the experiment. A Cypriot eurozone exit would then be a starting point for a new eurozone made up of solvent, northern-European nations only, something that the German Chancellor, Angela Merkel, is under mounting domestic pressure to back. The small but increasingly influential Alternative for Germany party, which will hold its first national gathering next month, will be campaigning on precisely that ticket in elections in September, pointing out that right now, the eurozone is promoting not unity among its members, but strife.
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