No. of Recommendations: 14
I hope it doesn't result in a crash
Angela Merkel to FDP members of her coalition

The European Commission, ECB and IMF, aka the Troika, or Unholy Trinity depending on your view, agree with Chancellor Merkel that Plan B proposals are not acceptable and since Cypriot politicians have unanimously rejected the bank levy demanded by Brussels, the question remains. Who will pony up the €5.8 billion shortfall?

There are reports that oil tankers are unable to dock becasue their Russian owners can't withdraw Cypriot funds to pay the port fees. Economic activity has ground to a halt as all transactions are restricted to cash. Allegedly 70% of those with bank accounts in Cyprus have applied to withdraw all their funds as soon as the banks open, which is some serious consideration because there is €70 billion in Cypriot bank accounts. But the banks remain closed. It is inevitable that there will be a run on the banks if they ever reopen. Cyprus is facing ruin, with an exodus of capital and a total loss of confidence:

'Cyprus is in a suicidal situation. Many Russians are scared they will lose everything, and I expect them — and their money — to leave the island. ‘Those who have real funds will never trust the Cyprus banking system or the EU again. There are plenty of other places for our rich to go: the Cayman Islands, Jersey, Luxembourg. This is a bad day for Cyprus. As a financial centre, the island’s reputation is ruined.’

It is extraordinary that triggering a bank run does not appear to have been seriously considered by the EU, ECB and IMF. Chancellor Merkel is exasperated with Cyprus, much as Cypriots are expasperated with the demands from the Troika. This shared frustration makes it harder to cobble together some deal to avert total catastrophe:

She also issued a clear warning: Cyprus should not test the troika's patience. "We want Cyprus to remain in the euro zone," Merkel emphasized during her meeting with FDP parliamentarians. But, she said angrily according to participants, the country is "taking things further than we have ever seen before." Europe, she said, must not abandon its principles, otherwise "the whole thing" will be in doubt.

The marcro implications? I'd say it's bullish for gold, but beyond that I think the fall out from this could stretch way beyond Cypriot shores:

this tiny Mediterranean nation accounts for less than one third of one per cent of the eurozone economy. The hole caused by a pin, though, is an even smaller percentage of the surface area of an inflated balloon. Yet it still causes a pretty big bang. Similarly, the hard, sharp realities of the single currency’s internal contradictions now loom over all member states and, in fact, the entire world economy.
The eurozone, taken together, is the second largest economy on Earth and, surely, the region most likely to spark a systemic lurch on global markets, yanking us back to the bad old days of “risk-off”. Cyprus could be the pinprick that bursts the eurozone’s balloon.
Liam Halligan
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