So how big is Cyprus? 800,000 people with a GDP of about 18 billion Euros -- less than 10 percent of the size and wealth of the State of Virginia. So, how can Cyprus rock the Eurozone?
Easy. Let politics substitute for economics and anything can happen.
The grand Euro scheme of bailing out country after country is rapidly running up against reality. The sacrifices that the bailers require are politically unacceptable to the bailees.
Austerity traded for more debt -- this is the bailout scheme devised by politicians. This scheme is an effort to change reality and it won't work.
The reality is that Cyprus banking is history. Who, in his right mind, would willingly leave their money in a Cypriot bank after the events of the past week? It doesn't really matter what solution is imposed, the Cypriot financial community will not recover.
Meanwhile, institutions with deposits in Italian and Spanish banks now face a new reality, hitherto not contemplated. The European Central Bank and the IMF have this week endorsed a new policy tool for dealing with debtor nations -- confiscation of bank deposits. Who would have thought? But now the thinking begins. Should I or shouldn't I move my cash deposits from Italian and Spanish banks for the safer confines of London or New York or Geneva or Singapore? No doubt such thoughts are now extant in the minds of all institutional investors across the globe.
When economics no longer guides economies and the politicians take over, this is the outcome -- collapsing GDP, rising debt levels, and growing political anarchy. We are just at the early stages of the coming demise of Europe.