Eurozone is Crumbling. Are You Ready?

“Together in the Eurogroup we decided to have the owners and creditors take part in the costs of the rescue – in other words those who helped cause the crisis,” German Finance Minister Wolfgang Schaeuble, one of the architects of the euro zone’s response to a debt crisis now in its fourth year, told German mass-selling daily Bild.

“Cyprus’s economy will now go through a long and painful period of adjustment. But then it will pay back the loan when it is on a solid economic foundation.”

European officials have worked hard this week to stress that the island’s bailout was a unique case – after a suggestion by Eurogroup chairman Jeroen Dijsselbloem that the rescue would serve as a model for future crises rattled European financial markets.

Which other Eurozone countries will be rescued under the same model? Malta, Luxemberg, Italy? Are you ready for a raid on your bank account by the government? Canadian Banks are already being labeled as too big to fail. What will happen with coming economic slowdown and “not going to happen in Canada” mortgage default and real estate crisis?

Cyprus reached an agreement to avoid national bankruptcy with the International Monetary Fund, European Central Bank and European Union on a plan to rescue the tiny debt-choked euro-zone member from financial ruin. But the plan — unprecedented in its severity — will economically handicap the island nation for years.

According to the bailout deal Cyprus agreed to close the Popular Bank of Cyprus, aka Laiki, Cyprus’ second-largest bank, and move deposits of less than €100,000 ($$129,830) from that bank to Bank of Cyprus, the island’s largest bank, where those balances will be protected. However, bank balances in Laiki that are greater than €100,000 will be frozen, and the government will take a percentage of each of those accounts, something euphemistically called a “haircut.” Initial signs that big depositors in Bank of Cyprus would take a hit of 30 to 40 percent – the first time the euro zone has made bank customers contribute to a bailout – had already unnerved investors in European lenders this week. But the official decree published on Saturday confirmed a Reuters report a day earlier that the bank would give depositors shares worth just 37.5 percent of savings over 100,000 euros. The rest of such holdings might never be paid back.

The money raised from that levy will be applied toward a €5.8 billion ($7.5 billion) contribution the troika is demanding Cyprus make to qualify for a €10 billion loan. In its previous financial rescues of four countries — Greece, Ireland, Portugal and Spain — the troika never required private depositors to directly bear some of the burden of a rescue. Without the rescue, however, the island’s banks would collapse, the nation would default on its sovereign debt and the euro zone would lose a member.