As Cyprus' Depositors Get Whacked is U.S. 10 Day Rally in Jeopardy?

     You would think so. After all, the law of averages would seem to be against it anyway. The news of Cyprus' agreeing to the EU demand that depositors pay $7.6 billion dollars towards a bailout plan was a serious downside shock to the Asia, and Europe at least in the early going. However, EU losses moderated throughout the trading day on news both on the prospects of a Cyrpus deal and some good news on U.S retail numbers, etc.

    Overall, the Cyprus deal sent a chill throughout the EU. While Cyprus is only .02 of the EU economy, it's what it means for the future that has depositors across the region spooked. After all, while the EU may argue that this is a one time tax-how can anyone be sure? What about the next Southern EU country that needs a bailout? Will they escape on their depositors? Then why was Cyprus singled out?

   The WSJ thinks it's a needed step to ask depositors to contribute but only those with deposits over $100,000 euros. While the numbers being used over night was a 9.9% one time levy on accounts above $100,000 and 6.75% for those under, the WSJ argues that it should have left those under $100,000 alone and 20% on those above. This would have not have violated deposit insurance-that insures up to $100,000- and so have left the rule of law sacrosanct.

    http://online.wsj.com/article/SB10001424127887323415304578366082331307780.html?mod=WSJ_Opinion_AboveLEFTTop

   Sumner thinks it's kind of like the Lehman decision-a very good idea at a very bad time; that is the tax on deposits above $100,000. The tax on those beneath it he says are a very bad idea at a very bad time.

   http://www.themoneyillusion.com/?p=20157

   While the idea of imposing some of the costs on depositors was, of course, the EU's, however, they imposed no demands on how the tax was distributed and the decision to put a significant portion on those with deposits under $100,000 was the choice of Cyprus' government. This seems to have a lot to do with the large number of Russian deposits in Cyprus-many of these deposits are mobster money laundering. The trouble is that Cyprus has been banking on more Russian aid.

   The latest news is that the Cyprian Parliament who has to vote on it may take some of the burden off of small depositors.

   http://online.wsj.com/article/SB10001424127887323415304578367693858391054.html?mod=WSJ_hpp_LEFTTopStories

    Nevertheless, Krugman points out  that there is likely to be a good deal of pain on the island in the future. The big advantage to Cyrpus that a similar country in terms of an overgrown financial sector-that Iceland had is that it prints its own currency.

     http://krugman.blogs.nytimes.com/2013/03/18/island-nightmares/?gwh=0CCB376EB7A40284D1A0E3363A71C2B8

      The latest news has the U.S. market down but not so sharply. The Dow is down a little over 30 points, with the S&P down about 7 and the Nasdaq about 13. Hardly earth shattering after 9 straight up days.