Cyprus: the stone on the beach — its financial problems and the eurozone

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So here we go again — the world’s single biggest currency back in play.

Cyprus is a tiny economy but the treatment of its financial problems by the eurozone could have symbolic and far-reaching consequences. Cyprus is like a small stone on a big wide beach casting a long shadow all the way down the beach. It casts a long shadow because the sun over Europe is so low.

What happens in Cyprus has this shadow effect because potentially: it affects the attitude of depositors and capital market creditors in the eurozone generally and especially the countries with high debt ratios; it crosses the line of failing to protect deposits, thereby removing the confidence of depositors elsewhere in Europe; it causes creditors to question whether the eurozone assurances that Greece was a one-off are credible; it reduces the credibility of a banking union with EU-wide depositor insurance, EU-wide bank regulation and an EU-wide last-resort new money facility for failing banks; and there could be geopolitical consequences…

Click on the link below to read the rest of the Allen & Overy briefing.