Will this precipitate a Euro bank run?
Cyprus needs a $13B bailout which is about 54% of annual GDP. For perspective that would be equivalent to a $8.5 Trillion bailout in the US.
The European Central Bank (ECB) has insisted that Cyprus impose a tax on deposits in Cyprus Bank accounts as a condition of a bailout. Banks in Cyprus are scheduled to open on Tuesday so the government must decide quickly.
This action sets an incredible precedent. Depositors in Euro accounts now know exactly how safe their money really is. Depositors in Europe have been moving their money to German banks from Greek, Portugese and Spanish banks for years now. Zerohedge has reported this type of data many times. The ECB's actions should scare more money movement to other currencies and commodities and even real estate and equities. If you are worried about unexpectedly losing 9.9% over the weekend you might rationally decided to spend it now, which will create inflation.
Can you imagine ending the week with 100,000 in your bank account, supposedly the safest place to keep your money and then by start of the next week you have only $90,100? The oligarchs of eastern Europe who commonly use Cyprus as a haven for their wealth are about to experience it.
Quick facts about Cyprus from wikipedia http://en.wikipedia.org/wiki/Cyprus
Population: 1.1 million
GDP: $24 Billion
Member of the European Union
Member of the Eurozone - so their currency is the Euro
Investment climateThe Cyprus legal system is founded on English law, and is therefore familiar to most international financiers. Cyprus's legislation was aligned with EU norms in the period leading up toEU accession in 2004. Restrictions on foreign direct investment were removed, permitting 100% foreign ownership in many cases. Foreign portfolio investment in the Cyprus Stock Exchange was also liberalized. In 2002 a modern, business-friendly tax system was put in place with a 10% corporate tax rate, the lowest in the EU. Cyprus has concluded treaties on double taxation with more than 40 countries, and, as a member of the Eurozone, has no exchange restrictions. Non-residents and foreign investors may freely repatriate proceeds from investments in Cyprus.
As a result of the reforms in the past decade Cyprus has developed into one of the world's more important international business centers. In the years following perestroika it gained great popularity as a portal for investment from the West into Russia and Central and Eastern Europe. More recently, although Russia and Eastern Europe remain the most important investment destinations, there have been increasing investment flows from the West through Cyprus into Asia (particularly China and India), South America and the Middle East. In addition, businesses from outside the EU use Cyprus as their entry-point for investment into Europe. The business services sector is the fastest growing sector of the economy, and has overtaken all other sectors in importance. CIPA has been fundamental towards this trend.