Banks in Cyprus are taking down the entire system? Really?

By Robert Romano

When the European sovereign debt crisis began at the end of 2009, when it was revealed that Greece had hidden about €30 billion ($38.7 billion) of liabilities from the accounting of its national debt, all the smartest people in the room assured us that there was no risk.  Greece was tiny, with a Gross Domestic Product just 2.5 percent of the whole Eurozone. Besides, €30 billion was a relatively small number. And even if Greece was having trouble raising money on bond markets, there would be little ripple effect throughout the Eurozone, let alone the global economy.

Fast-forward three years. Greece has defaulted on €100 billion ($129.1 billion), or almost one-third of its debt. Further debt crises have broken out in Ireland, Portugal, Spain, and Italy. The Eurozone is once again in recession. And it is not over yet.

Now, banks in Cyprus who were exposed to Greek debt have faced serious losses and their very solvency is in question.  Just an emergency liquidity lifeline from the European Central Bank keeps the economy there afloat. Banks have been ordered closed until Tuesday while policymakers scramble to figure out a solution……. Still, the same smart people in the room [assure us]……. That there is no crisis.

Who do you believe? After three years, the question any honest person should ask is how can the crisis in Europe have possibly been contained when a hiccup in Cyprus threatens to take the entire Eurozone?.....To Read More......

My Take – I think the author has outlined the problem very well, however I wonder if the last question he asks is the right one.  I think the appropriate question should be this:  Which straw will break the camel’s back?