Cyprus Crisis Pulls Down US Stocks

It was a relatively mild drop, but Cyprus managed to put a damper on the U.S. stocks today. The Dow closed down 62 points or 0.4 percent.

Cyprus is a tiny country, accounting for only 0.2 percent of economic output of the 17 countries that use the euro currency.

But countries that use the euro make up the world's second largest economy, behind the U.S.

As it has always been with the European crisis, the risk is contagion.

The "bail-in" plan as it is being called is imposing a tax on bank accounts, yanking money out of accounts before depositors can get their hands on it.

Arguably the most controversial part of the plan is that it does not respect bank deposit insurance. People with balances lower than 100,000 euros - which are supposed to be insured by the government - may also lose some of their money. Like the FDIC in the U.S., European governments are supposed to protect a portion of all bank deposits.

Cypriot banks are expected to reopen Friday. At the time there is a very real risk of a run on those banks. People could pull their money to deposit it in banks that they think are more secure. There have already been lines at ATMs in Cyprus, as people attempted to grab their money before the government could.

The worry is that Cyprus could be the match that ignites a banking crisis in Italy and Spain, which could roil stock and bond markets in the U.S. and the world.

Its this possibility that makes people hold their breath on a day like today.
















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