Unless you are a student of history or are planning a Mediterranean vacation, you may never have given the island of Cyprus much thought. Then suddenly, it dominated the headlines for several days. What does a banking crisis in a small and far-off land mean to you?
Here are five reasons you should care about Cyprus:
- The unthinkable is no longer unthinkable. Deposits in savings accounts -- especially insured ones -- are supposed to be rock-solid safe. However, the original deal negotiated between Cypriot officials and the European Central Bank called for a 6.75 percent levy on deposits below 100,000 euros, and a 9.9 percent tax on larger deposits. That proposal was ultimately replaced by one that would just freeze deposits over 100,000 euros. Any penalty on depositors is disturbing, and the fact that the European Union even considered confiscating a portion of guaranteed deposits is especially troubling.
- Offshore accounts just got a little scarier. Cyprus had been a favorite haven for foreign depositors. Right about now, anyone who has been squirreling money away in an offshore account, whether it's Cyprus or the Cayman islands or elsewhere, must be having second thoughts.
- It almost brought the Russians to the grown-ups table. Because many of those foreign depositors are Russian, Cypriot officials at one point sought financial assistance from Russia. No deal was reached, but just the fact that the idea was discussed is an intriguing might-have-been. Large, developing economies such as Russia's, China's and Brazil's have a growing amount of economic muscle. It would be helpful if they started to share the burden of safeguarding global economic stability, instead of the task always falling to the United States and the European Union.
- It's a reminder to check your deposit insurance coverage. Could this type of an unexpected seizure of deposits happen here? One would like to think not, but the truth is that it really depends on how big the next banking crisis is. The FDIC insurance fund is one line of defense against that. That fund is not inexhaustible, but it certainly means there can be a distinction between insured and uninsured deposits. The insurance limit is currently $250,000 per depositor, per bank, meaning you can have more money than that insured if you spread it among different banks. Given how bad the 2008 crisis almost got, the Cyprus situation is just another reminder not to get complacent about uninsured deposits.
- It's the latest sign of how fragile an interconnected world is. Cyprus represents about 0.2 percent of the European Union's GDP, and yet its problems are seen as a threat to the euro. In turn, that threat sent shock waves through U.S. markets. The problems in Cyprus are already an example of the financial notion of contagion -- the way one country's problems can quickly infect financial systems in other countries. Cyprus has a large ethnic Greek population, and its financial troubles can be traced to losses in Greek bonds. In short, while the Greek crisis has been out of the headlines for a few weeks, that doesn't mean the infection isn't still spreading.
You may never visit Cyprus, and you might never even look at it on a map. Like it or not though, that little island is suddenly part of your financial life.