Last weekend, when Europe announced that to bail out Cypriot banks, there would be a sizable one-off tax on all bank depositors, there was worry about bank runs elsewhere in Europe. Would depositors in Greece, Italy, and Spain start lining up to (further) move their assets into banks in more stable countries, for fear of a similar fate down the line?
So far that part of the story hasn’t borne out. There are good reasons to think that mechanistically, Cyprus is a one-off. In other Eurozone countries, the banking system is 8.5x GDP. And the notion that Cyprus is a haven for offshore Russian money is well understood.
But what is a real precedent here is Cyprus getting a tough deal because Angela Merkel is in a re-election fight, and playing tough with Cyprus is politically popular. Her coalition partners and opposition parties have made a big deal of not giving Cyprus a blank check.
So Cypriots are told: Tax your depositors or the ECB will let your banks collapse on Tuesday because of German politics.
And this is explosive.
The above picture is of supporters of Greece’s Golden Dawn Party (which is basically a Neo-Nazi party) protesting in front of the German embassy in Athens last night, due to the treatment of Cyprus. The leftist Alexis Tsipras has also been making hay over the treatment of Cyprus, and is doing well in the polls, so this is a common point of agreement for the extreme right and the extreme left. The middleground New Democracy party — the party with which the rest of Europe prefers to play ball — can only get squeezed.
Meanwhile Italy faces the risk of another election sometime in the next few months. One of the most salient issues in the February election was the notion that the existing Mario Monti government was just a puppet for Germany and Brussels. Now imagine if elections are held tomorrow against the Cyprus backdrop. The parties that are simpatico with Brussels wouldn’t do better.
With the ECB at the ready, there are good arguments that financial contagion will be limited regardless of what happens with Cyprus (if it takes the deal, if it goes bust, if it leaves the Eurozone, etc.). But with the economy going to garbage all over the place, this is a big shot in the arm to politicians and parties that are not going to be so friendly towards the status quo.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.