Europe  (© PhotodisccSuperStock)

As I look at the continuing Cyprus banking tragedy/farce, I keep thinking of Willie Sutton.

Sutton was a career bank robber -- credited with 100 bank robberies and most famous for a quote attributed to him after reporter Mitch Ohnstad asked him why he robbed banks. "Because that's where the money is," Ohnstad wrote that Sutton replied.

So why did the eurozone force bank depositors in Cyprus to pay almost 6 billion euros toward the bailout of the country's banking system? Because that's where the money was.

And that should be deeply troubling to anyone who lives in a country with a deeply indebted government. (And who doesn't these days?) Looking at Cyprus, you don't have to be paranoid to think "they" are coming after your money. That cynical conviction is a slow-growing but very serious threat to global financial markets.

Let's start with Cyprus. In the days after the late-night Sunday deal that "ended" the crisis with something short of the country's immediate departure from the eurozone, Jeroen Dijsselbloem, the new Dutch head of the group of eurozone finance ministers, set off a firestorm by saying that this deal would be the model for future bailouts.

Dijsselbloem continued, "What we've done last night is what I call pushing back the risks. If there is a risk in a bank, our first question should be 'OK, what are you in the bank going to do about that? What can you do to recapitalize yourself?' If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank and, if necessary, the uninsured deposit holders."

image: Jim Jubak

Jim Jubak

In the following days, Dijsselbloem and other eurozone officials attempted to walk back some of those comments by stressing that Cyprus, with a banking sector eight times larger than its economy, was a unique situation.

But frankly nobody much believed those "clarifications." Cyprus clearly was a new template.

And that's deeply disturbing -- even if you don't live in the eurozone.

Basic rules out the window

Of course, it's deeply disturbing if you do live in the eurozone because the deal violates so many of what everyone assumed were the basic rules of the euro. For example, the whole idea of a currency union is that the common currency is worth the same in every country in the eurozone.

Tell that to Cypriots who could take only 300 euros out of their banks when they finally reopened Thursday. Tell that to Cypriots who can't take more than 1,000 euros in cash out of their country. Tell that to Cypriots who can't transfer euros out of their country. Today, a euro is Nicosia isn't worth the same as a euro in Berlin or Paris or Milan.

But it's the deal itself -- and the way it developed -- that should be disturbing to people who live outside the eurozone as well.

Like just about every "solution" implemented during the eurozone debt crisis, this one was ultimately political. The "need" for a bail-in, for a contribution from someone in Cyprus toward the price of bailing out the country's banking system, was the result of a political calculus that looked at what eurozone taxpayers, and especially German taxpayers, could be expected to stand for without costing German Chancellor Angela Merkel her country's September election.

Once that was established, the issue became one of trading political pain within that formula. Initially, the newly elected president of Cyprus, Nicos Anastasiades, proposed a formula that would have confiscated money from all bank accounts. That was a good idea, Anastasiades thought, because it would diminish the hit that the largest depositors in Cypriot banks would take. That would lessen the risk of alienating the Russian money that had become so crucial to Cyprus' offshore banking industry. (Russia might even contribute to the bailout, the president apparently hoped.)

This deal went down in flames only when eurozone officials pointed out that it ran afoul of deposit guarantees for accounts of 100,000 euros or less.

Politicians help themselves

The next bright idea out of Nicosia was to set up a national fund that could be used as collateral for loans (from the European Central Bank, it was assumed) to bail out the banks. And what would go into the fund? How about assets from national pension plans? This idea, too, went down in flames when the European Central Bank said it wouldn't lend on that basis. (It's not clear whether the bank was appalled at the proposal or feared it would lose money it lent against this collateral.)

Against this background, the final deal looks -- on the surface -- like a model of fairness. Deposits under 100,000 euros remain guaranteed against loss. Only big depositors lose money, and then only depositors at the country's two biggest banks. The country's second-largest bank will be wound up with "good" assets being transferred to the country's largest bank.

The deal also has the advantage of allowing Northern European politicians to point to the pain being distributed in Cyprus to mollify voters who just might object to another bailout in the south of the eurozone. (And it seems, once again, to make sure that the European Central Bank doesn't take a loss -- so far -- on the emergency cash it lent Cypriot banks to keep the country's banking system functioning.)

Yep, from some perspectives this is a pretty great deal.

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