I am sure in the past few weeks you have at least heard someone mention Cyprus and wondered what all the market noise is about. Cyprus is a tiny nation of 876,000 people with a GDP of $22.4 billion in 2012 according to the IMF. The Cypriot banking system is known for money laundering with Russian oligarchs and mafia using it to clean ill-acquired money. The Cypriot Banks were heavily invested in Greek bonds and with the haircuts investors had to take on these bonds, these banks are deep in the red with losses on these investments and are new insolvency.

To save the banks from imminent collapse the ECB decided it would be best to levy a deposit tax mainly because the Cypriot banks are financed mostly by Russian mafia deposits as oppose to debt. Depositors under this plan would have suffered anywhere from a 3% to 13% deposit tax. Meaning you wake up the next day and your total bank balance falls by the levied percentage rate. The Cypriot parliament on Tuesday voted against the deposit levy tax and it was on to plan B.

Plan B involved Cyprus begging the Russians to take up equity stakes in the dying banks. The delegation sent out to Russian flatly denied this but it was well known that this was the deal the Cypriot delegation tabled to the Russians.

After plan B failed the bank holiday was extended to next week Tuesday but with ATMs working, queues have begun forming around them. We may be in for a “run on the ATM” scenario.

Plan C we are told is the possible collateralization of Cypriot Obligations. This will involve the forming of an Investment fund of some sought to payoff the obligations. This fund if it sees the day of light might be finance by the selling of state assets or collateralization of social security reserves. This would provide the needed money to bring the dying banks back into solvency.

I doubt this investment fund will work because that will basically be kicking the can down the road and with the way Troika is bent on taxing the Russians, the deposit tax is not completely out of the question. Senior Eurozone officials have already issued statements threatening to pull out emergency banking liquidity extended to Cyprus by Tuesday if the deposit tax levy is not implemented by Monday. After the Cypriot parliament rejected the first bailout terms, the Monday deadline is surely meant to box them in.

As things stand there are 3 possible outcomes.

In time all will unravel and we will see where this heads. Can’t wait for Monday.