CITI: The Real Impact Of Cyprus Will Be Felt Next Time There's A Crisis

Basically, the real fallout comes next time.

In any future crisis depositors have an incentive to shift their assets at an early stage of the crisis and any investor with exposure has an incentive to liquidate any exposure as soon as possible. This may speed up the time in which such crises occur and also force policymakers to make their move earlier in a crisis. The power of the state in being able to impose a levy literally overnight makes it harder for them to convince residents and investors that they won’t do so if push comes to shove.

If no resolution is found and Cyprus faces a banking crisis and/or leaves the euro zone, the onus on the ECB and Eurogroup will be to follow through on all their comments on ring-fencing and limited exposure. The Greek FM says that he has a plan to deal with the implications for Greek banks of a Cyprus banking system meltdown and the view is that the exposure elsewhere is limited. However, euro zone policymakers did not work through all the angles of last week’s agreement and there may be skepticism that they have adequate contingencies in place, if the fallout is bigger than expected.