Europe Just Broke The 'Cardinal Rule' With The Bailout Of Cyprus

The talk everywhere right now is about Cyprus, and the controversial bailout package that was agreed to in the early hours of Saturday morning.

What makes it controversial is that to keep the banks from collapsing, depositors in Cypriot banks will be charged with a one-off tax of 9.9 percent if you have over 100,000 euros in your account or 6.5 percent if you have less than that.

The levy is being called a "tax" but many Cypriot depositors are likely to see it as a stunning confiscation or a haircut.

There are fears that the impact of the deal will go beyond Cyprus, and disrupt stability in other peripheral countries, as folks wonder whether this really is a one-off.

Beyond that, this generally disrupts the flow of things since late last summer, when ECB generosity had been the tool to ease the Eurozone crisis.

Supposedly Germany had balked at giving Cyprus money unless there was this depositor tax, and had suggested that the alternative was for Cyprus to leave the Eurozone.

In a note out yesterday, Sebastien Galy of SocGen explained why this was unwise.

This will probably go down as an ill thought out rescue plan with consequences for peripheral Europe. Savers beyond 100K EUR will participate in the restructuring, targeting presumably questionable moneys. It breaks a cardinal rule, namely public trust on which money relies. Had they thought their savings were at risk from a restructuring, savers would have run on local banks, hence it is different from a tax. Some peripherals will suffer at the opening in Europe and hit EUR. It could be the trigger that our colleagues were expecting. Twitter reports of cash machines running out in Cyprus for what such unverified information is worth.

In other words, yes, the government may have the legal legitimate power to tax (savings), but this is a major trust destroyer.

Meanwhile, the plan is not a done deal. It still needs to be voted on by Parliament, where the government has a very slim majority.

There should be several developments today.