Updated from 9:17 a.m. to include the following breaking news on Italy.
This Just In: This piece warned about this happening this morning: Italian banks are losing deposits above 100,000 euros and some say that the Cyprus plan should be a template.
NEW YORK (TheStreet) -- Cyprus is not one of the so-called PIIGS -- Portugal, Italy, Ireland, Greece and Spain -- that the world worried about during the European debt crisis. The tiny island nation was too small to be considered an issue. I say that Cyprus can become the straw that breaks the Camel's back.
Overnight we learned that it appears that the European Union with possible help from the International Monetary Fund will provide the $10 billion in financing that's needed to shore up the Cypriot banking system. To get the money Cyprus has to raise 5.8 billion euros.
This morning as I sort though the news stories on this subject it appears that the EU is encouraging Cyprus to set up a Good Bank/Bad Bank solution to raise the cash needed. The process will eventually fold Laiki Bank the island's second largest, into the Bank of Cyprus, the largest. While doing this, deposits of 100,000 euros and smaller will be guaranteed by the EU. Then, the uninsured deposits above 100,000 euros would become part of the source of the 5.8 billion euros with a haircut reported to be 30% maybe 40%. According to Reuters Cypriot banks hold 68 billion euros in deposits and $38 billion are in accounts in excess of $100,000. To me, the overnight positive reaction in the global stock markets is quite surprising given the hit that depositors in Cyprus will take. Could similar Good Bank/Bad Bank ideas spread to other countries? Is this type of crisis similar to the subprime situation in the U.S. that eventually froze our banking system? Fed Chief Bernanke chimed in on Cyprus issue recently saying that Cyprus poses 'no major risk' to U.S. banks or the economy. Change the word Cyprus to subprime and that's what Bernanke said in 2007?
In my opinion there could be significant fallout around the world as citizens in every country will have a worry that the seizure of assets might be 'necessary' before the "great credit crunch" comes to an end.
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