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Cyprus Is Not a Problem; a Bank Run Is

But, as Sir Mervyn King, governor of Bank of England, once famously said: It is not rational to start a bank run but rational to participate once it has started. Bank runs are by definition emotional and panicked, mutually destructive reactions. If and when the fragile underlying trust is shaken, there's no telling when a bank run would begin. And often this uncertainty itself suffices to warrant a run.

To summarize, I don't think it's rational for other Europeans to be overly concerned about their deposits, yet cannot rule out such a possibility. Let's wait for daybreak and see whether there are long lines outside bank branches anywhere outside of Cyprus.

If there are, it could start a chain reaction or, if responded with swift, unified and strong action to assure the public, it might fizzle out. And if it does spread, this could very well be the long-anticipated end of euro.

Yes, there's an EU-wide insurance for deposits up to 100,000 euros, but the panic would be that the Grand Cypriot Bank Robbery renders it null and void. A typical fat-tail event, and one that OMT doesn't cover -- otherwise it wouldn't be a black swan, so at least we still have the logic perfectly working.

If there's no bank-run contagion, then the knee-jerk risk-off reaction in the markets (equities worldwide and EUR and industrial commodities tanking, USD and especially JPY surging, gold and treasuries up) would likely recover somewhat. The fact that Cyprus needs a bailout is not news. But as long as it's contained, it's too small to cause a eurozone crisis.

As to the news of Russia sending a permanent fleet to the Mediterranean, I appreciate the imagination and would otherwise write it off. Russians know better than sending a fleet into war without air cover.

Longer term, however, this is a perfect illustration of how lunatic the euro experiment has become. Although in the end analysis I doubt this will cause a systemic crisis, I fully expect more lunacy to come from eurozone. I do recommend panic, just not now.

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