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The Real Deal With Cyprus

This was no surprise to Felix Salmon, whose piece on this we ran recently. He said the Cyprus banks were broke months ago.

This fact wasn't known to the people of Cyprus until recently, but it should be no surprise. Cyprus is next to Greece, and many Cypriot investments are in Greece. Cyprus joined the EU only in 2004 and the eurozone in 2008, Wikipedia writes.

The way Cyprus' European bankers saw it, depositors had a choice between having no money and having roughly 90% of it, with an implicit guarantee, which would if explained that way be a very good deal. The "tax" would buy the insurance.

But that's not how it was reported. Salmon called it a "precedent," implying it could spark panic withdrawals across Europe. He's most troubled by the idea that the tax hits small depositors.

In working to save the levy this week, Cypriot lawmakers tried to address Salmon's concerns, aiming their tax more squarely at the Russians. The latest proposal drops the tax on deposits up to 20,000 euros, about $27,000. The Sun reports some Russians were apparently tipped off and took out more than $3 billion in the days before the levy was announced.

And Cypriots themselves took to the streets, as The Guardian writes, apparently unaware that, without the EU insurance guaranteeing 90% of their money is safe, they'll likely be left with nothing.

Although the big lesson for most analysts is that Cyprus shouldn't have been brought into the euro, or that the euro shouldn't exist, the larger lesson is that of instability caused by money that is on the run from the law. Whether we're talking about criminal law, civil law or "just" tax law, the question for me is whether the world will be ruled by law, or by money.

At the time of publication, the author had no investments in Cyprus.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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