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Cyprus Points to Euro Folly

NEW YORK ( TheStreet) -- The Cyprus bank "bail-in" shows why it's better for some European countries to have their own floating currencies.

As many economists have said over the past several years, having a common currency without having common economic policies is a recipe for long-term uncertainty. The saga of Greece's bailout seems never ending, as internal political events periodically threaten previous bailout agreements, which could force Greece to leave the euro.

The events in Cyprus this week show that the northern countries that are part of the common European currency, especially Germany, are not willing to bail out the outsized banking sector of a member country that has touted itself as a tax haven.

Cyprus secured 10 billion euros in bailout assistance for its beleaguered banking sector in a deal that allows Cyprus Popular Bank -- the island nation's second largest bank -- to fail, with its performing assets folded into the Bank of Cyprus. Depositors in both of the nation's largest banks will take losses initially estimated at roughly 30% on balances above 100,000 euro, while smaller deposit accounts will be unaffected.

The good news is that depositors will at least not see their insured deposits subject to a "stability levy," which was part of the original Cypriot bank bailout plan.

The Eurogroup -- made up of the finance ministers of nations that have adopted the euro common currency -- said in a statement that the bailout deal for Cyprus "will be an appropriate downsizing of the financial sector, with the domestic banking sector reaching the EU average by 2018." The Eurogroup also said the 10 billion euro bailout and the decisions taken by the Cypriot government will allow the nation's "debt to remain on a sustainable path."

Cyprus is paying a huge price to stay in the euro. While many of the depositors with uninsured balances taking the huge haircuts live outside the country, there is likely to be a huge negative effect on the island nation's economy, as those foreign depositors will no longer see Cyprus as a safe place to park cash.
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