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Cyprus’ 56-member Parliament voted to seize  a percentage of private individual deposits. Why should we care about a tiny Mediterranean island? Because Cyprus could be the canary in the coal mine.

Cyprus’s banks, like many banks in Europe, are bankrupt. Cyprus went to the Eurozone to get a bailout, the same way Ireland, Greece, and other European countries have.The Eurozone powers-that-be gave Cyprus a bailout — but with a startling condition that has never before been imposed on any major banking system since the start of the global financial crisis in 2008.The Eurozone powers-that-be (mainly, Germany) insisted that the depositors in Cyprus’s banks pay part of the tab.

Not the bondholders.

The depositors. The folks who had their money in the banks for safe-keeping are now being forced to surrender private funds.

When Cyprus’s banks reopen this morning, every depositor will have some of his or her money seized. Accounts under 100,000 euros will have 6.75% of the funds seized. Accounts over 100,000 euros will have 9.9% seized. And then the Eurozone’s emergency lending facility and the International Monetary Fund will inject 10 billion euros into the banks to allow them to keep operating

Cyprus’s government tried to explain this deal by observing that it was better than the alternative: Immediate bankruptcy and closure of the major banks. In that scenario, depositors would lose a lot more of their money. Businesses would go bankrupt. And tens of thousands of people would be instantly thrown out of work.

But, still, not surprisingly, news that deposits in Cyprus’s banks would be seized triggered an immediate run on the banks.

Depositors rushed to ATMs and tried to withdraw their money before it could be seized.But the ATMs weren’t working. And the government has now made it impossible to transfer money out of the country. Since the Great Depression wiped out a big percentage of the world’s banks, vaporizing the bank depositors’ savings in the process, banking system regulators have tried to do everything they can to protect bank depositors. And they are smart to do so. Because the moment depositors think that there is risk to their savings, they rush to banks to yank their money out.

That’s called a run on the bank.

And since no bank anywhere has enough cash on hand to pay off all its depositors at once, runs on the bank cause banks to go bust.

That’s what happened to hundreds of banks in the Great Depression.

But now, thanks to Eurozone’s bizarre decision in Cyprus, the illusion that depositors don’t need to yank their money out of threatened banks because they’ll be protected has been shattered.

update: The Cyprus representitives voted the plan down under heavy public pressure.

http://www.guardian.co.uk/world/2013/mar/19/cyprus-rejects-eurozone-bailout-savings-tax