A little more than a year ago Mario Draghi announced that he would do whatever it takes to save the Euro. That comment gave the Euro Zone time to start working on the massive debt problems that existed in those countries. However, very little has been done to fix those problems and the Euro area woes came back into focus over the weekend.
This time, Cyprus started the problems. Cyprus is .2% of Europe’s GDP. The Eurozone finance chiefs called on Cyprus to fund approximately 13 billion dollar bailout by imposing a 6.75% tax an all cash deposits up to 129,000.00 (USD) and 9.9% for any one amount above. If this tax does not pass the fear is that two of the country’s largest banks would collapse. Pragmatically, who cares about a country that is a small percentage of the Eurozone? The fear is that the European finance chiefs could use the same mechanism to help bail out countries like Spain and Italy. If this becomes the way the Euro zone does business it is possible that a run on the banks could ensue. This is what is spooking financial markets today.
The US markets are technically in an overbought position (not fundamentally), and this news could be used as an excuse to sell down the equity markets a bit. Our perspective is that the European leaders will calm the waters again, however this is a long term problem that will be with us for the forseeable future.
