4 reasons tiny Cyprus matters to Canadians

It's easy to dismiss eventsin Cyprusas yet another hiccup in the never-ending series ofEuropean debt crises from which Canada has managed to stay insulated. But despite Cyprus's tiny size, events there are worth paying attention to for troubling reasons we haven't seen before:

Individual bank accounts raided

In previous European bailouts, the actual money being bandied about was more of a theoretical construct. Citizens were likely hit with higher taxes down the line, and almost certainly saw a cutback in services and their quality of life once governments were forced to live up to the terms they had agreed to. That's what happened in Ireland, and that's what's happened in Greece. Butpeople thereweren't seeing their cash flow decimated in the dead of night.

When Iceland defaulted on its loans in 2008, bondholders and investment bankers lost billions, but the government made sure that individual Icelandic savers got their money. (The British government stepped in to ensure that British citizens with deposits in Icelandic banksgot the same.)

Under the terms of the Cypriot proposal that emerged Friday evening, however,any bank account with less than100,000 in assets would see 6.75 per cent withdrawn as part of the one-time levy. Anything over thatlevel would get an evenlarger haircut 9.9 per cent.

Lawmakers voted against that proposal on Tuesday, throwing the future of any bailout in doubt. But under the terms of the original plan, a savings account with $10,000 in it on Friday would have only $9,325 in it after government reached in.

The plan emerged on the Friday before a long weekend in Cyprus, meaning banks were scheduled to be closed on Monday. Through a series of emergency measures passed by Cypriot officials over the weekend, banks will remain closed at least until Thursday, and the government has made it impossible toelectronically transfermoney out of the country in the interim.

That could have meant anyone with the misfortune of having a savings account with cash in it last Friday is going to find themselves with betweensix and 10 per cent less money in it by the time they're able to get to an open bank and withdraw moneylater this week.

"Pay attention, please," Southwest Securities managing director Mark Grant toldclients in arecent note."The European Union and the European Central Bank and the IMF have just advocated the confiscation of private property for their own indulgence.

"Bank accounts are not bonds or stocks or some other form of investments," Grant said. "It is private property like your house or your car. Germany, France et al came in and said, 'We want it and we are taking it.'"

Faith that your bank savings are safe is the bedrock of a healthy economy. So a lack of faithin the banking system is the kind of thing that leads to the next reason Canadians ought to be concerned about Cyprus.

A run on the banks

There's an iconic scene in the movie It's a Wonderful Life, where the citizens of Bedford Falls converge at the Bailey Bros. Building & Loan to withdraw their money, once a rumour spreads that the bank is running out of money.

George Bailey is able to talk them out of their panic, and the bank stays open, but that chain of events is what's called a run on the bank. It happens when a perception spreads that there isn't enough money to go around, and people start looking out for themselves at the expense ofeveryone else.

A bank earns its money by taking the savings of ordinary depositors and lending it out to others via mortgages, or putting it to work in businesses through an investment banking arm.

At any given time, a typical large multinational bank might have as much as70 to 90 per cent of its capital lent out to other investments. As long as all savers don't demand their money withdrawn at the same time, the system works fine. Once the perception that there isn't enough money to go around takes hold, however, it's a snowballthat'shard to stop, and draws much-needed money out of the country.

It happened in Greece, and it appears to be happening in Cyprus, as citizens spent the weekend withdrawing what they could from automated bank machines.That sort of cashvacuummakes the tricky work of putting a wobbly economy back on its feet exceedingly difficult when there isn't enough money in the system for normal trade andcommerce.

Europe is still in trouble

On an international scale, Cyprus doesn't really rank. With a GDP of $25 billion (think of it asabout three times the value of Tim Hortons) and a population of roughlyone million, the country isn't a major economic player.

But because of its temperate climate and lax banking regulations, it's become a mecca for monied foreign investors.

The IMF estimates there's about 70 billion sitting in Cypriot bank accounts, about half of which is owned by foreigners. That's the money the Cypriot government is trying to get a share of to secure a bailout from the IMF that could be worth as much as half the island's economy.

Previous European nations that came to the brink of collapse include nations like Portugal, Spain, Ireland, Greece and even Italy. While policymakers were able to paper over those problems long enough for the global economy to focus somewhere else, the continent's debt load is still alarmingly high. In and of itself, Cyprus might not matter. But the EU dam constantly springing leaks is a problem that's getting harder to ignore.

If it can happen in Cyprus, it can happen elsewhere in Europe. Or North America. That's why it matters.

More than two years after term "European debt crisis" started creeping into the public consciousness, new countries keep emerging that are in danger of needing massive injections of cash to keep their books balanced. Whether that cash comes from the citizens of the debt-laden countries themselves, from other EU nations, or from bailouts from IMF members like Canada, the problem isn't going to go away.

Russia's involved

Moody's published areport Monday that estimated Russian citizens have about 19 billion stashed away in Cypriot banks. That approaches the scale of the island's whole economy, which means the Kremlin is keeping a close eye on proceedings.

Indeed, Russia has such a strong interest in Cyprus's fate that reports emerged late Monday that state-controlled Russian natural gas giant Gazprom was considering making its own offer to bail out Cyprus by itself as long as it received exploration rights to look for natural gas in and around the island in return.

Consider the outcry in Canada when Beijing-owned CNOOC launched its since-completed bid to acquire Canadian oil company Nexen Inc. There were concerns about giving it too much influence into Canada, because the acquisition of such an asset might open the door to meddling that might be hard to close later.

Thepossibility of a foreign state bailing out a sovereign nation in exchange for total access to resource rights is reason enough for concern.