Don't take your eye off of Cyprus

Tiny little Cyprus could wreck the whole European system. Why? They are over-leveraged. That's what happens when you leverage too much. One little rock fall can start an avalanche.

Published on Zero Hedge (http://www.zerohedge.com)

Home > Why Cyprus Matters (And The ECB Knows It)

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Why Cyprus Matters (And The ECB Knows It)

By Tyler Durden

Created 03/23/2013 - 18:21

Many have asked why the bondholders have not been tagged in the Cyprus fiasco. That answer is simple. Most of Cyprus's bonds are pledged as collateral at the ECB or in the Target2 financing program. Then one may also ask why the bonds of the two large Cypriot banks are not being hit. The answer is the same; most are held as collateral at the ECB or Target2. In both cases, remember uncounted liabilities, the government of Cyprus has guaranteed the debt. Consequently if the two Cyprus banks default it is of small matter as the sovereign has guaranteed the debt. However if the country defaults and leaves the European Union then it will matter and matter significantly as the tiny country of Cyprus would wipe out the entire equity capital of the European Central Bank. While it is not a matter of public record it is estimated that Cyprus has guaranteed about $11.6 billion of collateral at the ECB.

• Bond
• default
• European Central Bank
• European Union
• Germany
• Reuters

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Source URL: http://www.zerohedge.com/news/2013-03-23/why-cyprus-matters-and-ecb-knows-it

Update:

You're gonna need a bigger boat.

Update:

Or try this:

Very sensible proposition, that's why it will never happen here.

Update:

According to Instapundit, they've reached a deal.  My impression is that it is sufficient to end the crisis if it raises enough money, and the Russians don't raise too much hell.  Fear not, Western Civilization has been saved, for the moment at least.