Cyprus deal seen by US: when Europe started playing with dynamite

“Surprised by Merkel’s decision”, “totally unexpected and very dangerous precedent”, “they have violated the sanctity of insured deposits” or “how can you have a banking union when money is only safe in parts of it?” Those are just some of the high tone reactions heard on Wall Street’s favorite media, from CNBC to the Wall Street Journal.

But while media were bashing European decision on Cyprus, stock and bond markets in the US passed the day essentially unaltered. Wall Street’s Dow Jones closed just a 0.4% lower, while the US 10 year paper’s yield dropped just a 0.04% to 1.96%, meaning there was interest but no rush to buy the safe haven bond.

“This is a question mark about the sanctity of bank deposits in Europe. And a reminder that Europe has too many objectives and too few instruments,” Pimco Co-CIO Mohamed El-Erian told CNBC on Monday.

US investors worried about Brussels’ decision of imposing an unprecedented tax on deposits. U.S. stock futures fell, but not disastrously. If the same deal had taken place on this side of the Atlantic during the TARP (bank rescue program), some media stated, we would have seen the Armageddon.

“The European decision not to honor deposit insurance in Cyprus, by making all depositors contribute to the cost of a bailout, reminds me of the decision to let Lehman Brothers go under. Moral hazard is being avoided. The question is what that will cost,” wrote Floyd Norris at a New York Times’ blog.

The question about the euro crisis being back lingers in the air. However, American media are pointing out that there hasn’t been a run on the banks in Cyprus nor in Europe. The danger is about the hazard when something happens in a bigger country: will deposits under 100,000 euros be guaranteed, as everybody thought they were, or not?

“This is not a good idea at all,” Jim O’Neill, chairman of Goldman Sachs Asset Management, told CNBC on Monday, adding that Cyprus won’t be able to “put the Genie back in the bottle” despite whether or not the depositor hair-cut gets approval.

The fact that Russian money represents 30% of those deposits is making investors understand the political intention of the measure: Europe will not pay alone for money probably being laundered in the semi fiscal paradise island. Yet the risk, analysts say, is making also normal depositors pay for it.