Cyprus bailout plan puts eurocrisis back on the front page

The plan to levy a tax on Cypriot deposit holders is sending a chill around the continent, particularly in nations like Spain and Italy that already have troubled banks.

The tiny divided sun-dappled Mediterranean island of Cyprus rarely rides above the radar in European thinking – but is now suddenly raising a five-alarm panic in the European Union, just as financial crisis talk there was starting to abate.

Cyprus desperately needs a 10 billion euro ($13 billion) bailout, and to do so the EU has engineered a plan, now being voted on by the Cypriot parliament, to guarantee an EU loan with – and here is the kicker – money secured from the banking accounts of private depositors.

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Though some dispute that the decision entails a realistic threat to American and European bank accounts. In a statement sent to EU correspondents, Andriy Bodnaruk, an assistant professor of finance at the University of Notre Dame Mendoza College of Business, wrote that “While Cyprus’ proposed tax on deposit holders sets a precedent, there is little reason for depositors in Europe or the US to lose sleep.”

“…It is highly unlikely (if not improbable) that such policy could ever be forced on depositors in any other EU country, as it would be politically suicidal. Cyprus is a different animal as it is effectively an off-shore area within Europe,” he wrote.

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