Cyprus

The Chancellor said the financial situation in Cyprus was ‘an example of what happens if you don't show the world that you can pay your way’, adding: ‘We are not part of the bailout.’ Daily Mail

An island of 1.1 million, Cyprus has been a point of contention between Greece and Turkey for decades.  It may now become a flashpoint for the rest of the European Union.

The problem was created when Cyprus went to get bailed out, Germany insisted that the depositors (not the bondholders) pay part of the tab. On Tuesday when the banks open, every depositor will have some or all of their money seized.  According to Business Insider, "Accounts over 100,000 euros will have 9.9% seized. And then the Eurozone's emergency lending facility and the International Monetary Fund will inject 10 billion euros into the banks to allow them to keep operating."

Cypriots tried to run on the ATMs but found them to be shutdown.  This in-turn caused the British military (which maintains a base on the island) to assure their troops and families that they will have cash.  The British are not going to be impressed in this latest financial catastrophe from the EU.

This is where is gets even more interesting, guess who the majority of depositors are?  Greeks?  Turks?  Brits?  No, none of the above. Half of these depositors are said to be Russian oligarchs and other non-residents.  Putin especially has been acquiring vast sums of gold while the world occupies itself with Iran and Syria.  Cypriot banks offered Russia another means of depositing their wealth beyond their borders.

The people of Cyprus are not going to handle this well.  Spain, Italy Ireland and Greece depositors did not lose their money.  Now what if another EU countries even remotely thinks they need a bail out?  Depositors won't wait and will make a run on their banking institutions forcing the banks to go bust.

If this problem reignites the European financial crisis, the EU will have to turn to the United States and the US economy would not be able to handle the strain.