Analysts and the mainstream media have gradually been coming to realize that there was more to the Cyprus issue than merely striking a deal, and the headlines say those nagging questions were the reason the U.S. stock market declined today. The more immediate question is how Cyprus will prevent an all-out run on one or more of its banks when the banks reopen tomorrow. A few details of currency controls have been announced, but based on what I have heard so far, they seem to be far too loose to keep the banks open. It will not be a big surprise if the Cyprus government or the ECB have to intervene again before the week is over.
Looking forward a few weeks, what will happen to the banks in Europe now that bondholders are no longer too big to fail? That was the big change, remember, from last week to this week, as the EU disowned its previous policy that bondholders had to be protected at all costs. The cost of borrowing for banks will creep upward. Some banks, apparently, are already talking about suspending dividends so that they do not get caught short.