By Greg Peel

The Dow closed down 64 points, or 0.4%, while the S&P fell 0.3% to 1551 and the Nasdaq dropped 0.3%.

They struggled to pronounce his name, but it mattered not to traders from Frankfurt to New York when politician Jeroen Dijsselbloem threw markets into panic last night as European contagion fears once again surfaced.

Half an hour after the opening bell on Wall Street last night the S&P 500 hit 1564.91, less than a point shy of the 1565.15 all-time closing high. The scene was set for a break-out. But suddenly news came through that the Eurogroup finance ministers' leader, Mr Dijsselbloem from the Netherlands, had opened his mouth and stuffed his foot right in. Mr Dijsselbloem has been in the position for three weeks.

The reason the hasty and ill-conceived original bail-out plan for Cyprus ? the one which suggested a tax on all deposits of any size as concocted by the finance ministers and then rejected by the Cypriot parliament ? caused such consternation across the globe was due to the implications of a possible precedent. If the little people of Cyprus were going to have to give up part of their life savings to bail out the banks, would the same now apply to the little people of perhaps Spain, and Italy?

The bottom line is that Cyprus is a unique case being, as it is, a Mediterranean pretender to Switzerland in the hush-hush banking stakes, with a financial system eight times the country's GDP. To pay the attractive interest on deposits the Cypriot banks invested in Greece. The bulk of the deposits are owned by Russians. We are not describing Spain or Italy here. It was very necessary for the European politicians to point out this fact last week. Otherwise we would have likely seen a run on banks from Nicosia to Dublin.

Bail-out Plan B, announced yesterday morning Sydney time, involves a tax on all deposits over E100,000, thus protecting the little people. As a trade off, the big people ? most of them Russian but including local Cypriots whose crime is to have been successful ? would take an even bigger haircut of up to 40%. Cyprus' second largest bank, Laiki Bank, would be split into good and bad banks with the good bank and small deposits shifted into the larger Bank of Cyprus.

The news was enough to provide relief rallies across Asian markets yesterday and positive openings in Europe and New York last night. That is until our aforementioned Dutch finance minister came out and suggested the Cyprus model could form a template for future bail-outs elsewhere in the eurozone.

You idiot.

Unsurprisingly, stock markets on either side of the pond began to tank. By lunchtime the Dow had crossed into triple-digit losses and looked vulnerable. Then suddenly up spoke Mr Dijsselbloem again, this time to retract his previous statement. Cyprus, he said, was an individual case. What he really meant with his "template" comment was that in the natural order of things, a bank bail-out should involve first the shareholders taking a hit, then the bondholders, then, and only then, the depositors. After all, depositing money in a bank is not strictly a risk-free investment. Europe should not panic, he implied. Depositors across the rest of the eurozone can rest easy.

Few disagree with Dijsselbloem's pragmatic bail-out assessment. The problem lies, once again, with the PR. Show me a European politician and I'll show you a complete and utter card-carrying moron. Mind you, Canberra last Thursday? Whatever the case, the Dutch minister's retraction was enough to stem the tide and send stocks back up again, at least to a lesser level of fall. But one minute Wall Street thought the bull market bell was about to be rung as the S&P hit blue sky, and the next minute no one was really sure anymore.

The two Cypriot banks involved in bail-out Plan B will remain closed until Thursday. Other Cyprus banks will open tonight. The expectation is queues will form and deposits will be withdrawn, despite protection from haircuts. Will the same happen across the eurozone now Dijsselbloem has evoked doubt?

The Russians will be queuing up as well. They may not be able to prevent their own short back and sides, but they are not going to hang around to find out whether more levies are imposed some time down the track. The Russians support the local Cypriot economy. When Vladimir turns out the lights as the last man out, the Cypriot economy will be plunged into darkness. Already banks from Andorra to Switzerland and on to Germany are circling the Russian depositors with transfer offers.

The euro is naturally lower against the dollar as an end result of last night's confusion, sending the US dollar index up 0.6% to 82.87. It was all too confusing to spark a rush into safe havens nevertheless, hence US bonds were steady and gold was down slightly to US$1604.90/oz.

Base metals were all lower by small amounts. The oils had shot up on the initial Plan B announcement and later pulled back on the template announcement, with Brent closing up US29c to US$107.95/bbl and West Texas up US87c to US$94.58/bbl. Spot iron ore is up US70c to US$136.00/t.

The SPI Overnight closed down 44 points, or 0.9%, bearing in mind that yesterday's rally represented anticipation of a positive response on Wall Street last night. Not that yesterday's rally was all that convincing, with the index losing altitude after jumping above the 5000 mark.

We now await news pictures of bank openings in Cyprus. Images of panic and rioting, if that is what we are to see, do not feed well into global market confidence. The banking industry dominates the Cyprus economy, so as banks are folded in together the job losses will mount. Once the Russians leave, the rest of the economy will sink. It is not a great day to be a Greek Cypriot.


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