Against the tide: Cyprus – They think it’s all over

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The Cyprus solution is inadequate as well as sending the wrong messages on depositors’ risks and free capital flows. Then there’s Slovenia... and Italy.

Last month I argued that optimism in financial markets must be balanced against the risk of pessimism on growth from a fiscal squeeze in the US and the return of the euro debt crisis. The jury is still out on the first risk but the second risk has come back with a vengeance. The debacle of the bailout deal negotiations over Cyprus revealed yet again that the continued recession in Europe is putting the single-currency area under pressure. Contagion from Cyprus to Italy and Spain has been avoided, partly because Cyprus is a small player in the eurozone, partly because the taxpayer (both local and eurozone) has taken less of the burden of any bailout with the bail-in of Cypriot bank depositors. And it’s partly because Mario Draghi and the European Central Bank have continued to talk about being ready to support the sovereign debt of distressed...