The Cyprus bail out is an interesting story and although the size of it is quite small at 10 billion Euros ($12.5 billion dollars) it is how they have been forced to go about it which is of interest to the financial community.

The concern is what affect will this have on banks in Europe, will investors flee these banks just in case the same thing happens in their country? Will this cause a run-on the banks across Europe?

At the time of writing this the deal looked like this, there are two main banks in Cyprus one will be wound up the other will survive however investors in the banks including deposit accounts will lose all deposits above 100,000 Euros ($125,000). The extent is not only deposit holders but also bondholders, preference shareholders etc. This will affect the wealth of all depositors and investors in these banks.

To put in Australian term it would be like NAB and ANZ shutting overnight, all deposits lost all investments in these two banks lost. While the CBA and WBC were to survive but any saving you had over $125,000 is now gone. Add to this that if you have money in super you would hold shares in these banks as well, as such a major hit to your superannuation and saving at the same time. If like many Australians you fled to cash after the GFC for safety you are now worth $125,000.

How will or might this affect Australia:

We need to keep in mind that these measures have been forced upon the country by the International Monetary Fund (IMF) this is also the body responsible for the bail out of Greece, Spain Ireland and Portugal. This is where the concern is increased, will these sort of measures now become the norm for countries chasing bailouts in Europe?  

The issue is how will the citizens of these countries react to this news? How would you react to it? I suspect there reaction will not be much different to what you or I would do.

For now we will wait and see how this affects the world markets.

It is also a good time to remind investors that here in Australia the Government guarantees the first $250,000 of your investment in our banks. This is not per account, but per bank, as such if you are holding a lot of cash at present it makes good sense to spread it around the banks.

Make sure that you check first to make sure that the bank you are using is covered.

The below link will take you to a facts sheet about the guarantee scheme for large deposits and wholesale funding.