Cyprus is a tiny economy (though their banking system is of meaningful size). And it seems the bailout deal has been finalized, with details on what percentage of the uninsured deposits (rich people's money) will eventually be confiscated.
What matters is not how this will impact eurozone GDP growth, but how it will impact investor confidence in the region and around the world. The potential fall-out is still huge.
While a good amount a Russian money (and maybe British and Greek money too) has probably found a way out of Cypriot banks despite them being closed for several days now, China perhaps saw this risk developing ...
Specifically, the crisis in Europe will be a potentially major outflow of capital. Here's how Jack responded to a reader question wondering why Cyprus is such a big deal:
The knock-on effect to the EU as a whole is two-fold, it seems to me: 1) It further adds to mistrust among member states; 2) it likely leads to more cash hoarding among consumers, businesses, and banks across the zone—that means growth slows even more, unemployment rises, and pressure builds on the currency regime. Already much of the collateral among the individual countries banking systems has been pledged to the ECB. This adds considerable risk to both depositors and banks in general.
That is how it impacts the EU. And this impact will be real. If wealth cannot be created, the periphery spirals downward with rising debt levels and rising unemployment. It is a recipe for an breakup of the single currency and end to the European Project in general. Cyprus is a symptom of the dysfunction across the banking system—not the cause. But its demise opens the wounds for all to see.
Who will want to have their money parked anywhere in Europe after the way officials are handling the Cyprus bailout?
Now, albeit after the fact, we know where China is putting its money: back into US Treasuries.
This Wall Street Journal story is from Monday. But read it if you haven't already. I think this points to what has become, and will continue to be, an intermediate-term driver of markets: money moving to the US for safety.
The US Dollar is rising. So are US Treasury prices.
As a side note, capital seems to be flowing back into China after significant outflows last year. At first, this would seem like a positive development, i.e. investors international companies aren't fleeing for fear of a major economic slowdown. But in the shorter-term, these inflows suggest there will be inflation pressure and the government will need to act to contain said pressures. Such a maneuver could halt Chinese growth.
If this idea gains traction and the Cyprus debacle doesn't fade away (because investor confidence has collapsed), the markets (even in the US) will be in for a rude awakening.