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Beware the Doomsday Hype Over Cyprus Bank Crisis

Allow me to channel Claude Rains and state that I am shocked — shocked! — that there are hysterics in the financial media over the Cyprus bank crisis.

Who’da thunk it?

Yes, Cypriots have been racing to ATMs to pull out money lest they suffer a pending “levy” on deposits. Yes, this is another sign that troubled eurozone banks remain in deep trouble thanks to the overhanging debt crisis in the region. Yes, perhaps investors had gotten too complacent and this is a bucket of cold water on the markets.

But don’t believe the hype that this is the end of the eurozone — or a singular reason for the U.S. stock market or the global economy to fall apart.

Here are some important facts to remember:

Few Bondholders: The biggest reason depositors took a hit in Cyprus is that the banks there have very few bondholders and are funded mostly by deposits and the occasional central bank lifeline. With few lenders to shoulder the losses, the result was that depositors had to be punished because the math didn’t work otherwise. This situation does not exist at other troubled banks.

Tiny Economy: GDP for Cyprus is less than $25 billion, according to the World Bank. That’s less than the booming syrup and cheese economy of Vermont. Yet Cyprus’ banks had assets worth eight times the island’s GDP, holding deposits four times GDP. Unlike in Greece, a bank bailout wouldn’t just bail out the indebted nation, but a bunch of third parties with no stake in Cyprus beyond a bank account.

Tax Haven: This dynamic exists because like many small nations (Luxemburg or the Bahamas, for example), Cyprus has long tried to make itself attractive to foreign assets through loose tax law and regulations. So a large portion of Cypriot bank assets were not from fishermen or farmers, but foreign oligarchs and billionaires. Specifically, 37% of the $68 billion of deposits were from foreigners — mainly rich Russians.

Small-Time Savers Might Get Relief: The original 6.75% cut to those with less than 100,000 euro in their account has already been pushed down to a proposed 3%. And the Wall Street Journal reports that, “According to state media reports, the government was also considering a plan to eliminate the tax entirely on small savers with less than €20,000.” This should make sure the pain is focused on those rich foreigners as much as possible and not lower-income Cypriots.

Now, I’m not saying that this couldn’t precipitate bank runs elsewhere. It could, since nobody likes to see a penny of their savings get raked back by a bank.

I’m also not saying this means that the eurozone crisis is contained. Complacency had surely crept in and investors have been shaken once more by this latest development.

But it’s worth noting that while the Cyprus bank crisis is serious and unexpected, there is little evidence that these kind of tactics could ripple across Europe to larger financial institutions in Spain or Italy. Cyprus is a very unique case, and banks elsewhere in the region have different dynamics and other options.

I’d even suggest that the Cyprus bank crisis might help with future crisis mitigation, since that the International Monetary Fund and European thought leaders were not willing to simply throw money around. Germans in particular have been very stingy, and other nations in the eurozone are reluctant to simply bankroll every debtor over his head.

In other words, keep some perspective when you read about Cyprus in the days to come.

The biggest risk, in my mind, is the psychological impact of this bank tax and what it means for investors and consumers across the eurozone. If residents across the EU begin to see it as a harsh and unfair move, losing their faith in banks and the government, then any talk of facts and figures is irrelevant.

There are serious problems with the eurozone and this Cyprus move. But this move alone doesn’t mean that the global economy is doomed.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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