National Bank of Greece (ADR) (NBG), Banco Santander, S.A. (ADR) (SAN): The Eurozone and the Need for Change

The eurozone is facing its biggest challenge since its inception.

Cyprus is the second-smallest economy in the common-currency area, but the reverberations from its bailout crisis are being felt across the continent. Average citizens in Europe’s periphery nations are outraged. Germans and other core European citizens don’t want to fund their less-responsible neighbors. And risky banks in Cyprus and other nations, facing unsustainable futures, teeter on the edge of insolvency.

Cyprus may have found a way out of its imminent crisis by agreeing to a bailout solution on Friday, but the danger’s not over in Europe. While U.S. investors hardly need to start worrying — after all, Cyprus is a tiny portion of the EU’s economy and the Dow Jones Industrial Average (INDEXDJX:.DJI) is still happily surging to record highs — any spreading of the European contagion to larger, more powerful economies could lead to dire economic straits.

Crisis averted?
We’re now almost  out of default-watch as Cyprus’ politicians came to a deal to save the island nation from a financial implosion on Friday. Cyprus intends to restructure good and bad banks without crushing depositors, as the original plan that caused all this uproar would have done.

Cyprus’ lawmakers also set up a “solidarity fund” for future crises, along with placing a restriction on financial transactions in any similar times of hardship that occur in the future. The country needs to come up with 5.8 billion euros in all for the EU to provide its pledged 10 billion-euro bailout, although one plan being floated around that’s sure to spark more anger among average Cypriots would tax all bank deposits at a much lower rate of less than 1%.

It’s not anywhere near the earlier rates lawmakers floated. That’s unlikely to placate incensed Cypriots, however, considering average citizens have expressed outrage  among any taxation of previously guaranteed deposits under 100,000 euros. Cyprus’ politicians may be forced into coming up with a less provocative resolution.

Greece is lending a hand, for its part. The debt-plagued nation had to help, as its own fragile financial stability rests upon stopping any signs of bank runs or other problems before they spread, especially with Greece’s own citizenry disgruntled at Germany and other core nations in the eurozone.

The Piraeus Bank of Greece is slated to assume control of local branches of Cypriot banks to protect Greek customers, in hopes of stemming any panic among average Greeks fearing for their deposits. But will these measures be enough to restore the shaken confidence of average citizens across Europe?

Will the infection spread?
Cyprus got into this situation in the first place by letting its financial sector run wild. The country’s banking sector swelled far beyond its GDP, and when the banks inevitably failed, there was no chance the Cypriot government would be able to save the nation from financial turmoil. That’s not the fault of the eurozone, and one can’t blame Germans and other core lender nations if they grumble about coughing up the whole bailout bill.

Similarly, you can hardly blame average Cypriots for expressing outrage at the earlier proposed deposit levy. While fellow analyst Morgan Housel correctly points out that the cost of leaving the eurozone would cripple Cyprus far worse than the levy would, average citizens are hardly responsible for Cyprus’ debt situation. Shredding any semblance of deposit guarantees and demanding more from the common people — rather than hitting large bank accounts from wealthy foreign depositors — would never be accepted with open arms.

But Cyprus isn’t the only country facing unsustainable levels of debt — and the other peripheral European nations on the brink of disaster would hit Europe with a much bigger hammer.

Source: The Economist.

A lot of talk has been floated over Greece’s debt problems, but in comparison with the eurozone, the Greek debt is hardly influential enough to induce panic. Greece also isn’t a tax haven for wealthy individuals looking to deposit cash in its banks, but the country’s not entirely on stable footing. The Greek populace has already exploded over Germany’s intervention in its bailout in a similar (but more violent) pattern to what happened in Cyprus’ streets. Meanwhile, the National Bank of Greece (ADR) (NYSE:NBG) took big hits after restructuring following last year’s austerity measures. However, Greece is small enough in the big picture that, while it’s vulnerable to instability, it’s not likely to rock the European boat too hard.

Nor is Spain: While the Spanish financial crisis has sparked massive protests in the streets and even a separatist movement in Catalonia, the country’s banks are on good footing. Institutions such as Banco Santander, S.A. (ADR) (NYSE:SAN) aren’t in trouble like Cyprus’ imploding banks are; Santander in particular has done a spectacular job diversifying into growing markets in Latin America and elsewhere worldwide, rather than consolidating too heavily in economically crippled Spain.