Cyprus, chaos and the butterfly effect

Chaos theory – and no, we’re not talking about the operating principle of Congress – is the attempt to predict the consequences of systems that are so complex their functions seem to be random. And no, this will not be on the test.

A popular illustration of chaos theory is the “butterfly effect,” where a butterfly flapping its wings – say, deep in a South American jungle – sets off an escalating series of consequences until one of them becomes disastrously large, like a hurricane in the Atlantic.

We seem to be dealing with the economic equivalent of the butterfly effect with the banking crisis in Cyprus.

Cyprus, a member of the European Union, has a population of only about 800,000 and a gross domestic product of $24.69 billion, by some estimates. But somehow its banking system, which The Wall Street Journal describes as “opaque,” has attracted $91 billion in deposits.

Much of that money is from Russia, from oligarchs who want their millions stashed safely away from the prying eyes and grasping hands of the Russian government.

The situation is similar, but not quite analogous, to that of Iceland, which attracted huge deposits from the United Kingdom and, like Cyprus now, found itself in deep financial trouble when the time came to make good on those deposits.

There has already been a run on Cypriot banks, temporarily brought to a halt when the ATMs ran out of cash. The government closed the banks, at least until Thursday.

Although Cyprus – and here is where the butterfly effect comes in – accounts for only 0.2 percent of the eurozone GDP, the fear is that the Cypriot panic will spread, causing runs on banks in larger, more economically significant countries like Greece, Italy, Portugal and Spain.

The European Central Bank, the International Monetary Fund and the European Commission weighed in with an offer of a $13.07 billion bailout, but in return the lenders want Cyprus to raise $7.5 billion from bank depositors.

Cyprus proposed to do this by imposing a 6.75 percent levy on bank accounts up to $130,000 and 9.9 percent on those above. Depositors, not surprisingly, are balking and the Cypriot parliament balked as well. But the consensus seems to be that the percentages may change and the depositors and parliament will come around.

If the eurozone is lucky, the butterfly is just harmlessly flapping its wings.