I always will try to avoid a “breaking news” section here. I am most definitely not online all the time, so there might be a lot of breaking news I am not bringing you. Right now I’m even in the wrong time-zone for most of my readers, and I’m bringing you news that’s 22 hours old, however, it’s big news nonetheless:

It is the EC Statement on Cyprus. It is a must-read, and it’s also thankfully short. It also confirms my prior predictions, that the EU can’t and won’t budge on this. Budging on the size of the bailout is the only thing that might risk contagion. Even a Euro exit, on the other hand, might just do the opposite: It will focus the minds of Italian, Spanish, Greek, etc. citizens that exit is an alternative. I call this “positive contagion“, for it might be a good thing for two reasons:

(1) It will make everyone plan for the “too unthinkable to fail” event, for it must be becoming thinkable

(2) On a purely domestic view, long- and medium-term, it might genuinely be the best solution for countries like Cyprus, and possibly others, allowing their economies to get back to health through a re-denominated currency, a monetary policy that can adept to the local circumstances at any time, and a politically helpful, greater sense of self-determination.

As I predicted also, the EU has thrown out Cyprus’ plan B. My next bet was Cyprus will go after un-secured bank debt. That is if Cypriots still want to stay in the Eurozone after all this (for whatever such rushed surveys are worth, so please take this with a very big grain of salt, a Prime Consulting survey found 67% favoring an exit at this stage).

The thing to remember is and remains: As long as a Eurozone exit is the worst option, do not panic. (unless of course you already hold Cypriot assets and are a foreign investor; Sorry). For while this “worst option” would certainly create volatility, it would still be brushed off by the markets eventually, and will in time even be seen as a good thing; Particularly in Cyprus, but also in the rest of the Eurozone. Setting the example that there is a “way out”, with all its consequences (good and bad), will focus the minds.

And one last point: perhaps the reason Cypriot politicians seem so reluctant to contemplate touching bank creditors hides the saddest irony of all in this saga: It wasn’t the size of the banking sector, or the offshore banking model that broke Cypriot banks (as many in Europe would have you believe), it was the “voluntary” restructure of the Greek government bonds, of which the Cypriot banks simply held way too many.