The Cyprus resolution is taking shape as it looks like accounts with balances greater than €100,000 will be subject to a 30% hit to go toward meeting the requirements of the bailout. This news seemed to have visible impacts on iShares Italy (EWI) and iShares Spain (EWP) which were both down more than 4% yesterday.
Those two countries are clearly perceived to be the shakiest of the Euro countries yet to fall (I consider Greece to have fallen in this context). Obviously there is debate as to whether this current event in Cyprus is significant or not and it seems like just about every not argument focuses on how small the country's GDP is--we produce a new Cyprus everyday before lunch is one quip I read somewhere.
Of course the size of the GDP is not really the issue. If this is going to be important it will be because of how large the banking system is, who owns what debt and whether or not there are any implications for something similar in any other countries.
I certainly do not know whether this will be important or not but I do know that anyone who stops at how small the GDP is is not looking at this thoroughly. As for my opinion I think this can be important for Europe and companies that rely heavily on Europe for revenues. Any countries or companies that don't do a lot of business with Europe won't be immune if there is a large decline but countries and companies that don't rely heavily would be fundamentally detached.
For many years I have been saying that if this was the worst crisis in 80 years that there would be more shoes to drop and I still believe that to be the case. Europe has been and continues to be better left out of a portfolio and I would urge extreme caution with US financials. Financials have been great performers but I think these have been great trades, not great investments. As someone who is an investor I prefer small exposure.