As news circulated of a banking bailout for the small Mediterranean island of Cyprus, world financial markets convulsed. But why? Cyprus is hardly a G20 economy, so how bad could things there really be? A lot of it comes down to the fact that as the bailout was engineered, the government in Cyprus basically admitted that it could no longer be counted on to live up to its own deposit insurance guarantees – the backstop governments have provided to private banking since the 1930s that keeps the entire system going. Cyprus could no longer make that promise, showing the world how bad things there really are.

Read the story.