Cyprus is in the headlines; it has been for more than a week with the Cypriot government twisting and turning at every suggestion of any disciplined measure except free money.

The committee of lenders (misunderstanding their position as committees so often do) initially suggested that a surcharge on all bank deposits, both small and large, should be imposed. This nonsense was then swept away as it became clear that all bank deposits under 100,000 Euros with European banks were effectively guaranteed anyway and the mere suggestion to raid these was a disaster for a whole market.

That there are some Russian depositors, with deposits in their tens or hundreds of millions of Euros, has enraged the European authorities, with the German Finance Minister asking (with some justification) why the German taxpayer should subsidize and protect Russian money launderers. Interestingly, there is anecdotal evidence that some of the most influential depositors were forewarned of the impending crisis and managed to extract their own money to somewhere slightly safer, or at least out of Cyprus.

All very interesting and important to Cypriots and residents of Cyprus. In the rest of Southern Europe there is a feeling of ‘there but for the grace of God go I’ but what are the implications for investors?

1. Just as it was felt to be safe for investors to add financial company risk to their portfolio, it is suddenly abundantly clear that bank depositors and shareholders, especially in the south of Europe can no longer be secure that their interests will be taken into account. Placing money with these banks is once again under the Economics so forcefully put forward by Mrs. Thatcher a question of ‘Caveat Emptor’ or buyer beware. If one is offered higher than normal returns, one should expect higher risks, sometimes much higher risks. Therefore don’t invest with banks that seem superficially attractive.

2. The problems of Southern Europe – The Olive Oil States- are far from gone, they have merely been swept under various carpets waiting for the next German cleaning lady (Die Putzfrau’) with a degree of self-righteous pomposity, to unearth them again and hang them out for the world to see and wonder at. Government bonds issued by southern European states will suffer again and this will include French Government Debt.

3. The implications of this new reality have not been lost on the European equity markets which have suffered somewhat under the uncertainty. The larger markets in Northern Europe will soon stabilize especially Germany and the United Kingdom. The southern states will continue to be unstable, this despite the fact that there are so many excellent companies there.

4. Now is the time to invest in top quality equities; the brave and those who believe they know the markets can consider investing directly. The rest of us should make the effort to find the most capable fund managers, those able to manage risk and to use their services. This will result in lower losses in bad times, while still giving up only minimal profits for the skills of the fund manager.

5. The rest of Europe still expects the European Central Bank to foster growth by reducing interest rates still further. This will encourage the profitability of the best companies as well as downstream investment by their suppliers.