"Eurogeddon" - The Cyprus Nightmare scenario.

"Eurogeddon" - The Cyprus Nightmare scenario. (Forbes). Cyprus said on Saturday it was looking at seizing a quarter of the value of big deposits at its largest bank, as it races to raise the funds for a bailout from the European Union and to avert financial collapse. Finance Minister Michael Sarris said “significant progress” had been made in talks in Nicosia with officials from the European Union, European Central Bank and International Monetary Fund.

He confirmed discussions were centered on a possible levy of around 25 percent on holdings of over 100,000 euros (about $130,000) at Bank of Cyprus, and expressed hope that a package could be ready by the end of the day for approval by parliament.

Cyprus faces a Monday deadline to clinch a bailout deal with the EU or the European Central Bank says it will cut off emergency cash to the island’s over-sized and stricken banks, spelling certain collapse and a potential exit from Europe’s single currency. Amid signs of momentum, Cypriot and EU officials said Cypriot President Nicos Anastasiades was expected in Brussels on Sunday to meet EU leaders including Council President Herman Van Rompuy and Commission President Jose-Manuel Barroso, as well as IMF Managing Director Christine Lagarde and the head of the ECB, Mario Draghi.

Protesters in Cyprus gather outside parliament as government officials try to strike a bailout deal with the European Union. NBCNews.com’s Dara Brown reports.

Van Rompuy and Barroso canceled a planned EU-Japan summit in Tokyo to tend to the Cyprus saga and euro zone officials told Reuters that the bloc’s 17 finance ministers would meet on Sunday afternoon. “Significant progress has been made in the direction of getting a deal, at least at the troika level,” Sarris told reporters.

He said a number of issues were still outstanding, but that a package could be ready “late this afternoon or early evening” for approval by parliament. Arriving at the troika talks, Andreas Artemi, chairman of Bank of Cyprus, was asked if a 25 percent haircut was being considered on uninsured deposits. He replied: “I don’t know that yet.”

Nightmare scenario: Like the Corvair, the banking system in Cyprus is built to fail – to spin out of control at a moment’s notice. But so is every banking system around the globe, including our own. And when a country’s banking system fails, its economy flips from a good path to a bad one – in economics speak, from a good to a bad equilibrium.

Cyprus is a small country. Still, the failure of its banks could trigger massive bank runs in Greece. After all, if the European Central Bank is abandoning Cypriot depositors, they may abandon Greek depositors next.

A run on Greek banks could then spread to Portugal, Ireland, Spain, and Italy and from there to Belgium and France and, you get the picture, to other countries around the globe, including, drum roll, the U.S. Every bank in each of these countries has made promises they can’t keep were push come to shove, i.e., if all depositors demand their money back immediately.

But could little Cyprus , figuratively speaking, be the thin sheen of water that flipped my Corvair from a fun buggy into a death trap? Could it really kick off a global banking panic? Yes. The chances are small. But even a very small chance of an enormous collapse can spell a huge expected problem.

Yes, the Federal Reserve, European Central Bank, Bank of England and other central banks can print “hard” money and give it to the banks to use to pay off depositors. But the specter of this massive money creation, which in the U.S. case would entail printing roughly $12 trillion overnight, would spark fears of inflation. The fear of inflation would, in turn, prompt everyone to get and spend their money as fast as possible before prices rise. This transformation of money into a hot potato would, by itself, produce the inflation that everyone would fear.

Given the above, the question we need to ask about Cyprus is not really about Cyprus. The question we need to ask is why we continue to tolerate a banking system that’s built to collapse with the right triggering events?Hmmmm........Anyone gets an idea why Obama keeps delaying to present a budget plan?Read the full story here.