Cyprus: has the IMF made a huge mistake?

IMHO, YES and YES.

Mistake #1.

In spite of the false reports of the Drive-by-Media (also known as 'Lame Stream') there was more money at stake than the E5B - much more. Cyprus is used by the Russians as their own Switzerland and between 100-500B Euros are stashed there by former and current Security Apparat officials, plus whatever the Russians want to spend off budget. It is one thing to shout imprecations at the Russian Bear (from a safe distance), it is not so safe to try to swipe their pocket book. The IMF, and by implication Washington, created this confrontation with Russia and Putin and the Cypriot Parliament voted it down. No doubt, the Cypriots were told what would happen to them if they went along with the proposed theft.

Mistake #2.

The IMF (and by implication the FED) was trying to change the practice of how the bailouts were done. To suddenly confiscate a portion of people's money as a requirement challenged not only procedures used to conduct the bailouts, but undermined the integrity of the banking system. The moves the IMF wanted went against all the agreements and promises made about the banks. Furthermore, the IMF proposal puts Europe one step away from a bank run.

Mistake #3.

By defying the IMF and the EU, Cyprus puts the question to the EU: you want us IN or OUT? A default by Cyprus will start the contagion and possible bank runs and the unraveling of the EU.

We live in interesting times.