Though an island geographically, Cyprus is by no means an island financially. The world woke up Monday morning with yet another reminder of just how interconnected everybody is with everyone else.
One by one, as each country stepped out of the shadow of night and into the light of day, stock markets from Japan to Europe started plunging as they opened. By the end of trading Monday, Japan’s Nekkei index had dropped some 320 points (2.5%) and Hong Kong’s Hang Seng index lost some 500 points (2.2%).
By about the same time, Europe’s exchanges were opening to sell-offs of their own, with Germany’s DAX losing some 140 points (1.7%), France’s CAC 40 giving up some 75 points (1.9%), and the UK’s FTSE 100 shedding some 100 points (1.5%) in their sessions’ first few minutes. Even America’s futures were being dragged down, with the U.S.’ Dow Jones index losing more than 150 points (1%) in its pre-market overnight trading.
What happened? “Leaders in Cyprus and Brussels scrambled Monday to contain the fallout from an unprecedented effort to force ordinary bank depositors in this crisis-hit nation [of Cyprus] to pay for part of an international bailout, as stock markets faltered on concerns about the wider implications for Europe’s long-running debt crisis.” – the New York Times reports.
Cyprus is a member of the EU. The world has already had it up to the neck with one European nation after another holding one foot over the precipice of default. Now we have to add yet another country to that list.
“Cyprus, whose banking system is verging on collapse, is now the fifth nation in the 17-member euro union to seek financial assistance since the crisis broke out three years ago,” expands the New York Times.
Over this past weekend, EU members had come to an agreement for a Cypriot bail-out package… with one very unprecedented condition. Cyprus, which needs at least €15.8 billion, would receive only €10 billion from the ECB. The remainder would have to be taxed, or quite simply taken out of people’s bank accounts. That’s right — confiscated.
 |
The New York Times explains the unprecedented measure. “For the first time since the onset of the euro zone sovereign debt crisis and the bailouts of Greece, Portugal and Ireland, ordinary depositors — including those with insured accounts — were being called on to bear part of the cost, €5.8 billion.”
News of this spread like wildfire across Europe, as the Huffington Post describes, “It … has stoked fears of bank runs among the 16 other countries that use the euro.”
“The new direction raised fears that depositors in Spain or Italy, two countries that have struggled economically of late, might also take flight,” adds the NYT.
If Cyprus is suddenly being given the okay to reach into any and all bank accounts in the nation and simply take out an amount it deems appropriate, what is there stopping any and all other governments from doing the same? Investors in the markets of both stocks and currencies gave clear evidence of their nervousness.
To prevent a run on its banks, Cyprus has simply locked the doors. “A vote on the tax, needed to secure 10 billion euros in rescue loans, was delayed for a second day until tomorrow [Tuesday],” Bloomberg informs. “Banks will remain shut through March 20 after a holiday today, a government official said.”
But there is a nail on this wall that is not being hit squarely on the head by the majority of the media. We have to ask a very important question here: Why a tax on bank deposits?
“The previous bailouts have been financed by taxpayers”, the New York Times reminds us. “It would be the first time in the European debt crisis that bank deposits have been seized,” echoes the Huffington Post.
If standard practice is to tax the taxpayers, what is going on in Cyprus that has prompted the ECB to force this tax on Cypriot bank accounts?
We need only consider who those account holders are. By taxing all accounts in the country, both Cypriots and foreigners alike are taking a hit. The decision makers here do not want to tax Cypriots alone.
And let us also notice the rather large gap in percentage brackets. Bloomberg cites figures presented by Antenna TV:
“The potential changes include taxing deposits less than 100,000 euros at a 3 percent rate, while setting the levy at 10 percent between 100,000 euros and 500,000 euros and at 12 percent for deposits greater than that.”
€100,000 is nearly US$130,000. How many Cypriots do you think have that much money in their bank accounts? And what of that gap from 3% for your average Cypriot jumping to 10% for the next bracket up? The target of this tax on deposits seems to be wealthy foreigners.
The UK paper The Guardian describes the Cypriot banking system as being “heavily reliant on questionable Russian deposits”. “According to Reuters,” the paper quantifies, “nearly half of the €70bn-worth of deposits in Cyprus’s banks is held by foreigners, the vast majority believed to be Russian. The Moody’s rating agency said Russian deposits amounted to $12bn-$32bn coming from banks and $19bn from corporate clients.”
Join Wealth Daily today for FREE. We’ll keep you on top of all the hottest investment ideas before they
hit Wall Street. Become a member today, and get our latest free report: “Why You Need to Fire Your Money
Manager.”
It contains full details on why money managers are overpaid and provides you with
tools for growing your wealth.On your own terms. No fees, no comission.
So what is wrong with foreign accounts? All countries have foreign account holders. Yes, but the relationship between Cyprus and Russia’s wealthy seems to be of ill-repute.
“Cyprus has had to fight off accusations that it has become a money-laundering haven for Russia’s ill-gotten gains,” declares The Guardian. “Undeniable is the fact that vast networks of offshore companies registered in the country have added to the opaque nature of Russian business, allowing true company owners and directors to mask themselves from public view while also avoiding taxes.”
As a result, “Russian banks and businesses have been flooding Cyprus for years, taking advantage of the country’s low taxes and loose regulations. Much of the cash is then re-invested back into Russia, making Cyprus the biggest foreign director investor in Russia, at least nominally,” The Guardian completes the picture.
From Russia with love; from Cyprus with “clean bills” of health.
Figure the Cypriot government is aware of this? Cyprus is taxing savings, but not just the savings of its own citizens; it’s taxing the savings of Russian depositors, banks, and corporations as well – and at a much higher rate.
Might this be one way to “make amends”, to “fix what once went wrong”? Perhaps a quiet admission of guilt for permitting – how shall we put this delicately – the “mutually beneficial circular transfers of money”?
Whatever the drama behind the curtain is, the drama being played on stage is what matters to the average investor. And the play is about to become much more dramatic still, likely turning into a tragedy for Europe and the rest of the world, as this week’s churning of the markets may have foreshadowed.
People are beginning to clue-in that currencies are just arbitrary notes issued by governments. And as those governments weaken, so does their money. What is more, they have now broken through the barrier. Savings that were once thought protected are now exposed to be plundered.
It was no freak accident that while stock markets and currencies were selling off on Monday, gold was being bought, rising some $15 an ounce on the day. Do we remember what started gold on its wild tear up to 2011’s peak of $1,925?
It was one very critical call by Standard and Poors on August 5th, when it downgraded the U.S.’ credit rating. How many more credit rating downgrades do you imagine are overdue now?
The tinderbox is dry. It takes just one little spark to set the whole wilderness on fire. One little tax on a tiny island on the edge of the Mediterranean Sea sent a shock wave that rippled through every stock market on the planet.
What might we expect when a real quake hits the financial system? Might gold’s 21-month cycle spike repeat itself yet again? Right on cue for this summer?
A lot can happen in a short period of time.
Joseph Cafariello
*Image courtesy of the New York Times
If you liked this article, you may also enjoy:
