The Death of the Euro: Cyprus Suffers Confiscation
Imagine waking up one morning and finding out that while you were asleep someone accessed your bank account and stole 10% of your money.
That’s the rude awakening the citizens of the island nation Cyprus had this weekend, after the European Union presented the Cypriot government with an offer it could not refuse – confiscate 9.9% of bank deposits over 100,000 Euro, 6.7% of anything below that – or watch their banks go bankrupt. The Cypriot government, in power for less than a month, chose the former route, and the people of Cyprus ran to ATMs and drained the machines of as much cash as they could before the machines ran out; all attempts at electronically transferring funds were cancelled by the government.
But fear not, “European officials said it would not set a precedent.”
Funny thing about precedents: they tend to set themselves regardless of what an unelected bureaucrat in Brussels says. Banking is a fragile affair that relies on trust. People hand their money over to the bank and trust they can get it back. Once that trust is broken in Cyprus, who’s to guarantee the trust in Ireland, in Italy, Greece or Spain will remain? The same group of EU bureaucrats who broke it in Cyprus?
It’s difficult not to think a rubicon has been crossed, that punishing depositors to allow lenders to avoid the consequences of their poor investment decisions will remain localized in Cyprus. Is it the fault of depositors the banking sector is 8x bigger in Cyprus than elsewhere? Without trust, people will pull their wealth out of banks and stash it under their mattresses. They will convert it into foreign currencies not threatened by confiscation, or transform it into gold and silver.
In order to counter these moves governments tend towards oppression, banning forex transactions, limiting transfers of money abroad and confiscating and banning the ownership of precious metals, tactics used by the United States government under the administration of Franklin Delano Roosevelt in the 1930s. Such tactics may annoy the wealthiest citizens of a country, but they don’t suffer much. With armies of attorneys and tax accountants at their disposal the wealthy are able to shield their assets from the thievery of governments. Lacking those resources the middle and lower classes are the ones who suffer the most.
For years the fragility of the European Union has been on display, with agreement upon agreement announced on a seemingly monthly basis. The Cassandras who have been predicting the collapse of the Euro have been shouting for so long that their din has disappeared into the background. But eventually anything that is under enough strain will break, and do so suddenly and in unpredictable ways. It’s worth remembering that on the eve of World War I, war was expected yet it began not with a massive attack on a large country like Austria or France, but with the assassination of a minor Austrian nobleman in the far-flung province leading to the declaration of war against tiny Serbia. The single bullet that killed Archduke Franz Ferdinand set off World War I which in turn laid the groundwork for the following World War. Could this be the single bullet that sets the death of the European Union in motion? Have the Europeans finally broken their own economic system by stealing from the Cypriots? The confiscation is predicted to net 6 billion euro against a 13 billion euro bailout package. The relatively insignificant sum raised by the confiscation may come to haunt the Europeans for days, weeks, perhaps even decades to come just as the ghost of Archduke Ferdinand haunted Europe through the trenches, the blitzkrieg, and the Holocaust that followed decades later.
It will be interesting to see how depositors respond in Spain, Ireland, Portugal, Greece and Italy over the coming days. These economies are so fragile to begin with that it is unlikely the EU could survive even a small bank run or investor panic. It is quite likely, though I’m not foolish enough to say exactly when, the EU will unravel very soon, with countries refusing to abide by the dictates of Brussels, drop out of the Euro, and face the world on their own. There’s even a chance the government of Cyprus will renege on the deal, and the nation be forced out of the Euro. Such an action would in the short term be worse for Cypriot depositors, who could see losses of 25% or more as their Euro assets are changed into Cypriot Pounds, but over the long term such devaluation would allow Cyprus to recover at its own pace without suffering the draconian economic program demanded by the EU.
At the very least it makes one realize how little governments respect the hard work and sacrifices of their own citizens, and that the gold bugs aren’t completely nuts after all.
Update: Via ZeroHedge, RBS analysts explain the situation (I’ll pretend to forget that RBS itself went down in flames only to be resurrected by bailout a few years back). Cyprus deposits total €126.4bn, or over 7-times GDP. Much of that money is of Russian origin, which is why the EU thinks the Cypriots will swallow the medicine. But Russians aren’t the ones draining ATMs, Cypriots are. When Spaniards, Italians and Greeks see the freak out in Cyprus, even the dullest of them will question whether their assets are safe from EU bureaucrats. And it will also be interesting to see how Russia takes the hit. Russia isn’t the most magnanimous nation, so expect it to gain something from the mess – like a Mediterranean port.
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