Cyprus: An Old Fashioned Crisis in Europe

‘It looks like a botched and improvised job, and unprofessional – groping in the dark without much consideration of what sort of signal it sends,’ says Alessandro Leipold, a former International Monetary Fund official. He was talking, of course, about Europe’s plan to bailout Cyprus by raiding the bank accounts of savers.

‘That’s no way to really run a crisis.’

We disagree! A good crisis is like a mystery movie. It requires unexpected plot turns and surprise revelations. You also need villains, victims, and dead bodies. We have all the makings of a great thriller in Europe!

The villains are playing the double role of Keystone Cops. Incompetent and bungling politicians are trying to ‘fix’ the situation by committing more crimes. The victims are mostly savers who made the silly mistake of thinking that when you put your money in the bank, it’s your money. As our colleague Nick Hubble pointed out yesterday, a depositor in a bank is really just an unsecured creditor.

You can imagine the surprise someone would have upon finding out that your money can be taken from you without your consent. It’s the sort of thing that causes bank runs. It also makes investors nervous. Japanese stocks were down 2.71% yesterday. The S&P/ASX 200 fell over 2% (to the delight of Murray Dawes, who’s been waiting for this trade for months). Both the Dow Jones Industrials and the S&P 500 were down in New York trading.

The wealth-stealing elites of Europe are now furiously back-pedaling to prevent Cyprus from becoming Lehman Brothers – the signature event that started a crisis. Monday was a bank holiday in Cyprus. Now, the government says banks will remain closed until Thursday while politicians try to work out a deal that exempts depositors with less than €100,000 from the ‘just’ bank levy.

The new deal would increase the levy on deposits to 12.5% but reduce the levy on smaller deposits to ‘just’ 3% – or about the rate of inflation, according to the Financial Times. This would placate the masses. And what are the rich going to do about it anyway? If they haven’t already taken their money out of the country, it will be hard to do now.

Let’s not forget the Russians. Russian nationals have as much as $31 billion stored in Cypriot banks, according to Moody’s. That means they’ll be paying close to $4 billion of the total ‘bail-in’ tab. That’s a steep price to pay for keeping your money. You might even call it a ransom.

Russian Prime Minister Dmitry Medvedev is more direct. ‘We should say this directly: this simply looks like the confiscation of other people’s money,’ he said. It doesn’t just ‘look’ like it. That’s what it is. And it’s business as usual for a country with a broken banking system or a broke government.

You take the cash where you can find it. It could be a pension fund, or private property. But the obvious place to look is bank accounts. Sure, it’s brazen. But who dares wins, no?

That said, we wouldn’t want to cross the Russians on this. Germany’s Angela Merkel appears to be the driving force behind the Cyprus deal. She has an election in September. Before then, she has to ‘look’ like she’s not spending endless amounts of German money bailing out Southern European governments and economies.

But this puts the Germans at odds with the Russians again. Historically, that hasn’t worked out well for Europe, to have the Germans and the Russians coming to blows over money. We note that the Germans waited until the end of a cold European winter to make their move on Russian money in Cyprus. It doesn’t take the Russians long to turn the gas switch ‘off’ to Western Europe.

Stay tuned. A good old fashioned economic crisis in Europe has a history of turning into a political crisis. And a political crisis can become anything quite quickly. Our advice to Frau Merkel: don’t poke the bear!

Regards,
Dan Denning
for Markets and Money

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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


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