On the eastern mediterranean island nation of Cyprus, bad loans to Greece have left the place in desperate need of a bail-out. The debt-to-GDP ratio is hovering at 85% while deficit-to-GDP is well into the 6% range.
That’s just part of why there’s been plenty of talk that a Cyprus bank confiscation is coming, ever since I was in nearby Turkey last year.
The EU tried to work with the nation of barely one million last summer, but the then-ruling Communist Party indicated it would play hardball and hit up its comrades in Russia for the help. Talk about the potential to embarrass the EU.
With a new conservative government in place, talks are resuming once again. Cyprus needs an estimated 8-10 billion euros, but with government operations financing and restructing of sovereign debt, the total could be closer to 17 billion euros, the entire size of the economy.
The interesting rub that’s been bandied about for some time now is what’s most frightening, however. Germany and several other EU states have been pushing for Cypriot bank depositors to participate in a “bail-in” where part of their deposits would be forfeited to kick-in for the bail-out.
Concerns have existed for years that Cyprus is a money laundering haven. Its close ties with Russia along with a liquid banking system and low-tax environment have made many in the EU uncomfortable with the banking sector there.
Russian individuals and companies have a high level of deposits there and the nation remains a favorite offshore banking hub for shell companies and those needing the patina of a European Union bank account for their activities.
Cypriot officials have been pushing back against the deposit confiscation program. Just the initial idea caused two percent of funds on deposit to flee the island in January. Depositors are running scared, and for good reason.
The new bail-out culture in Europe is becoming exhaustive and Berlin and Brussels are looking for ways to take the heat off.
Cyprus shows how the “safety” of a bank account in the European Union, with all its strict rules on deposit insurance and depositor protection, are moot if the central authorities want you to pay for an insolvency you didn’t create.
As usual, the government’s motives for your money are not the same as yours. They’ll use it to cover themselves as necessary.
While Cyprus is a small country, which I like as it often forces government to create innovative solutions to attract and retain capital needed for to maintain a certain standard of living, its embeddedness within the European Union causes its level of financial safety that has always concerned me.
Of course, there’s that part of having been ruled by communists, too.
Nevertheless, it emphasizes just how careful you must be with your money in a world when bureaucrats will find whatever reason possible to shift the burden from their pockets to yours.
For those across the pond in the United States, don’t be so sure that your deposits are any more secure from confiscation than those at the hands of the European Union.
