Tax on Deposits for Cyprus Banks

The small island of Cyprus is getting some unexpected attention.  It was announced that there would be a one-time tax on bank deposits.  The proposal would put the tax at 9.9% for those with over 100,000 euros and 6.5% (minor correction: 6.75%) on everything else up to that amount.  So if a person had 10,000 euros sitting in a Cyprus bank, that would mean he would have 650 euros seized from him, never to be seen again.

This is part of a deal formulated by European "leaders" to bail out the small country.  It is not as if there had already been a massive run on the banks and this was some kind of a solution to solve it.  Perhaps the banks there are set to go under and this proposal was submitted to try to spread the pain around.  But ironically, this announcement, no matter what ends up being passed by the legislature, is sure to spell doom for the Cyprus banks.

They scheduled "bank holidays" for Tuesday and Wednesday so that the legislature could officially pass something and get the money while it is frozen.  If they had not shut down the banks, then bank runs would probably have bankrupted the banks within a couple of days.

But even when banks open up again, do you think depositors are going to feel like their money is safe now?  Maybe it will be safe for another month or another year.  But why would they take that risk?  If you are a person living in Cyprus and just had 6.5% of your savings taken away overnight, wouldn't you look for another place to do your banking, even if it is inconvenient?  It is far more inconvenient to lose 6.5% of your savings.

I'm guessing that the proposal will be changed to lessen the hurt on the little guy.  But it won't matter much now.  One thing I learned from this whole incident is that Russians make up a large percentage of deposits in Cyprus banks.  I'm guessing most Russians are going to be taking their money elsewhere, which will surely send the banks there into a nosedive.

Ironically, it would have been cheaper and easier for the European Union to just bail out Cyprus in full and not ask for anything in return.  It is a tiny country with just over a million people.  Yet it is causing shockwaves and rightly so.  It is quite symbolic of what could potentially happen with the bigger players.  So we shouldn't be surprised to see bank runs occurring in some of the vulnerable countries like Italy and Spain, even if it happens somewhat quietly and subtly.  This in turn will just cause more problems for the banks and more economic issues overall for the euro zone.

Whenever you read someone who is talking about a grand central conspiracy to control the world and the world's economy, just look at what happened with this debacle.  Do you really think this was planned?  It is the nature of bureaucracy and bureaucrats.  A few of the elitists made a mistake.  Even elitists can be complete morons sometimes.  They went too far this time.  If this is some kind of a grand central conspiracy, I don't think we have much to fear.

All of this news sent the markets in turmoil.  Stocks were down.  The dollar went up.  Gold went up, despite an up dollar and despite the fact that the other metals did not go up.  The most interesting thing about reading all of the news stories today on the internet was actually the comments below in the many articles out there.  People (particularly Americans) are aware that they are being dealt a bad hand by their own government.

It will be interesting to see if this story dies down or if this was the trigger for something bigger to happen.  I still fully expect that the euro zone will eventually break apart.  I have no idea in what order or form it will happen.  If we start to see massive runs on banks all over Europe, then that alone could spell the end of the European Union as we know it.  It still may take years.  But then again, with what is happening with Cyprus banks, it may only be weeks away.

I don't know what the effects will be on the U.S.  I will discuss this further in detail tomorrow and whether it could happen in the U.S.  For now, I expect short-term volatility in the financial markets with the chaos in Europe.  The next few days and weeks ahead could get very interesting.