Cyprus represents only point two percent (.2%) of the EU economy but due to insolvent banks and a stunningly stupid decision by the EU, we are now facing capital controls in Cyprus which may very well lead to bank runs in other troubled countries of the EU known as the PIIGS: Portugal, Italy, Ireland, Greece and Spain.
In addition, those bank runs, if they happen, could lead to a global destabilization of all banks with consequences that could effect us here in US.
What happened
A little over a week ago,Cypriot banks were on the brink of failing. They needed an EU bank bailout just as the PIIGS have needed over the past four years. This time, however, rather than loaning the money, the EU has demanded that Cyprus implement a "tax" on bank deposits of between 6 and 10%. These deposits were insured up to 100K Euros similarly to how our own bank deposits in the US are insured by the FDIC for up to $100K (The higher insurance amount put in place after 2008 has now expired). This so called tax is actually a confiscation of wealth. It is inexcusable theft of customer money and unprecedented in Western banking.
The Cyprus government refused to impose this "tax" for two reasons. One, it would have to have been passes into law by the Cyprus government by politicians who would prefer to keep their jobs. Two, Cyprus is an off shore banking haven for Russian mafia and Oligarchs ( It could be argued they are one and the same) who may very well threaten or take revenge against the politicians.
The EU passed down this directive to Cyprus eight days ago. The banks have been closed since but customers have been allowed to take small amounts out of ATMs. The banks being closed has been the only thing stopping a run on the banks and capital controls were passed yesterday (Saturday) to prevent any money leaving if/when banks reopen.
Note: The American colonies began their revolution against British rule due to high taxes and no representation. Just imagine what their reaction would have been if the king had confiscated 10% of the colony's wealth.
What could happen
Citizens with bank accounts in other EU countries have now been alerted that their bank deposits are now not insured and may be confiscated by the EU. How long will it be before those EU citizens in those countries, especially the PIIGS, withdraw their money in fear? Already Cypriots are learning that gas stations who still have gas will take only cash, not credit or debit cards. Without banks being open they cannot pay their suppliers. With fuel not available, stores will not receive deliveries. See where this is going?
A run on EU banks would create widespread fear. Fear that could lead some banks to not lend to other banks they think might be financially on the edge. This is exactly what happened in the Fall of 2008 when banks froze up. It would only take one trading day for that to effect the US banks. Nobody knows what could happen at that point.
What should I do?
I don't want to spread fear but you might want to ask yourself:
- Do I have enough cash to last at least one week if a "banking holiday" hit us here?
- Do you have anything in bank deposit boxes that you would not want to be in a failed bank ore "locked up" during a banking holiday?
- Do I have enough food and gas to last me if banks closed for an extended period?
- Am I comfortable with the risk I have in stocks and bonds should a global banking crisis hit here?
Its possible this will quickly be resolved over the next few days though the Cyprus bank holiday continues to be extended, Its also possible this will quickly spin out of control and we could wind up with a crisis worse than 2008. Irregardless a trust has been broken between depositors and the banks that will not quickly be regained.
Hope for the best. Plan for the worst.
I will provide updates as this next week progresses.
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