Scratch Cyprus off your “safe as money in the bank” list. Bank customers on the tiny Mediterranean island learned this week that deposit insurance is little help when your own government robs you.
Debt-laden Cyprus banks have lived on borrowed time (and money) for years. Ditto for Greece, Spain, Italy and Portugal. Cyprus has the additional complication of being a favorite tax haven of wealthy Russians. However dubious the origin of their money, it is in the bank and ought to be safe. This is why banks exist, right? They safeguard our money so we don’t need to hide it under the mattress.
Civilized places like the United States and the eurozone (of which Cyprus is a member) bolster the public’s trust in banks via government-sponsored deposit insurance. Theoretically, the first 100,000 euros in every Cypriot bank account is insured from the bank going insolvent.
Wrong. EU authorities in Brussels hatched the insane idea of making Cypriot savers share in the bailout of their island’s bankrupt banks. The exact amount of the “stability levy” is still under negotiation as I write, but it should be ZERO for those with account balances below 100,000 euros. Any number higher than zero would prove the whole concept of “deposit insurance” is a lie. And if it is a lie in Cyprus, it is probably a lie elsewhere.
This is why Cyprus presently has its banks closed, but the problem is far bigger. No bank, anywhere, can survive if more than a tiny fraction of “demand deposits” are actually “demanded” at once. The house of cards will collapse. Bank runs are very hard to stop once they begin, and make no mistake, it has begun. Anyone with money in a Spanish or Italian bank is right now deciding where to go next. Those banks are much, much larger than the ones in Cyprus.
Lighting this fuse is such a monumentally bad idea that I can only imagine one scenario in which it makes sense. The EU honchos must regard Cyprus as a test. They’re seeing if they can get away with outright theft. Maybe they can. We’ll know soon enough.
Back in January, I wrote about The Mirage of Risk-free Returns
. Now we have a new risk factor to consider. Your government can retroactively change the insurance plan you thought “guaranteed” your account.
We should all hope the European Union and Cyprus find another solution. If they get away with it now, you can bet they will do it again.
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