Tags: Cyprus | banking | US | Greece

When Will the US Become the Next Cyprus?

Wednesday, 27 Mar 2013 08:08 AM

By Ashish Advani

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The dominoes have begun to fall. Just when the euro thought it was safe to emerge from the three-year crisis (we saw the euro climb above 1.35 against the U.S. dollar), the world’s attention was seized by Cyprus.

Did we ever wonder why this tiny, idyllic, scenic country got caught in a “kicking the can down the road” game?

Another reason why I completely distrust central bankers these days!

Urgent: Obama or GOP: Who’s to Blame for Budget Crisis? Vote Now!

Back when Greece got bailed out, we heard the European Central Bank (ECB) chairman talk about the moral dilemma of bailing out countries. Dilly dallying and dithering followed and then they succumbed as we suspected they would. The ECB promised us that they had “ring fenced” the crisis in Greece and that a contagion domino effect would not happen.

Lies!

The unintended consequence of rescuing Greece led to Greece’s debt restructuring, the largest in history. But it trashed the financial health of lenders, including the Bank of Cyprus and Cyprus Popular Bank. When the lenders to Greece were forced to take a haircut on their holdings, two of the biggest banks in Cyprus were deeply affected.

Now, I do not want to let Cyprus banks off the hook. The practices that the banks engaged in were nothing short of irresponsible.

Cyprus’s total bank assets grew to 126.4 billion euros at the end of January, seven times the size of the 18 billion-euro economy, from 78 billion euros in 2007, data from the ECB and the European Union’s statistics office show. Russian companies and individuals have an estimated $31 billion of wealth in Cyprus, according to Moody’s data cited by Bloomberg.

So the banks grew much beyond their capabilities due to lax tax laws and easy banking laws. When the financial tide receded, the Cyprus banks were found swimming naked in the ocean.

The banking sector dwarfed the overall economy size multiple times over. While this was known to most, greed overtook common sense and everyone looked the other way while money was being made.

Now the resolution is rather draconian and we have the deposits over the government insured amount of 100,000 euro being wiped out with a possible 30 to 50 percent loss.

Once again, an unintended consequence (or is it intended?) of this move is angering Russia, whose citizens will lose an estimated $15 billion or more. Beware of how Russia will retaliate to this, as they do not have a Gandhi-like temperament of turning the other cheek.

But more than that consequence is to take this time to look inward.

Urgent: Obama or GOP: Who’s to Blame for Budget Crisis? Vote Now!

The U.S. economy is also heavily dependent on an outsized banking sector as well as construction. With construction in the toilet and expected to remain tepid, how long will it be before the banks here get hit by the next wave?

I would caution against complacency and work diligently toward diversification of assets in stable and fiscally responsible jurisdictions like Singapore, which has never had a banking failure, and into multiple assets in multiple countries, making it harder to get seized all at once.

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