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Fallout From Cyprus: Increasing Unease

Posted by Larry Doyle on March 28, 2013 8:44 AM |

The island nation of Cyprus today implemented a set of capital controls within its banking system so as to forestall a “run on its banks.”

Having had a number of conversations with individuals since the onset of this meltdown in Cyprus, the consistent theme among people with whom I have spoken is one of increasing unease.

Cyprus may be a small island nation with a level of economic activity that barely registers on the scale of international trade and overall output. That said, when funds can be expropriated in the manner in which these large depositors in Cyprus are experiencing, there is a ripple effect as people think, “how would I feel if that happened to me?”

Responses to that daunting question have left people somewhat dumbfounded thinking that a Cyprus-like scenario could play out in their own financial backyards. People have shared the following reactions with me:

“I do not know exactly what I would do but I would certainly go out of my mind.”

“If those bastards ever tried to come after my money or my accounts, I would be beside myself.”

“Could this actually happen here in America? I do not know how I would handle something like that.”

Well, as the media downplays the actual reality of the expropriation of depositors funds in Cyprus, what do I think will be the fallout from the increasing unease that is clearly rippling throughout the world?

I foresee the following:

1. A shifting of funds to those institutions deemed “too big to fail” while simultaneously seeing that funds do not rise above the maximum level protected by deposit insurance.

2. The storage of currency and other hard assets (gold, silver) within private households and safeguards.

3. A movement of currency out of banks and into other stores of value (hard assets) and other markets (including black markets).

How do you feel? Does the situation in Cyprus unnerve you?

Would love to hear from people as to what they think and how they feel. I thank you.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Jake Schroeder

    This does make me nervous – I have long thought about putting part of my investments in gold and store outside of a bank. Is that really any safer – can I insure it? Would I want to keep it in my house in a hidden vault or somewhere outside of the home. The action of taken defense against such a situation seems to create a situation. I do feel like this could happen in America and our deposits/savings/retirement would be used for the good of the country (not my good). Is there anything in the constitution against this?

  • Donald

    I intend to store gold coins in my vault, I will also have 25000 cash available for emergencies.

  • James

    1- You’re right. If you wanted to identify one policy that could destabilize banks, the prospect of expropriation would be it.

    I can only think the snooty Germans and French are looking down on the Greek Cypriots (not even Greeks!) and stupidly look on this as a way to tweak Russian crooks who have deposited in Cyprus.

    2- If Cyprus now has capital controls, doesn’t that mean that they are out of the Euro? Or that the Euro itself is bust? Can they in effect have two kinds of Euro and call it a currency union?

  • Vince

    That’s why you keep a safe in the house……Happy Easter.

  • LD

    Much good might come from restoring some semblance of normalcy to the hierarchy of creditors in banking. Even better would be to see Germany try it for a change with its own zombie lenders, such as Commerzbank AG (CBK), which is still partly government-owned after its bailout in 2009.

    The way it’s supposed to work at failing banks is that shareholders get wiped out first. Next the losses go up the ladder from junior debt holders to senior bondholders, and then all the way to uninsured depositors, if need be.

    Taxpayers and insured depositors shouldn’t have to absorb others’ losses or put money at risk to spare them. Troubled banks should have to fend for themselves.

    This was the approach imposed on Cyprus. In ordinary circumstances, it would be considered fair. The best argument for why it wasn’t is that Cyprus had been lulled into believing it would be treated just as well as Europe’s other bailout recipients. The entire country got hooked on moral hazard.

    Now Cyprus may be the template for the future, regardless of European governments’ recent statements to the contrary.

    Bloomberg’s Jonathan Weil writes: Betray Your Bank Before Your Bank Betrays You

  • coe

    Resist the delusional comfort that goes with the old Frank Zappa Mothers of Invention song from his seminal album, “Freak Out” -that “It Can’t Happen Here”…in some ways it is already happening here as the policy wonks continue to lead us on a low interest rate path – generating no return for those on fixed incomes who believe in the sanctity of the US banking system, too big to fail, and all of the other platitudes that accompany these policies…if ever there was a run on US banks by depositors, then the fallacy of the levered banking system would be exposed…diversify asset classes/act on alternatives to over depositing in the banks…oh, but wait, that wouldn’t be fair in Obama-speak to those people who don’t have what you have, regardless of life’s decisions…quite the conundrum for a socialist to contemplate

  • LD

    Coe,

    Did you say Frank Zappa?

    Love it. Rock on …!!

  • searoemer

    When government turns predatory it is time for radical action.

    I don’t think it will matter what you do with your money. Value will be endangered and manipulated.

    If, under color of law, some $ is confiscated,you have the right to engage in regime change politics. This will mean establishing an alternative currency and fomenting civil unrest.






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