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What is Going on in Cyprus?

Posted by Larry Doyle on March 18, 2013 8:23 AM |

News emanating from the Republic of Cyprus that depositors in its banks will likely be hit with a tax to support an EU bailout of this small nation is a warning signal that the financial system specifically and the world at large remains fraught with risk.

Some individuals within central banks and creditor nations may like to discount the impact of the taxing of depositors as no big deal. Additionally, I can already hear people asserting that Cyprus is a tiny nation with an economic GDP that is hardly statistically significant.

Should we disregard a tax on bank depositors that would relegate the topic of deposit insurance onto the garbage heap? At our peril. Let’s navigate. 

I see the taxing of depositors as both a trial balloon and the next iteration of financial repression being foisted upon the “little people” by the grand and powerful wizards within the central banks and halls of political power.

Specifically, the tax on depositors in Cyprus as currently laid out would be imposed at a 9.9% rate on deposits above EU100,00 and 6.75% on deposits up to  EU100,000.

Banks in Cyprus are closed today, and I would not be surprised if they remain closed again tomorrow. Supposedly, the government in Cyprus needs to debate and pass legislation for these taxes to be imposed. How might those legislators feel about debating this tax knowing Angela Merkel and other officials from the EU creditor nations of the north are holding a loaded gun to their head?

Everybody gave a heavy sigh of relief when the Germans accommodated a European Central Bank bailout for the periphery nations, right? Well, now we learn what the Germans had in mind as a price for approving the ECB bailout. The following questions beg:

Cyprus today, where will depositors be taxed tomorrow? I would not be surprised to see a “run on the bank” in many southern European financial institutions.

If depositors can be taxed in Cyprus, are we naive to think that variations on this play could not or might not happen here in the US? What do you think quantitative easing is? A de facto tax upon savers. Might our wizards go after our retirement accounts?

Why aren’t bondholders being asked to take a haircut on the values of their securities? I think if that were to happen, it would be defined as a “credit event” and likely release the genie from the derivatives bottle and cause a domino effect within that enormous market segment. The wizards have no interest in going down that path.

Navigate accordingly.

Larry Doyle

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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.

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