Bailout by Any Other Name: EU & Cyprus Change Deal

March 26, 2013

By: Kelly Diamond, Editor

The response from Cypriot account holders to the initial bailout proposal to levy a “tax” of 6.7% to 9.9% across the board sent the EU and Cyprus government back to the drawing board for a different deal.

The second largest Cypriot bank (Laiki) will close, the first largest bank (Bank of Cryprus) will inherit its debt, and anyone with more than 100k Euros is going to lose… a LOT.

Remember how the Cypriot account holders were going to be “taxed” anywhere from 6.7% to 9.9%?  That is SO last week!  They were just kidding!  As it turns out, the Cyprus government agreed this week to close their second largest bank, Laiki (Cyprus Popular Bank), and restructure their first largest bank, Bank of Cyprus.  This way, no “taxes” will be levied.  Translation: this measure need not go through the parliament since this is just a bank reorganization, so the banks take the money instead of the government and the EU manipulates the controls.

Last week’s deal fell through, and very little in this current deal resembles it… except the part where people get their wealth seized to bail out a country’s EU standing.  The private citizen never stood a chance.

• Accounts with 100k Euros or less are spared completely.  Even the ones held by Laiki will transfer over to Bank of Cyprus, as the EU upholds its 100k Euro guarantee (much like the FDIC here in the US).
• Accounts OVER 100K Euros will be placed in what they are calling a “bad bank”.  Translation: their accounts will be wiped out entirely.
• The lenders’ investments will disappear.

The Bank of Cyprus is hardly off the hook here, since they will receive a 9 Billion Euro debt from Laiki and are responsible for recapitalizing absent any bail-out money.  So who pays?  Share and bondholders, and of course, those with accounts over 100k Euros are expected to receive a hit anywhere from 30% to 40%.  Considering nearly one-third of the accounts with over 100k Euros are held by Russian nationals, this has devastating implications for Cyprus’ off-shore wealth investment industry in the Eurozone.  Understandably, Russia pulled out of their initial offer to lend 2.5 Billion Euros over five years to mitigate the hit to the large number of Russian investors.  Negotiations are still underway to see if some arrangement is possible with Russia, given so many Russian account holders will be cleaned out with this new deal.

The fact that private bond holders will take a huge hit runs contrary to the original promise made by the EU saying Greece was the anomaly.  By backing out on its word here, what real assurances do investors and savers have that Cyprus’ deal is unique to only Cyprus?  Moreover, the fact that the EU and the Cypriot Government even seriously considered the initial plan to tax all account holders shakes the nest straight out of the trust tree!  Who’s to say that proposition won’t be revisited?  Who’s to say this is the one and only bailout for Cyprus?  There will be capital flight.  Of that, everyone is certain.  But if that wealth leaves, and no new capital come to Cyprus, how exactly is the Bank of Cyprus meant to endure the burdens with any modicum of success?  How is another bailout not already imminent?

Aside from the share and bondholders, lenders and affluent account holders taking a huge loss, with the closing of Laiki, and the recapitalizing of the Bank of Cyprus, thousands of jobs will inevitably be lost.  Any trace of confidence in the Cypriot banks has vanished.  The European Commission is levying controls on capital movement, transfers and withdrawals.  If they are being truthful about these controls being “exceptional and temporary”, then the moment they are lifted, wealth will flee the country… or at the very least OUT of the Euro and Cypriot Banks.

And what of the on-lookers like Spain and Italy?  How safe do they feel with the EU duplicating a strategy promised to never happen outside Greece?  How safe do they feel that anyone and everyone’s money is up for grabs when the going gets tough?  Capital flight will not stop at Cyprus.  In fact, there seems to be a global awakening in terms of distrust for government, banks and the currency they employ.  This awakening runs parallel with the series of bailouts happening.  With each intervention and “rescue” a few more folks snap out of their trances.

With capital flight, come economic refugees.  With economic refugees, comes demand for a new “home” for wealth.  And what do you know: from the thorn-bush emerges a rose!  A good friend of Global Wealth Protection, Jeff Berwick, stepped up to answer the call!  He expressed his intentions to install the first BitCoin ATM in Cyprus, and other wobbling countries like Spain and even Argentina!  The European Central Bank continues to discourage investment in virtual currency, but the EU has lost credibility in determining how to operate sound money.  And no matter how disparaging the conjecture may be, individuals are increasingly becoming uncomfortable with how little control they have over their wealth and assets when entrusted to a government “regulated” bank.

As I said in the last blog regarding Cyprus: people put their money into banks to keep it safe… but mainly just to keep it!  The world’s producers and savers may not use the exact words, but the intent is there: they want to OPT OUT!