The confiscation of a large proportion of Cypriot bank deposits – above a €100000 threshold – as part of a financial program between Cyprus and the EU/IMF signals a new chapter in the developing crisis. Here are a few thoughts to be considered in conjunction with the comments of Dutch Finance Minister Dijsselbloem (Eurogroup head) in an interview with Reuters here:
- The determination of EU leaders to stick with the Euro-Project has been underlined. It clarifies that the EU/ECB are prepared to utilise all sorts of measures, many of which might almost have been considered taboo until now.
- The ECB has shown itself to have a much more stringent approach than the Anglo-Saxon central banks. The confiscation of deposits is intended to raise only a measly €5.8 billion. The ECB could easily have printed up the base money for this, but did not do so. Compare this with the massive bond-buying programs taking place in London and New York – as well as Tokyo.
- Large depositors will from now on be regarded not as savers but as investors. That is, they will be expected to have performed due diligence regarding the financial health of the bank, and to bear a part of the losses should things turn out not as well as forecast.
- Large depositors will become understandably much more skittish with regard to leaving their money in bank accounts, particularly in the other crisis-hit countries. Although some have laid emphasis on the special nature of the Cyprus situation, it would be a foolish saver who left several hundred thousand Euros in a Greek, Spanish or Portuguese bank account from now on.
- Interest rates available to investors in bonds or to bank account holders throughout much of the West are now below inflation rates. This effectively constitutes a form of confiscation. For example the 10-year US Treasury Bond currently yields 1.84% compared to an official CPI (inflation Rate) of around 2%, while John Williams of shadowstats estimates the real inflation rate to be about 5,5%. Rates offered by banks on savings accounts are generally below the inflation rate. Given these facts, together with the general global financial environment and the prospects going forward, anyone whose savings are in a bank account needs their head examining.
- What these measures imply is that as determined as the ECB is to maintain the Euro’s role as a medium of exchange, it is not particularly interested in promoting the Euro as a means of saving. Historically, currencies such as the British Pound and the US Dollar have attempted to fulfill both roles – to be all things to all men.
- The confiscation has not been sold too badly to the mass public in the EU, particularly after the decision was taken to spare accounts with less than €100000. The fact is that a large proportion of the population lives from paycheck (welfare check) to paycheck (welfare check) and has no savings to speak of. They thus do not identify with the large account holders. Added to this, the typical large account holder has been depicted as a Russian oligarch whose money is of dubious origin. This has helped the confiscation to attract support. That many of the affected savers may for example be small businessmen (restaurant owner or builder) and that the money represents the work of many years has not received the same attention.
- The reset is getting closer.