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Monday, March 18, 2013

Cyprus Explained: Taking Money from the Savers

***Please feel free to leave comments or ask questions at the bottom of the article. We will reply or will write a special article to answer your questions.***

What just happened in Cyprus is not that hard to explain.

Savers have money. The government of Cyprus and the European Union needed money.

So they are trying to take the money from the savers.

It is that easy.

The Government of Cyprus needed money to bail out its poorly managed and over inflated banking sector. After years of mismanagement and months of negotiation, it became clear to the recently elected government of Cyprus that the rest of the Eurozone was not willing to bail out Cyprus like it had bailed out Ireland, Greece and the Spanish Banks.  This was partly because Cyprus is small and virtually powerless. But is it also true that many European politicians believe Cyprus handles a lot of money for what is politely called “non resident Russians.”  In other words, a lot of folks believe that the Cypriot banking system does money laundering for the Russians.  As such, it would not be good for the Troika (European Union, European Central Bank and the International Monetary Fund) to be seen to be using taxpayer’s money to bail out banks with questionable reputations.  Of course, lots of other banks do money laundering for criminal organizations (hello to the nice folks at HSBC) but they are large banks from powerful countries and they have been deemed “too big to prosecute” no matter what sort of dubious activities they undertake.

Therefore, the Troika told Cyprus that it would have to take money from their own working citizens and from foreign customers. The final outcome is unclear, but it looks like Cypriot bank account holders could lose anywhere from 6.75% to 9.9% or their money or more. In financial terms, this is called “getting a haircut.”

The shock this time is that it is not bond holders or major investors who are getting the haircut. It will be the average Cypriot citizen that is getting scalped – along with some “non resident Russians.”

Remember this if you have cash in a bank anywhere in the world.  If that government needs money they can do several things to get it. They can tax you, borrow more money, print money, create inflation or even selectively default on loans. When things get really bad, they can just take money from responsible citizens who save money – because these days they are often the only ones that have it.

This is economics for the rest of us - at least those of us who try to save some money now and again!

(See the video at - Protesters in Cyprus remove the flag from the German Embassy. Most Cypriots (and Greeks) blame Germany and President Angela Merkle for the austerity policies which are causing unrest).

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