I’ve said for some time that one of the reasons the US dollar and United States Treasuries remain well bid are the problems over in Europe.
The economic and social problems in Greece, Spain, Italy, and France are becoming increasingly obvious, and while the European monetary authorities respond to these troubles with calls for austerity and increased taxation, rising political movements ( AKA the “Euro-skeptics”) within these countries are calling for the abandonment of the Euro and a return to national currencies and monetary sovereignty.
The political cross currents of maintain the Euro at all costs versus the ditch the Euro and we’ll print our own money, thank-you-very-much, are the perfect recipe for uncertainty and doubt, which are the great enemies of fiat currencies (paper money) and bank deposits. In other words, is my money safe from taxation, confiscation, devaluation, or redenomination (into a new currency) where it is, or would I be better off putting it someplace else?
For bank depositors in Cyprus (an island nation in the Mediterranean near Greece and Turkey) this question has just been answered with a resounding “you shouldn’t have kept your money in Cyprus”.
Over the weekend Euro monetary officials have directed Cyprus to freeze all deposits in Cyprus banks and extract a “tax” of 9.9% on account balances over 100,000 Euros and 6.75% on accounts under 100,000 Euros. The banks will be closed Monday and by the time they reopen for business on Tuesday the special tax will have been deducted from your account! Thank you for banking in Cyprus.
Now it must be pointed out that Cyprus is to Europe what the Cayman Islands, or the Bahamas, are to the United States, namely an off-shore banking tax haven. Cyprus banks are full of Russian and British deposits and the “Eurocrats” are using the fact that Cyprus banks are receiving a 10 billion Euro bailout subsidy to remain solvent, and keep their depositors (relatively) whole, as the rationale for imposing this special tax. But call it what you will, the risk of having your Euro deposits confiscated, taxed, revalued, or marked down, is no longer hypothetical, it’s very real, and for depositors in Greece, Spain, Italy, and France it certainly begs the question “who’s next”?
Will the relatively insignificant 6 billion raised by the proposed deposit tax do anything to stabilize the Euro banking system or will it lead to further instability? History suggests depositors will flee from uncertainty and loss of confidence by withdrawing their money and taking their deposits elsewhere. It’ll be interesting to see if that elsewhere is the US dollar and treasuries. If so, expect to see a bounce as money migrates from European to American markets.
But first things first. Job one is to get your money out of the bank before they run out, or before capital controls are imposed. This is the essence of a Bank Run!