That is how the European Union proposed to deal with Cyprus, which is a tiny EU nation with an economy about the size of Vermont. But, on a percentage basis, it has a huge banking sector, about eight times larger than the U.S. For us to have such a large portion of our economy in banking, we would need 25 more JP Morgan giants. One primary reason their banking sector is so huge is that it is the depository for the Russian oligarchs and Russian mafia, holding billions in dirty money.
So, when the Cypriot banks got into trouble (from making bad bets on Greek bonds), they asked from help. Like so many banks in Europe, the “Troika” (European Union, ECB, and IMF) offered a loan — for most of what was needed, but not all. For the remainder, they decided to take some of that dirty money to save the banks holding the money. For deposits over 100,000 Euros, the depositors will lose 9.9% of their deposit. For smaller deposits, they will lose 6.75%. Cyprus has something equivalent to our F.D.I.C. to protect their small depositors, but it does not protect small depositors against this confiscation. Small depositors are getting hurt badly. Social unrest is a real possibility.
This poses a question that should never be asked: Is my money safe in the bank? A “run-on-the-bank” is never a good thing. Depositors have already started lining up to take their money out of the banks.
If it can happen in Cyprus, why can’t it happen anywhere? Once that thought escapes, it is hard “to put the Genie back in the bottle.”
Asia fell sharply overnight. Europe is down, and the future market indicates the U.S. market will drop. But, here is the good news: It was just announced that the deal would be changed, without saying how. We are currently in “suspended animation.”
I have long suspected that “a Jim Fixx moment” or financial heart attack would come from a derivatives blow-up in Europe, and I’m watching this carefully.