Cyprus Gets Bailed In

The financial world was rattled this weekend by the dramatic plans out of Cyprus. All bank accounts there will be dinged in order to help bailout the banking sector. The initial plans say that accounts in excess of 100,000 euros will be subjected to a one-time tax of 9.9%. Accounts under 100,000 euros will be hit by 6.75%.

Let me explain the background. Cyprus has become a tax haven, and a lot of Russian oligarchs have used Cyprus’ banks in order to stash their earned cash from, shall we say, unsavory activities. That’s really who the authorities are going after. As a result of Cyprus’ tax haven stand, their banking system has grown overly large so any attempt to bail them out by their government would soon become a sovereign debt crisis. From the European perspective, elections are coming up in Germany so Angela Merkel is in no mood to come to the rescue yet again. That leads us to this one-time deposit tax.

What are the ramifications for the U.S. market? I’m inclined to say, not much. In fact, this might even help our markets because it will increase the demand for dollars and peace of mind. Treasury bonds are up today. Last night, I saw that S&P 500 futures were down by as much as 19 points. We’re down today, but only by eight points. Gold is currently up but only by $10 per ounce. That’s hardly a big move.

Here’s the mistake I think that many investors make. They tend to draw out the chain of events beyond reason. We see this with Cypress in that people are afraid that a Rubicon has been crossed and authorities will go after any bank savings. The precedent has been set so there’s no turning back. The fear is that next there will be a bank run in Portugal. Then Spain. Then Italy. All across Europe, bank accounts will be drained.

Slow down. Those concerns are definitely real, but it’s still very unclear how certain that risk is. I’m puzzled why the hit to smaller savers in Cyprus is so large. I would think that it should be aimed at the larger fish, and perhaps the plans will be reworked to do that. Until we know more, no one should be worried about Cyprus bringing down the U.S. stock market.

Posted by on March 18th, 2013 at 11:09 am


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