How Cyprus bailout fiasco could cause chaos
Cyprus says it is planning to pilfer up to 10 percent of ordinary savers' accounts. If people in other southern European countries think it could happen to them too, prepare for anything
In normal circumstances you would take a look at the reports about the government of Cyprus's plans to plunder people's savings as part of the latest eurozone bailout package and you would assume that someone had perpetrated a hoax. But given the gap between what the EU thinks and what happens in the real world, it seems these days that anything is possible.
Even by eurozone standards, this is a reckless and ill considered course of action. For the vast majority of people, the whole purpose of putting savings in the bank is to park them somewhere safe. Confidence is therefore key. If the government can simply turn round and swipe a portion of your life's savings you will a) obviously not place your savings in a jurisdiction where that might happen, and b) instantly remove your savings from any jurisdiction where it has now been announced that it can happen.
It shouldn't have taken a genius to predict that the immediate reaction of depositors in Cypriot banks would be to get every last penny out of them as soon as humanly possible. Since it is the weekend, and since tomorrow is a national holiday in Cyprus, they can't actually get through the front door. Surprise, surprise, they are therefore withdrawing everything they can from the ATMs, most of which have by now run out of cash.
When they do get into the banks on Tuesday it will be too late for them to secure their funds. The money will already have been stolen. Precautions have also been taken to stop people transferring money electronically.
So what do you think's going to happen when they do get access to their accounts? What would you do? Since you now know that the government is capable of pilfering your savings in Cyprus you'd likely close your account and move the money elsewhere -- Switzerland, the UK, the US etc. If they've done this once they could do it again, you would think. The confidence is gone forever.
The risk then must be that this move causes runs on all the Cypriot banks. But that's not all. The move was apparently pushed by the Germans. Every depositor in southern Europe has now been put on notice that if their country needs bailout money any time in the next few years the deal could easily involve swiping money from the accounts of ordinary savers.
Again, what would you do? If you're a Spanish saver, for example, why would you leave your money in a bank in Spain? It's not hard to open a bank account in a foreign country. If it means protecting your savings, why not just go ahead and do it?
If this does happen to any significant extent, in Spain and elsewhere in southern Europe, the next few days could be very rough indeed. As I say, it all depends on confidence, a commodity that is easy to lose but difficult to acquire.
The way in which the press in the countries of southern Europe decide to play this will probably be the crucial issue. If they start running front page stories warning savers of the risks to their deposits, there will be panic. And if southern Europe's banks go down, the euro goes down with them.
Back in Cyprus -- where public fury is predictably mounting -- the deposit tax plan is due to be voted on in parliament on Monday. But even if it is rejected, one thing is now clear: if you have your life savings in a bank located in a eurozone country in the south of Europe you can never again be sure that your money is going to be safe.
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