Cyprus: Chasing the Wrong Culprit?

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by Adam Richardson

“Huge losses”, “Tough terms”, & “Strong medicine” – a few choice phrases that jumped out at me this morning while quickly scanning the news about Cyprus.

 

Quick scans, that’s the only way I allow myself to read the news these days.  This is in order to get a general feel for whats happening (or at least how it is being portrayed in the media) without indulging in the toxic spew of opinions and wildly spun variations of what is a fairly straightforward story.

cyprus bailout
Bank Runs In Cyprus

By the time my coffee cup was empty I was done scanning and went out for a morning walk in the springtime sun, a ritual that helps to clean my head for the day and detox from the brief exposure to the news.  Upon returning home I found I had received an email from a friend who has been thinking about Cyprus as well.

 

The following is what my friend Nigel “The International Austrian” has to say on the matter (as Nigel is specialist in economic analysis, I listen to what he has to say.  I suggest you do as well)…

Enter Nigel Bolton Shaw:

Der Spiegel reminds us that the fallout from Cyprus continues. The decision of Brussels to encourage Cyprus officials to confiscate up to 60 percent or more of the funds of big depositors is going to have long-term effects – beyond what was intended.

The article entitled “Bail-In Blues,” reports that Luxembourg leaders are convinced more bank deposit levies could lead to a Eurozone panic and a generalized departure of capital from European banks. Of course, Luxembourg itself has a great deal to lose as a so-called tax haven.

Tax havens are districts that attract depositors with promises of bank secrecy and generally secretive services that are enticing to those who do not want to make their savings generally known. The money deposited may or not be “illegal” or even untaxed but such is the reputation of tax havens that the assumption is such funds are not entirely legitimate.

In the case of Cyprus, Brussels in particular wanted to make a statement that an Eastern European and Russian element attracted to the island nation because would suffer consequences from their use of such services. Surprisingly, Russia itself went along with the EU’s perspective, with Vladimir Putin making it clear that his country has no more use for such tax havens than the EU.

Despite this united front, many voices have been raised especially in the media warning heavy handed tactics are going to backfire. And even though Luxembourg is a “tax haven,” this doesn’t make the warning emanating from its leadership any less credible. Here’s more from the article:

http://www.spiegel.de/international/europe/luxembourg-warns-of-investor-flight-from-europe-a-891672.html

The debate over this week’s “bail in” of bank account holders in Cyprus as part of the country’s debt crisis bailout is continuing to simmer in Europe. In Luxembourg, Finance Minister Luc Frieden has warned that the example set in Cyprus by taxing people holding €100,000 ($129,000) or more in their accounts could drive investors out of Europe.

Earlier this week, Euro Group President Jeroen Dijsselbloem sparked an enormous controversy after stating that the solution found in Cyprus could be applied throughout the euro zone in the future.

The remark triggered immediate criticism from his predecessor as head of the Euro Group, Luxembourg Prime Minister Jean-Claude Juncker. “It disturbs me when the way in which they tried to resolve the Cyprus problem is held up as a blueprint for future rescue plans,” Juncker told German public broadcaster ZDF earlier this week.

“It’s no blueprint. We should not give the impression that future savings deposits in Europe might not be secure. We should not give the impression that investors should not keep their money in Europe. This harms Europe’s entire financial center.”

But in the European Parliament, politicians are considering ways to make banks bear greater responsibility for their own financial problems. Lawmakers are considering the European Commission’s proposed banking resolution legislation for faltering financial institutions …

Regardless of the exact nature of these regulatory discussions, Jean-Claude Juncker is correct that using Cyprus as a blueprint is counterproductive. The EU is trying to send a message to those with illegal money pools that their funds are not safe anywhere in the world, but this is not a message that will resonate.

What WOULD work is less taxation and fewer monetary and fiscal regulations – thus reducing the incentive for tax avoidance and money laundering. But the idea that raids on perceived offenders will create a generalized acceptance of monetary rules is likely naïve. The profits that are taken by such actions are tangible, while the penalties are only hypothetical.

It is far more likely that Brussels, by insisting on the Cyprus “bail in,” has badly frightened small savers that make up the bulk of many bank customers.  In doing so, it is destabilizing an already fragile bank structure – and on that EU officials have worked on stabilizing for the past half decade or so.

EU officials have in the past denounced “tax competition” involving various EU countries that seek to undercut each others’ industrial policies by offering favorable rates to tempt businesses and wealthy potential citizens. But this sort of competition is a fact of life, given that the EU’s reach is continental not global.

Much better to reach accommodations with citizens over optimal tax rates and regulations that are sensible rather than overly burdensome. This would go a long way toward reducing non-compliance and make the EU’s efforts at stabilizing and expanding the eurozone more effective.

As it is now, EU officials have the worst of both worlds. The Cyprus example will not deter those who are aware of the profits to be made by flouting EU dictacts. At the same time, smaller depositors that make up the majority of commercial banking business are now going to be tempted to secure their funds by removing them or sending them outside the EU.

Whatever EU officials were thinking, they may wish to generate a “rethink.” They are not apt to realize their goals and may indeed be worsening the situation they intended to rectify.

Nigel Bolton Shaw specializes in international Austrian economic analysis and writes for numerous publicationsincluding Global Speculations where you can see more of his work on a regular basis. Latest: ‘Tax Havens? Russia Stands Aside’ @ http://www.globalspeculations.com. Articles provided to Q Wealth are original compositions not to be found elsewhere.   

Adam again.  What do you think, what lessons are we to take away from all of this?  More importantly, how can we help you to make YOUR plan?

 

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6 thoughts on “Cyprus: Chasing the Wrong Culprit?”

  1. The Central Banks are all corrupt. At this point it's all just a shell game courtesy of fractional reserve banking and fiat currency. I try not to keep money in banks or in cash. Rather, I try to keep it in cash flowing assets and hard money.

  2. I just opened a Swiss account (as I live and work here) and it was awkward for me as an American… I had to go to a certain office, and some banks just flat refused my business! Are there still banks worth using in Europe? I am sad to see this state of affairs in a place I always thought was bank-friendly. It looks like they are even signing off on FATCA.

  3. What lessons are we to take from all of this??? If I were in control of the Cyprus government I would have solved the problem overnight. I would tell the European Union to go jump in the lake and say goodbye to the decrepit Euro forever. The so called European Union should be renamed the German Union. And, may I add that the so called European Union is the biggest scam ever conceived? Those countries that are raped by Germany stay within the Euro Zone for one simple reason. Their governments are being paid off to turn the blind eye because Germany is sucking the blood of those countries and it will continue sucking until there's no blood left. In the meantime the governments of those countries at the end of the day will depart and go live abroad under the sun in luxury from the spoils they collected by selling out their countries. It doesn't take a rocket scientist to figure out the fraud that took place in Cyprus. The politicians are not rocket scientists but they are crooks with privileged information that the rest of us don't have in order to make decisions that affect all of us. They are not necessarily charismatic or more intelligent. If anything, they are stupid and short sighted. One has to wonder how they made it to the top. Someone said that only eagles and worms make it to the top. I will have to say that in this case they are all worms!!!

  4. Hi,
    Adam, you need to decide what you stand for: do you want unsecured creditors of a for-profit organization to pay for their stupidity to keep money in insolvent banks who were hoping that they will be bailed out or you are happy to transfer the cost of this stupidity/carelessness to taxpayers?

    For he last five years people at Q-Wealth, Sovereign Man, Stansberry Research, Casey Research, and other really reputable organizations have been pointing out the fact that the tails I win heads you lose attitude of bankers is corrosive to the soundness of any financial system. Exactly what would have been your suggestions to save the banking system of Cyprus? More than 84% of the liabilities of banks were deposits. All the shareholders and bondholders were wiped out, but exactly what would be your suggestion to pay out big depositors without a government guarantee? Do you want to transfer the burden to others to pay or you want them also to pay for their stupidity?

    For me the answer is very clear. It is the principle of normal capitalism that you, as an unsecured depositor must take responsibility for your actions. The only mistake in the original proposal was to take money from the sacrosant depositors guaranteed by the deposit-guarantee system. Otherwise the ECB showed that unsecured creditors of a capitalist enterprise should also take the burden for the mistakes.

    I think a very good sign has been sent that use your brain in deciding who your counterparty is in the banking system.

  5. I have so little faith in the entire banking system that this latest piece of banker-theft leaves me rather cold. What can one do if one has paid taxes, saved money, exercised self discipline all one's life, and now in retirement with only one's savings – in order to feel secure? To be frank I am at a loss. I consider all banks in league with big government which, in turn, seems to be driven by international corporate greed as well as personal greed. There appears to be a widespread lack of recognising foundational principles which always predict the future of any enterprise. If principles of good management, uniting people under goals that help everyone were utilised – rather than divisive political c orrectness – each individual would be more likely to take action to hold banks and government policy makers accountable. But the divide and conquer, group rights approach is destructive to the core.

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