Cyprus Banks Seize Customer Deposits
A financial catastrophe happened in the world today and most people hardly noticed. As part of a European bailout agreement, the country of Cyprus froze depositor’s bank accounts and will seize part of their assets. This is the first seizure of private assets since the financial crisis began. I doubt it will be the last.
Here is How it Happened
Many of the banks in Cyprus are insolvent. When they requested a bailout from the European Central Bank to stay afloat, the bankers insisted depositors should pay for it. So, the banks in Cyprus shut off the ATMs and wire transfers out of the country on Friday night. The banks remained closed on a “bank holiday” today and they may remain closed until Thursday. They imposed a levy on depositor’s assets in the following amounts:
- 6.75% on deposits < €100,000
- 9.9% on deposits > €100,000
Most important, the bondholders (aka bankers) didn’t lose any money on the deal. They kept all of their assets while depositors lost part of theirs. Legally, the bondholders should have to write down the value of their bad debt and depositors should be protected. Instead, the government of Cyprus essentially confiscated part of their deposits.
Why it Matters to You
What happened in Cyprus today sets two undeniable precedents:
- Private wealth may now be seized in order to pay public debts
- Central bankers wield more power than sovereign governments
Anyone who thinks this is an isolated incident in an insignificant country is clearly naive or delusional. This is just the first attempt at extorting the private wealth from debtor nations. If the central bankers in Europe are successful, they will be emboldened to use this technique all around the globe. Cyprus was likely chosen because it was small and relatively powerless. It was also a tax haven and there were lots of foreign deposits. Soon, other debtor nations may be in the cross-hairs of their bondholders, including America.
For anyone who thinks that’s impossible, think again. Five years ago, no one in America thought our government would provide an $800 billion bailout to failed U.S. banks and lend trillions of dollars to foreign banks around the world. But, it did happen and there was no way for the citizens to stop it. We still owe much of the debt for that bailout, as the bankers profited and our government claims the money was paid back. If the banks in Europe or America freeze depositor’s funds, we will be just as powerless as they were in Cyprus today.
Update 3/30/13
After the parliament of Cyprus rejected the initial bailout plan, the European Central Bank played hard-ball. Depositors with over €100,000 will receive shares in the banks worth only 37.5% of their original deposits. So they stand to lose over 60% of their money and that’s if the banks do well, after the bailout.
Banks reopened Thursday for the first time since March 16. Customers lined up at ATMs, but withdrawals were limited to €300 per day. The ECU will review all commercial transactions over €5,000. Deposits over €100,000 are currently frozen. No one is allowed to take more than €1,000 off the island. Local businesses have no money for payroll and customers have little money for purchases.
The thing that disturbs me the most about this disaster is the way central bankers have blamed depositors for the mishandling of the money by the banks. Depositors aren’t the ones who chose to invest in Greek sovreign debt, bankers were. Yet, the depositors were repeatedly singled out as contributors to the crisis.
“Together in the Eurogroup we decided to have the owners and creditors take part in the costs of the rescue – in other words those who helped cause the crisis.”
Wolfgang Schaeuble – German Finance Minister
The Bottom Line
The bottom line is that politicians around the world are simply the corrupt puppets of the moneyed interests. The further they lead us into debt, the worse conditions become for our citizens, our economy and our sovereignty.
“And to preserve their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.”
Thomas Jefferson – 3rd President of the United States
Recommended Reading
Len Penzo – 9 Important Tips for Managing Financial Risk
Online Investing AI Blog – Why Too-Big-to-Fail means Most-Likely-to-Fail
Financial Samurai – Diversify your Assets and Never Trust the Government
A cogent analysis Bret, and I better appreciate now the import of what’s happening in Cyprus.
I’m very interested to see what’s next. If it becomes apparent to depositors in other, and larger, debtor countries that their bank deposits may be subject to partial confiscation, the next logical step on their part would be to withdraw their money pre-emptively. If that begins to happen, might regulators forbid or seek to control what would be a potentially catastrophic continental bank run?
Imagine how that would make one feel: Your money held hostage in a bank so that the assets can be preserved in case needed for future confiscation. ‘Them’s revolution words’, seems to me.
Kurt,
I think there are huge problems on two levels. First, there are the ultra-rich, who have been shuffling money around the world through offshore bank accounts for years. This has to scare the heck out of them, to know their money can be confiscated so easily. I believe most governments like what happened today, because they are trying to keep money captive and capture tax revenue.
Then, there are the wealthier middle-class, who have been saving their whole lives, hoping to retire. This has to scare the heck out of them as well. I’m the not-so-wealthy middle class and it scares the heck out of me. If I lived in one of the PIIGs countries, I would be freaking out and withdrawing my money ASAP. It could definitely cause runs on European banks. We shall see.
Wealty individuals must see this as a huge problem, knowing that their assets and investments can be confiscated easily. The most logical situation is to withdraw the money and thing another way to keep the assets and investments. Hope there is a better solution for this.
Gold, silver and even Bitcoins are becoming popular. Now that central bankers have resorted to outright theft of deposits and gotten away with it, anything is possible.
If it is not safe anymore to save money in the bank, people will withdraw their money… and this will be a problem for the bank. But if i were the private wealth surely but sure I will withdraw my money and invest them in another form like gold or property.
It’s pretty scary to see banks and governments confiscating people’s wealth. I hope this is just an incident and not a trend. Nobody seems outraged about it happening.