After the initial proposal to confiscate 6.75% of all deposits up to EUR 100,000 and 9.9% of all deposits above EUR 100,000, the final plan will instead take as much as 100% of deposits (in excess of EUR 100,000) at Popular and convert approximately 40% of such deposits at Bank of Cyprus into equity.   Strict new capital controls have also been implemented to limit further withdrawals of capital.  The damage to the EU banking system will be permanent.

The Cyprus Euro

A Euro in Cyprus is no longer worth the same as a Euro in other counties of the EU. Debit and credit card use outside of Cyprus has been limited to EUR 5,000 per month.  In addition, only EUR 3,000 in cash can be physically transported out of Cyprus.  A daily EUR 300 cash withdrawal limit has also been imposed.  Finally, checks can be deposited, but not cashed. Seriously? Who in their right mind would deposit more money into a Cyprus bank account?

The capital controls are scheduled to be in place for a week, but this period could be extended if necessary.  Months? Years? The longer the controls remain in place, the more likely depositors will be to remove their funds if and when the controls are ultimately removed.  I do not see a solution to this problem.  They sealed their fate as soon as they proposed stealing money from depositors.

This Could Never Happen Outside of Cyprus

The European Commission initially indicated that Cyprus was unique and that the Cyprus deposit "tax" would not be part of future bailout plans in other EU countries - until Dutch Finance Minister Jeroen Dijsselbloem suggested that confiscating the funds of uninsured depositors in Cyprus would be a template for future bailouts.

Confidence in the EU banking system has been irrevocably damaged.  Ineptitude on the part of the European Central Bank (ECB), the European Commission, the International Monetary Fund (IMF), and the Cyprus authorities has created a powerful incentive to remove funds from all marginal banks throughout the EU.

Take Your Money and Run

Depositors with balances in EU banks above the "insured" amount should remove those excess deposits immediately.  Only modest transactional balances should be maintained and only in stable EU countries with strong banking systems.  The same advice applies to other non-EU countries as well, even the United States.

Now that this precedent has been set, there is simply no reason to accept a risk of 100% losses on your deposits.  You are certainly not being compensated for this risk and it is completely avoidable.  In fact, there is no reason to hold large amounts of money in cash, at banks or even in brokerage accounts.  US T-bills could be held instead.

Will this damage the banking system and the economy?  Unfortunately it will, but the damage was done as soon as the idea of stealing money from depositors was proposed.  We are just playing by the new set of rules.  The last one out the door loses all of their money.

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Brian Johnson

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