The Cyprus situation had us all scared there for a moment. But they came up with a solution and investors calmed down. So, it’s all over now, right? Unfortunately, the answer is no.
In Cyprus, the reality turned out much worse than initially thought. When the buzz started that they were going to levy bank deposits, they were threatening to take an unprecedented 9.9 % of deposits totaling more than 100,000 euros, and 6.75 % on lesser amounts. Ultimately, the smaller tax was scrapped. The tax on larger deposits remained, however, and the scary reality is much worse than a mere 9.9 %. According to the Washington Post, some account holders stand to lose up to 80 % of their savings!
Obviously, such government-sanctioned thievery has made banks very untrustworthy places to house one’s life savings. Luckily, that’s all the way over there in Cyprus. What happens over there doesn’t affect us, right?
Unfortunately, it does.
What frightened investors when this situation began was the possibility of the practice spreading to other countries in the eurozone and beyond. And much reporting on the bailout deal that Cyprus and the EU finally came up with would have us believe that it will not, but Cyprus was not an isolated event.
In fact, the European Parliament is actually in the process of using what happened in Cyprus as a template for future situations in the EU. It is now very likely that this template will be made a law that will take effect starting in 2015. In other words, instead of finally regulating banks so that they can’t take the risks that cause them to fail, they are setting up a legal framework that passes the buck directly to citizens when those institutions inevitably fall flat.
Also considering bail-ins, either as part of a legal framework for possible failures or as immediate solutions, are Denmark and Slovenia.
Other countries might have already been considering making “bail-ins” regular legal action before Cyprus even started making worldwide headlines. Such bail-ins are included in the 2013 Canadian government budget. But they didn’t get the idea from Cyprus. The budget was released on March 21, which means the Harper Government was considering such action before Cyprus went viral. From Canada’s 2013 Economic Action Plan:
The Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks to taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.
Here “conversion of bank liabilities into regulatory capital” is euphemistic legal mumbo jumbo for “steal money from citizens.” And attempting to soften the blow by claiming that they are doing it to “reduce risks to taxpayers” is utterly ridiculous. Don’t taxpayers keep their money in banks?
Furthermore, that “unlikely event” seems be happening more and more often these days, doesn’t it?
The Moral of the Story
So what have we all learned from this? The biggest lesson to take away from these unsettling turns of events is that banks are no longer suitable institutions to trust with securing our finances. Even “insured” deposits aren’t safe in such an economic climate as this, as we saw in Cyprus.
There have yet to be any reports of the practice being suggested for use in the United States, but it seems to be pretty contagious. U.S. investors have the option of believing the American Banking Association when they say that they won’t do what Cyprus did, but it’s probably safer to prepare. Our government isn’t known for being very harsh on unscrupulous banking behavior. In fact, it has shown that big banks can even get off with a pecuniary slap on the wrist for helping drug cartels and terrorists launder billions of dollars. To have faith that the U.S. banking system is a safe place for one’s finances could be seen as a financially fatal move in the coming years.
The best way to protect wealth is to invest in gold bullion bars and coins. When banks can’t be trusted, having your wealth stored right there at home in an asset that will always retain its value is an option that has no alternative. Gold is the ultimate asset to have in a crisis.
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