Get Your Money Out of the Euro Zone!

So the European political elite went ahead and did it. They forced Cyprus into seizing people’s bank deposits. They are taking 40 percent – yes, forty percent – of the deposits above 100,000 euros in one of the two largest banks and essentially wiping out deposits above the same level in the other.

This will effectively destroy the banking sector in Cyprus and cause a plunge in the nation’s GDP. Today we learn that this might have been the intention all along.

But it does not stop there. More euro-zone countries have already pledged to adopt this confiscation method, which means two things: 1) anyone with common sense and a fistful of dollars stashed away somewhere in the euro zone should pull his assets out right now; and 2) this is opening up to become a currency war between Europe and America.

More on these two points later. Let’s start with the actual deal that Cyprus was forced into accepting by the Eurotarians in Brussels, Frankfurt and Berlin. Bloomberg News reports:

Cyprus dodged a disorderly default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid. Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets.

They would never have kicked Cyprus out of the euro zone. Frankly I doubt that they could actually have done it, technically. This would be like the United States trying to force dollarized Latin American countries into using their own currency. But it would also have opened the opportunity for other euro-zone members to exit in order to save themselves from crippling austerity programs. A Greek exit would probably have been right around the corner, with Portugal presumably to follow.

The EU, the ECB and the German government would never have done everything to prevent this. Cyprus should have called their bluff.

The fact that they did not raises a certain number of more shadowy questions about under-the-table deals. But let’s leave those to the investigative reporters. Back now to Bloomberg, which reports that the plan to seize bank deposits was not something that the Eurotarians came up with as a last-minute solution. On the contrary:

Cyprus, the euro area’s third- smallest economy, is the fifth country to tap international aid since the crisis broke out in Greece in 2009. The first Cypriot accord, reached March 16, fell apart three days later when the parliament in Nicosia rejected a key plank, a tax on all bank accounts that sparked the indignation of smaller depositors.

This deposit confiscation scheme is now going to spread to other countries. More on that in a moment. Now for the real shocker in the deal:

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest. Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

So there you have it. Confiscation at the 40-percent level, elimination of some deposits and a virtual destruction of the Cypriot banking industry. Which, again, was apparently part of the purpose all along:

The squeezed banking industry will likely lead to a “sharp drop” in Cyprus’s gross domestic product this year and next, according to Reinhard Cluse, a London-based economist at UBS AG. As a result, the euro group’s debt-to-GDP ratio target of 100 percent by 2020 “must be doubted,” he said. The Cypriot Finance Ministry said in a January presentation that bailing out the country may push debt to a peak of about 140 percent of GDP next year.

The debt ratio is no longer the primary issue for Europe’s political leaders. Their goal is to maintain the euro zone as it is and to open up a currency war on the United States. Thre currency war is unequivocally at the request of the Germans, whose manufacturing industry is stagnant while their competitors in the United States are doing reasonably well.

In order to keep the euro zone together and create a currency war the Germans and the EU-ECB leaders are willing to once again trample upon the very livelihood of European citizens. Just as the UBS economist says, the wiping out of the Cypriot banking industry will severely affect the Cypriot economy. But we know from before that the Eurotarians have no problems destroying the economy of an EU member state to get what they want. They wiped out a quarter of the Greek economy in four short years and they forced Portugal into austerity measures that have shrunk their economy so it is no bigger today than it was a decade ago.

Again, the two-fold goal of the Cyprus bank heist is to secure the euro zone as it is and to cause a long-term depreciation of the euro. In order to accomplish the latter, the Eurotarians have to create a certain, calculated level of capital flight from the euro zone. There are several ways to do this, but the instrument they have chosen – seizing bank deposits above a certain level – is devious enough to work. However, to cause a “right-sized” exodus you cannot limit the scheme to one country. You need others to follow. Alas, EUBusiness.com reports:

Three small eurozone countries — Finland, Estonia and Ireland — said Sunday the private sector ought to be involved in future financial rescue packages for member states. “There must be some private sector involvement,” Irish Minister of State for European Affairs Lucinda Creighton said on the sidelines of an informal retreat in Finnish Lapland on the future of Europe. Finland, which hosted the two-day meeting of European leaders in Saariselkaeae, said the proposed Cyprus rescue package marked a departure from previous packages. … “We are moving from a system of bail-out to a system where we decouple the connection between the bank and the sovereign. We are going towards a system of bail-in,” Finnish European Affairs Minister Alexander Stubb said. Under a bail-in, creditors share the burden by forfeiting part of their investment to help rescue a bank.

Now, let’s be apprehensive of the details in this. The Cyprus bank heist was not about saving the banks per se. It was about getting revenue for the government from a new source. In other words, the deposit confiscation is a one-time tax that replaces other taxes, such as a temporary increase in income, property or consumption-based taxes.

As a source of revenue for government, the deposit confiscation can serve to finance any spending need the government might think it has. That it is tied to a bank bailout is of less importance, though not insignificant. It is easy to sell this tax to the public if it is tied directly to a bank bailout; however, once people have seen this “tax” be used once, they are also willing to accept it for other, supposedly equally urgent measures – such as to close a large government budget deficit.

Neither Finland nor Estonia have any urgent problems in their banks, yet their governments are eager to endorse bank-deposit confiscation as effectively a kind of “emergency tax”.

Expect other euro-zone countries to endorse this egregious violation of private property rights. Once enough of them have done so, and one or two more countries have used it (hello, Portugal and Spain?) there will be a momentum of fear among investors in the euro zone, enough to propel a certain amount of money to leave. This is a risky game, of course, because the drainage could be so large that  it affects the viability of the banking industry in the euro zone. However, I doubt that this is of any concern in Eurotarian circles: they have taken enormous risks already to get what they want; the game they played with Cyprus about expelling them from the euro zone was just the latest example.

A sizable flow of money out of the euro zone would cause the euro to depreciate, especially vs. the U.S. dollar. This way the Germans can de facto use the currency of the euro zone to neutralize the cost of their own ridiculous restructuring of their energy sector in a “renewable” direction.

Political cynicism at the highest level. Unfortunately, it looks like the Eurotarians are getting away with it, especially since they are being supported by so called “non-government organizations”. These NGOs are helping castigate Cyprus as a nation that deserves to be hammered like this. After all, Cyprus has committed two evils: they are a haven for off-shore banking and they are a low-tax jurisdiction.

Cardinal sins in the eyes of some. Behold a second story from EUBusiness.com:

In the heat of a crisis which has left it on the brink of bankruptcy, NGOs have accused Cyprus of a host of economic wrongdoings — as a tax haven, a hub for money laundering, and of financial opacity.

How about that… financial opacity. Don’t you just love it when statists invent new, fancy terms for the same old hate-the-rich ideology?

French Finance Minister Pierre Moscovici has spoken of excessive expansion and lending in the financial sector of an overbanked country. He put the total capital of the banking sector at seven times gross domestic product, with deposits paying annual interest rates of 5-6 percent, with non-residents — especially Russians — accounting for a large portion. According to a study by the Institute of International Finance (IIF), a banking lobby group, non-residents accounted for 20 billion euros ($25.8 billion) of deposits, out of a total of 52.2 billion euros in Cypriot banks. Citing figures from the European Central Bank, the IIF said 85 percent of those non-resident deposits came from clients outside the European Union, in particular Russia, Ukraine and Lebanon. Other countries, chiefly Germany, suspect Cyprus of having turned a blind eye to money laundering, with an independent European audit lined up to verify.

So the uniquely vicious assault on the Cypriot economy also serves the purpose of bringing a low-tax jurisdiction to its knees. Such jurisdictions pose a threat to high-tax welfare states who do not want their taxpayers to have a better alternative than to stay at home. Once the high-tax jurisdictions, led by Germany, have subjugated Cyprus, others will hesitate to use low taxes to compete for foreign investments. Otherwise, countries like Greece, Ireland and even Italy – not to mention possible breakaway provinces like Scotland and Catalonia – could do just that in order to kick start their economies.

Shutting town the “tax haven” of Cyprus is therefore an ancillary benefit to the Eurotarians.

It is going to be a turbulent spring in Europe. Let’s hope we can keep its fallout away from our shores. And whatever you do – get your money out of the euro zone!

4 comments

  1. Pingback: See I Told You So: Get Out of Europe! | The Liberty Bullhorn
  2. Pingback: Sven Larson: “See I Told You So: Get Out of Europe!”
  3. Pingback: . . . the euro, like many of the world’s currencies, is private money created by private banks. When they want some of it back, they are well within their theoretical rights to take back their ‘property’, which they only lent to you and