Some have asked me today about the Cyprus situation and whether it affects me and not-his-real-name Rupert in Italy. Short answer: no. Even if a ripple-effect bank run spreads through all the “troubled” Mediterranean countries, we’re fine because we don’t have any of our “real” money in an Italian bank; we only have enough here in euros for bills and daily life. And there will be no riots in our Turin neighborhood, and basically, no, we’re not worried about ourselves in the near term. We have resources.
But what’s happening now in Europe is worrisome in the long term, even for Americans living in America. Which is why I’m baffled that so few of my friends and family pay even vague attention to the European financial news. It’s like no one’s ever heard of dominoes.
This Business Insider article puts it in as simple of terms as possible:
Here’s the short version of what’s happening:
Cyprus’s banks, like many banks in Europe, are bankrupt.
Cyprus went to the Eurozone to get a bailout, the same way Ireland, Greece, and other European countries have.
The Eurozone powers-that-be gave Cyprus a bailout — but with a startling condition that has never before been imposed on any major banking system since the start of the global financial crisis in 2008.The Eurozone powers-that-be (mainly, Germany) insisted that the depositors in Cyprus’s banks pay part of the tab.
Not the bondholders.
The depositors. The folks who had their money in the banks for safe-keeping.
When Cyprus’s banks reopen on Tuesday morning, every depositor will have some of his or her money seized. Accounts under 100,000 euros will have 6.75% of the funds seized. Accounts over 100,000 euros will have 9.9% seized…
…not surprisingly, news that deposits in Cyprus’s banks would be seized triggered an immediate run on the banks.
Depositors rushed to ATMs and tried to withdraw their money before it could be seized.
But the ATMs weren’t working. And the government has now made it impossible to transfer money out of the country.So, assuming Cyprus’s government approves the deal (still pending), depositors will have some of their money seized on Tuesday morning…
Other depositors at weak banks all over Europe, in places like Spain, Italy, and Greece, will rightly wonder whether this is the beginning of a new era of bank bailouts, an era in which bank depositors are going lose some of their money.
What do you think those other depositors in Spain, Italy, Greece, etc., are going to feel like doing when they realize that, if their banks ever need a bailout, they might have their deposits seized?
That’s right.
They’re going to feel like yanking their money out of their banks.
And if some of them yank their money out of their banks, well — then the financial condition of those banks will go from weak to insolvent.
And the banks will go rushing to their governments and the Eurozone for help.
And if, god forbid, the Eurozone decides to seize the deposits of more bank depositors …
Well, then, a good portion of Europe is going to suddenly experience a good old-fashioned bank run.
That, to put it mildly, could be a disaster.It could bring the European financial crisis, which has lurched from one flare-up to another for most of the past five years, to a rather sudden head.
How much would it cost for the powers-that-be to bail out all of Europe’s weak banks at once?
A lot.
More than the Eurozone has in its emergency lending facilities, certainly. And more than the International Monetary Fund has on hand.
So the U.S. would probably have to get involved.
And, regardless of whether the U.S. needed to get involved, the European economy would likely suffer the equivalent of a heart attack.
That wouldn’t be good for the U.S. economy.
Or the Chinese economy.
Or any other economy that sells things to Europe.
So, you can see, this little decision to seize a little money from bank depositors in the little island of Cyprus could be a much bigger deal than you think.
It could conceivably precipitate a run on weak European banks.
And a run on weak European banks could hammer the European economy and then the economy of Europe’s trading partners. And it could cause global markets to crash.
It’s more than a little creepy that the regular Monday bank holiday has been extended through Tuesday and Wednesday by the Cypriot government so that people can’t get their money out. Really – holy shit.
If you want even more of a butt-clenching, spinal-fluid-crystallizing, cold-sweat reading experience, pop yourself over to Zerohedge for the next few days. Commenter Jeff Bonwick once said that if you have a constipation problem, reading Zerohedge is your cure, and that’s more true than ever this week. Try this.
But I do think some of the current reports are a little too breathless, and sometimes I’m astounded at how American news articles talk about the situation over here in Europe. I’ve read headlines on U.S. sites for the last 18 months saying, “Italy Set To Burn With Social Unrest and Riots and Poverty!” but I go outside every day and everyone is frolicking with their dogs and toddlers in the park, the grocery shelves are overflowing, and the biggest “riot” I can find is at a pizzeria in the city center involving a half-dozen hungry Chinese tourists who can’t decide whether to order a Quattro Stagione or some Insalata Caprese.
Also, this Cyprus confiscation thing only happens if their parliament approves it tomorrow, which, who knows? Maybe they’ll realize what a gobsmackingly stupid idea it is. Or, probably not.
Commenter Swampwoman asked on the last post if there are any rumblings about the Cyprus deal in Italy. I can’t say what the entire Italian press is doing, but the mainstream Italian sites I check daily are weirdly quiet about it.
Corriere della Sera, as of 7 p.m. Italian time on Monday, has the first headline about Cyprus halfway down the main page, after a story about Satan looking like Obama in that History Channel show. The top several stories are about Grillo and Berlusconi and the Pope and the weather (we got snow this weekend).
Euronews has its top headline about Cyprus right now, but just one, and it’s followed by articles about Obama’s first trip to the Middle East and something Syrian opposition in Istanbul and about some bullshit in Venezuela (where of course someone is accusing the U.S. of some complicity in some plot).
The main Turin newspaper, La Stampa, is mildly more interested in the potential collapse of the entire Euro system, featuring a Cyprus headline third after ones about Grillo/Berlusconi and the snow. That one headline is followed by several about the Pope, about some Muslim Brotherhood movie being censored, on and on and on…in other words, pretty much just like CNN.com at this hour. Seems that Drudge is the only big site top-headlining it today.
Like I said, I’m not into fearmongering, but this story deserves more attention. Which it won’t get because SQUIRREL!
Oh and the reason for my post title is that this Cyprus deal forced by EU bureaucrats will hammer the shit out of Russian depositors (who use Cyprus for money laundering and apparently everyone knows this but winky-winks about it), because almost half of all Cypriot deposits belong to those non-resident wealthy Russians that I refuse to call “oligarchs” because why should I, they’re mobsters!, and some commentators are worrying that a potential consequence will be a massive price-jack of natural gas used for heating in Europe because it all comes from Russia.
Brilliant. Good times. We’re all in the best of hands.