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Clearing away the hysteria about the Cyprus insured deposits scare

Posted by John Reed on

Copyright 2013 by John T. Reed

The media and the kooks kind of went nuts over the Cyprus tax-on-insured-deposits trial balloon. Here are the basic facts.

1. Cyprus is two countries on a Mediterranean island. Part is Greek. Part is Turkish. There are peace-keeping troops between them.

2. The Cyprus that had this problem is just the Greek one. Indeed, the trouble came from Cyprus (Greek section) banks lending money to Greek banks. The Greek banks did not pay the loans back so a couple of Cyprus (Greek section) bank went belly up.

3. Cyprus (you know which one), which uses the euro as its currency, asked the Eurozone (EZ) central bank (ECB) for a bail out.

4. The Eurozone responded that they wanted a tax on the deposits in all Cyprus banks to raise money to cover the losses in the two bad banks. I repeat, the EZ dreamed up this idea, not Cyprus.

5. The proposed tax was 6.75% on insured deposits (100,000 euros or less) and 9.9% on larger uninsured deposits.

6. The ECB requires that all EZ countries insure bank deposits up to 100,000 euros.

7. People who want to deposit more than 100,000 euros and still be insured can generally do so by putting 100,000 or less in each bank. In the U.S. a single family can have something like five different accounts in the same bank all insured up to $250,000. This is done by having a joint account for both spouses, separate accounts for each spouse, trust accounts, etc. See the FDIC website for details. There are even companies that do nothing but spread the money of wealthy people around to a bunch of different banks so they are all fully insured. The limit of 100,000 euros or $250,000 in the U.S. is not about rich and poor people. It is about encouraging all depositors to spread their money around and not have too many eggs in any one bank basket. There is no excuse for having any uninsured deposits in countries with federal deposit insurance no matter how much money you are depositing.

8. So the ECB, which required the 100,000 in deposit insurance throughout the EZ was asking Cyprus to renege or default on its deposit insurance. This immediately made depositors throughout the EZ and in other countries like the U.S. wonder if their deposits might, in the future, be subjected to such a bailout tax. I would not have thought so before, but after this stupid stunt, I guess it’s not out of the question. The EZ big shots say Cyprus is a special case. But that is contrary to the whole idea of the EZ which is that a euro is a euro in all EZ countries. Apparently, unless it’s a Cyprus euro in which case you may lose part of it to reneged-on deposit insurance.

9. The proposal was withdrawn after the outcry against it from around the world. The new proposal which has taken effect is essentially Lehman Brothers. Let the bad banks go bust. Like a bankruptcy, assets are sold and those with claims on the banks assert them. There is a hierarchy. First, the Cyprus government pays off the insured depositors in full. That is sort of an indirect tax on all Cyprus taxpayers if not depositors. There is probably little distinction. I am not sure Cyprus can afford it. Then the uninsured depositors get paid. If there was enough to pay them 100%, they would get 100%. But the whole problem is there is not enough. So they are expected to lose 25% to 40% of their deposits. Then, if there were any more money left, the bank’s creditors would be paid. And finally, the bank’s shareholders. In Cyprus’s case, probably the shareholders and creditors will lose everything and the uninsured depositors will lose 25% to 40%.

Like I said. This is rather normal. Just a plain old bankruptcy. People seem to be incensed that the uninsured depositors are not getting 100¢ on the dollar. Of course not. They’re uninsured! What the hell do you think uninsured means? And they could have been insured by just making sure they did not have more than 100,000 euros in any one bank. But they could not be bothered to take that simple step. Tough

10. Much has been made of New Zealand saying something along the lines that they would do the same, the same, that is, as the final Cyprus plan, not the earlier one that reneged on insured depositors. Only New Zealand has no deposit insurance for anyone. I put some of my rainy-day savings there and urged readers to do the same. I happened to be in New Zealand when the Cyprus story broke. One of my tasks there, before the Cyprus story, was to spread my money around to three New Zealand Banks. I did that. When I arrived, I only had one. Now I have two different big banks and one little bank. I also have Google Alerts that do a daily search for the phrase “[name of bank] trouble.” That is to give me as much warning as possible so I can move the money to another bank if need be.

I also have money in Canada and Australia and recommend readers do the same. Those two countries have federal deposit insurance so I only have one bank in each.

So is this going to happen in New Zealand now? I doubt it. New Zealand is ranked number one in the world integrity along with Finland and Denmark by Transparency International. Cyprus was ranked 29th and probably will plummet now. The U.S. is 19th. The other countries whose currencies I recommend are Australia (7th), Canada (9th) and Switzerland (6th). I also look at national debt-to-GDP ratio (from IMF). Here are those ratios (low is good): Australia 27%, Canada 88%, New Zealand 39%, Switzerland 47%. Cyprus was 87%.

I expect a whole lot of countries—especially New Zealand—are now looking closely at their banks to make sure they are not another Cyprus in waiting.

With regard to New Zealand deposits, I paraphrase President Reagan: Trust but diversify.

11. Part of the hysteria is the public suddenly believing the financial world is coming to an end and the federal governments of all the countries are going to steal our savings. No shit!? Why wasn’t I informed? Oh, wait. I am the author of How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition. I’ve been telling you guys for three years that the government was probably going to “steal” your money by “printing” too much of it and thereby creating hyperinflation. Hyperinflation makes your money worthless. Many of you believed me and started taking the low-cost-low-risk steps I urged. But billions more ignored me but now are freaking out because of an ECB trial balloon about Cyprus.

Who knew that 320 pages of well-researched explanation was no way to get the message across? The correct way turns out to be have dopey Cyprus Greek banks full of Russian money make bad loans to actual Greek banks then threaten to confiscate 6.75% of uninsured depositors money to bailout the Cyprus government for not regulating the banks better. I should have been in sunny downtown Nicosia, not doing research in the U.S.

The Cyprus situation is not hyperinflation per se. It’s just bad loans—lots of them. But the broader EZ/ECB situation is hyperinflation, because the ECB is trying to paper over bad loans and malfeasance is the PIIGS (Portugal, Italy, Ireland, Greece, Spain) countries by “printing” euros which is inflationary.

The U.S. government is about to steal your life savings, to the extent you are dumb enough to leave it in dollar-denominated assets. They are doing it more subtly here—by “printing” far too many dollars. It’s called “Quantitative Easing III” to slip it by you without alarming you. Be alarmed. Be very alarmed.

Will FDIC insurance save you from hyperinflation? No. It does not cover loss of purchasing power, only loss of actual money. FDIC will make sure you get your $250,000 back, only it may not be enough to buy a candy bar when you get it back.

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