The Financial Situation in Cyprus and the End of the Euro
April 5, 2013
by Mark Nestmann The Nestmann Group, Ltd.
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Over the last few weeks, I’ve watched in horror as the financial situation in Cyprus goes from bad to worse.
Cyprus banks have now reopened after a 12-day “bank holiday.” But, depositors can’t simply close their accounts and move their funds elsewhere. In exchange for a €10 billion bailout from the European Central Bank, Cyprus has imposed restrictions on withdrawals to prevent capital flight. Bank customers can withdraw no more than €1,000 daily from their accounts. That’s for insured deposits under €100,000. Larger depositors with accounts over €100,000 stand to lose as much as 60% of their assets. What’s worse, those depositors who went to the trouble of choosing a safe, highly-liquid bank in Cyprus in which to invest face the same losses and withdrawal restrictions as the larger commercial banks that needed a bailout.
The bottom line is that euro deposits in Cyprus banks are worth less than euro deposits anywhere else. I can’t think of a scenario more likely to instill distrust in banks throughout the euro-zone. That’s because bank account holders in other financially troubled EU countries, especially Greece, Spain, Italy, and Portugal, rightly consider the Cyprus example as a template for their own country’s banks. And, they’re frantically withdrawing euros from their accounts to get under the €100,000 deposit insurance maximum.
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