The Cyprus Bailout Tax

Dear PGM-Capital, blog readers,

The big news over the weekend was the Cyprus Banks having to be bailed out by the ECB.

The Mediterranean island nation of Cyprus,  a former British colony, is divided into a Greek and Turkish part. On May 1st 2004, the southern part, the Republic of Cyprus, became a member of the European Union and adopted the Euro on January 1st, 2008.

Cyprus has a service based Economy, in which especially the financial sector has a great exposure to the Greek sovereign debt.

Serious problems surfaced in the Cypriot financial sector in early 2011 as the Greek fiscal crisis deepened. Two of Cyprus’s biggest banks are among the largest holders of Greek bonds in Europe and have a substantial presence in Greece through bank branches and subsidiaries.

These banks are now insolvent mainly due to the two “haircuts” they received on those bonds, which is the reason why the ECB decided during the weekend to provide Cyprus with a 10 billion Euros bailout,  (13 billion USD) which is approx 56% of Cyprus GDP.

Bailing out troubled banks is nothing new, because since 2007 several banks in Europe and the USA have been bailed-out by either their government or the respective central banks while depositors remained un-touched and were protected by the government deposit insurance. What is different this time is that the depositors in Cyprus banks, for which over 50% are russian, are going to lose money, even though they are protected by the government’s deposit insurance for up to Euro 100,000.00.

The Cypriot bail-out plan that was announced this weekend includes a tax on the bank deposits. All deposits of 100,000.00 Euro or less are going to be taxed 6.75% and those accounts of over 100,000.00 Euro will be taxed by 9.9%.

Ladies and gentlemen simply put, in the Cypriot ECB Bailout, the depositors are paying the price for the mismanagement of their money by Cypriot banks, when the experience how the government will confiscate approx 10% of their money, via a bail-out Tax

See below video

Depositors in Cypriot banks don’t like the idea of getting a haircut of approx. 10% of their deposits due to this bailout. But chances are that if there were no bailouts these Cypriot banks would have gone bust while the government wouldn’t have the money to bail them out in accordance with the deposit insurance and would have lost everything.

Most probably the banks in Cyprus will remain closed until Wednesday March 20 2013 and the Cypriot Central bank ordered all deposits to be frozen with a maximum of 9.9% of the account balances in order to avoid a run on the banks.

The lesson that investors and depositors should learn from this Cyprus bailout is that you cannot trust the word of your government and that you have to do the research and homework for yourself regarding the credit position of the country and the bank in which you are going to put your money.

If depositors in Cypriot banks had done their research and home work they would have noticed the following related to Cyprus Credit situation:

• Standard & Poor, Fitch and Moody’s have respectively a CCC+, BB- and Caa3 rating on Cyprus, all three with a negative outlook, which means that Cyprus bonds are not investment grade.
• A public debt of 80.9% of GDP, at the end of 2012, in accordance with the CIA world fact book

Based on the Cypriot bailout and depositors Tax, almost all major global financial markets tanked on Monday March 18, 2013 and the Euro dropped to a 4 month low against the USD. On the other hand Gold and Silver, the only real money, which cannot be printed out of thin air by governement and centralbanks have appreciated.

Ladies and gentlemen we believe that the Cypriot bailout and depositors tax, is a precedent for other nations in the future to tax or confiscate assets, from their citizens or depositors when they are at the end of the road with no way out.

This means that the money you have for your retirement or for that rainy day must be in a safe bank in a safe country, where the risk for confiscation or tax on your deposit is low or nonexisting.

For your convenience please review here below with a table provided by “Euromoney Country risk” showing the ten least-risky countries for investment as of January 2013. Ratings are further broken down into components including political risk and economic risk.

We hope to have informed you satisfactorily and look forward to being at your service

With kind regards

Eric Panneflek