Don't Be a Cypriot!March 18, 2013 Posted by: Joe Morgan, CFA
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
There is more than one way to recapitalize. The banking industry emulates that statement more than any other.
And so we have the Cyprus "bail-in."
Banks in Cyprus create 60 percent of the nation's GDP and deposits are eight times annual production. It is an enormous off-shore haven with a banking industry and economy teetering.
Euro leaders have agreed to provide €10 billion in bailout funds, but only if the country can provide €5.8 billion in security…quick.
So the government has decided to steal, confiscate, appropriate, tax existing bank accounts up to and in many cases more than of 10 percent of principal value*. The funds will then be used to recapitalize the banking system.
Prior to enacting this seizure tax, accounts were insured up to €100,000. Now, instead of having that backing, depositor funds will be diminished by the amount of the theft tax.
Why is this €50 billion banking industry globally important? Because the markets know much larger countries in the eurozone are heading toward similar problems.
What happens today on a tiny scale may illustrate what will happen tomorrow on a much larger scale.
Will Spain (€740 billion debt), and Italy (€1.9 trillion debt) become Cypriots, too?
Source: Eurostat, SVB Asset Management
*Note the tax is applied to principal, not earnings. This is not an income tax, this is a wealth tax. Think negative interest rates.Read More