This weekend it was announced that the Euro Zone and the IMF have decided to assist the island nation of Cyprus with a 10 Billion Euro bailout package. The reason for this is because Cyprus as a nation was on the verge of bankruptcy and default.
Whereas the Euro Zone nations and the IMF did this, they also decided to levy a tax of up to 9.9% of a person’s fund in their banks in Cyprus. So if a person has one Euro more than 100,000 in a bank account in Cyprus they will pay nearly 10,000 Euros for the sake of being bailed out by the IMF. It is a graduated scale that is being used such that if an individual has less than 100,000 Euros in their bank account, it will be less percentagewise.
This in turn caused a bank run by the local Cypriots and anyone else that had money deposited in the Bank of Cyprus or any known Cypriot bank. This in turn caused worldwide markets to falter. All Asian exchanges closed lower, many to the tune of triple digit losses. Europe also fell as well as the US markets. The USD shot up over the 83 mark again today and US government bonds went up as well. The 30 Treasury bond went from a close of 141.31 on Friday to a high of 143.24 today. That’s a gain of 55 ticks which is highly unusual. June ’13 Gold went from a close on Friday of 1594.70 to a high of 1612.10 today for a gain of 17.4 points or 174 ticks. The Cypriot government has decided to postpone a decision on the revised percentages until Tuesday morning.
What surprises me though is Christine Lagarde, the Managing Director of the IMF. Christine was a vocal critic of former US Secretary of the Treasury Hank Paulsen for allowing Lehman Bros. to go bankrupt in 2008. This event set off the Financial Meltdown and virtually shutdown credit worldwide for a period of time until the US government stepped in with the TARP program. Obviously Cyprus is not the United States or Europe but what amazes me is why go after the ordinary consumer? I don’t see how they had anything to do with Cyprus falling off a cliff. It would appear as though Europe is taking austerity very seriously these days after Greece, Ireland, Spain, Portugal and Italy are all having financial difficulties.
Some pundits on Wall Street are saying “well we don’t have anything to be concerned about, we have FDIC.” Now it is true that in the United States we have deposit insurance that was upped from $100,000 to $250,000 during the meltdown in 2008. But this type of thinking invariably gets us into trouble time and time again. It lulls into thinking that all is well and we have nothing to worry about. Now it may be true that this scenario may turn out to be a one day or one week affair, we don’t know that right now. But does anyone remember Greece and what happened in 2010? Each occasion from that time to the present that Greece has had financial difficulties it set in motion the same trauma we saw today. Only time will tell if this is a short lived affair or something far more serious.