Economic Tsunami in the Med

Published Date Author: , March 18th, 2013 Just over two years ago, when Mohamed Bouazizi stepped into the middle of traffic in Tunisia, poured gasoline over his own body and set himself ablaze as protest against his government; it was at first noticed by only a few. At the moment it occurred, the world beyond Mr. Bouazizi’s neighborhood was completely unaware of the moment of the occasion. It is doubtful that even Mr. Bouazizi himself knew just what tectonic shift he had caused in the form of destructive transformation of the Middle East. Not because the world wasn’t paying attention, but because sometimes energies that build up which cause paradigm shifts is not comprehended until after they are manifest. Another such “unknowable” event may have just occurred this weekend in a similarly overlooked country called Cyprus, which may in the future be looked upon as the great spark which caused untold disruptions and transformation in the perceptions of citizens towards their banks and governments. Up until this weekend, banks had been viewed by depositors as a safe haven for money, albeit one with minimal returns in the form of paid interest. Despite the great depression, the advent of depositor’s insurance, such as the FDIC offers U. S. investors, fostered a sense of inviolable trust. In a stunning and unprecedented move, European finance ministers have demanded that the government of Cyprus impose a 6.7-9.9% “deposit tax” on all bank deposits in the country as a condition of receiving bail out money. For depositors In Cyprus who visit the bank on Tuesday morning, they will find out that just like that South Park episode, the banks will tell them “…aaaaaaand it’s gone!”. Just like that. Poof! Their money or at least a significant percentage of it will have been confiscated by the Cyprus government. It is not difficult to imagine how the Cypriots will react to this news, because no matter how much they may differ in culture, humans are pretty much the same when it comes to protecting their assets. They will no doubt react with disbelief at first, then fear, and then probably great anger. Imagine being in their position. You wake up to the news that up to 9.9% of your savings has been arbitrarily taken from you by your government over the weekend with no warning whatsoever. Your perception of banks and government would instantly and forever have been altered. It seems safe to conclude that most people would immediately take steps to recover what money they could as quickly as they could to protect it from any future theft by the government. Cypriot’s by the thousands did just that on Saturday when the news came out. ATMs were quickly drained of all cash within hours. The Cyprus government had anticipated this however, and had already moved to force banks to freeze assets before the announcement was made. Checkmate. The timing of this event had obviously been carefully thought out. You see, this is a three day holiday weekend in Cyprus, which means that on Monday, the banks would have been closed already due to “Green Monday” or “Ash Monday”. The timing by the Cyprus government reminds me of something I saw a couple of years ago during the great recession here in the United States; a series of articles nestled somewhere between other articles about chem-trails being sprayed in the sky and scary FEMA camps describing how we in the United States would soon be subject to our own bank holiday, where the value of the dollar would be debased overnight while we remained powerless to retrieve our funds until after the financial carnage. At the time, the derogatory term “conspiracy theory” was bandied about by those who scoffed at the notion that this could ever occur. In light of the shocking reality of what has just occurred in Cyprus, the idea of a banking holiday and theft of depositor’s money is no longer theoretical, and it certainly smells like a conspiracy. It is not difficult to imagine what the immediate future holds for Cyprus, or of what import it is to the rest of us. First of all, the Cypriots will likely flock en masse on Tuesday morning to withdraw the remainder of their funds. Whatever fantasies the Cyprus government might have indulged in saving their already teetering banking system with bailouts from Europe will be utterly destroyed when the rest of the deposited funds are angrily withdrawn. Chances of survival for those banks now seem slim to none. Seeing what is transpiring in nearby Cyprus, which ironically found itself in dire straits in no small part due to investments involving Greek banks, how do you suppose the average Greek citizen will now view things? Unless they are all in a drunken stupor (which can’t be entirely ruled out) it seems inevitable that Greek depositors will soon rush to withdraw their own funds, irrevocably damaging their own country’s banks. What then of Spain, Portugal, Ireland, and the rest of Europe? Who can say now that any depositor is safe? If it can happen in Cyprus, why not Greece, or Spain, etc…? It seems just a matter of a very short time before this realization will set in, and the question will become not whether European depositors will withdraw their money from other European banks, but to what degree? As we have come to learn these past few years, banks and their debt are not islands. They are intertwined with other banks and debts in other countries. The illness of one infects the other. In this world of derivatives, bond swaps and international bail outs, there is no escape, there is only the attempt to diffuse the burden widely enough to spare any one location such heavy damage that it causes unmanageable consequences. If one views our global financial system as a great house of cards, one might think that the cards on the bottom row would be of most importance since they support the entire structure above, just like the developed countries of the United States, England, Germany, Japan, etc… support the lesser developed ones. The lesser cards on the top might fall, but the damage would be contained only to those above. In this model, Cyprus might be seen as one of the cards at or near the very top, since their GDP comprises less than one half of one percent of European GDP. However, if one takes that top card, and instead of letting it flutter gently down on its own, smashes it down with some force it is likely to take out the cards underneath, the combined weight of which would cause a chain reaction downward until the whole thing falls anyway. The act of stealing depositor’s money from Cyprus banks ensures that depositors will withdraw their money in a violent way, which means the Cyprus card is being slammed down with some degree of force, placing the entire system at risk through the cascading consequences created by international exposure to each other’s banking systems. In a manner that only governments seem to be able to do, the actions taken to “save” the Cypriot banking system will end up having the exact opposite effect. To invoke the law of unintended consequences seems inadequate in this case, because the result of destroying the banks that were supposed to have been saved seems too obviously predictable to have been accidental. So while the obscurity of this financial earthquake is not yet being felt by the rest of the world, it soon will. The resulting tsunami is coming in the form of massive withdrawals by depositors of their money not just from banks in Cyprus, but in other countries as well. Distrust in governments and banks will soon surge to a whole new tidal level. The coastal alarm bells will soon be ringing and the beachgoers will be running for their lives. Make sure you get out before they do. __________________ Ginette E. Houle — Money in an electronic account can disappear in a millisecond “If you can’t touch it, then you don’t really own it”.


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