We we’re shocked with the news that came out over the weekend from Cyprus in which the infamous “troika” of creditors asked the Cypriot government to actually tax its peoples (not just Russian oligarchs)deposits as a means of obtaining €7 billion in bailout funds.
Even though the total amount required of €17 billion is not particularly much on the Eurozone bailouts scale, Northern European countries led by Germany and Finland wanted the payment reduced to €10 billion, and so they came up with the brilliant idea of taxing deposits at initially a rate of 9.9% for deposits over €100,000 and 6.75% for all other. Not surprisingly this has not gone down well with its people and the Cypriot parliament has since pushed back on this proposal.
When we heard the news for the first time, I frankly couldn’t believe my eyes as it sets a dangerous precedent for other indebted nations in Southern Europe and could in fact set of a crescendo of deposit withdrawals from these countries. This would also explain some of the dollar strength we have seen recently,
The proposed measure is nothing less than state sanctioned robbery and one that will have profound and malefic effects all over the Eurozone, the kind we frankly do not need at this point. It seems that the bubble that European politicians live in has made them so out of touch with the reality of their peoples circumstances. The last thing they should be doing is shaking confidence in the integrity of the state and the sanctity of any banking system. It is no different to some of the antics of banana republics.
Just think about the plans for a moment. Let’s say you have saved diligently throughout life and just put the money in your domestic banks precisely to avoid other several riskier alternatives. You have done this because the Eurozone assured you that deposits up to €100,000 are insured even in the case of bank goes into bankruptcy. In recent years, to make matters worse, you have also been penalised by inflation and so meaning that with the derisory rates on deposits that are paid, that have been a loser in real with money in the bank. But, as if that was not enough, trying to impose a 6.75% haircut on your deposit really takes the biscuit.
Of course, following the weekend news, the whole weekend ATMs have been emptied by Cypriots trying to withdraw as much as they can from their bank accounts. All those eccentrics keeping money under the mattress are now looking less eccentric eh? No matter what the Cypriot government decides to do now, the genie is out of the bottle. The troika have made clear that they are prepared to impoverish the people of Europe even further to save the banks and moneyed elite.
A tax on deposits will not only lead to a run to deposits in Cyprus but also will have impacts in other peripheral Eurozone countries. People in Portugal, Spain, Italy, Ireland and others will start thinking in alternatives to their money and Gold and Silver is likely to be the main beneficiary from this.
Countries such as Germany, Switzerland, Finland, and even the UK can however capitalise with this. The expected flow of funds from the wealthier ndividuals will go into every kind of low risk assets from those countries and so may also inflate further the bubble in Government bonds. Germany for example benefits further through the demand for their bonds which keeps their financing at negative real rates. Today, a 10-year German bond is yielding 1.39 and a 30-year bond yields 2.30%. Those rates are artificially low and are clearly the result of a dangerous game that may end with the Eurozone actually blowing apart. Scaring people seems to be an actual policy of Germany!
We expect the Euro to continue its losses through the spring and summer and look for the 1.25 level again against the dollar as a 2-3 month target. As we highlight in the next edition of our mag, this will also, contrary to all the doomsayers following the AAA downgrade of the UK, likely boost Sterling which had been dropping in value against the Euro since the beginning of the year. Don’t be surprised to see us back over 1.20 just in time for the summer holidays.