March 19, 2013

Why you should worry about what happened in Cyprus

Crossing the Rubicon means to pass the point of no return.  The idiom refers to the moment when Julius Caesar and his  army crossed the river Rubicon which marked the boundary between Gaul and Italy which was controlled directly by Rome.  While Caesar had the right to command in Gaul, he had no such right in Italy.  When he crossed the Rubicon with his legions, he committed an act of insurrection and was automatically condemned to death.  Caesar himself said, "The die has been cast."  Thus began Caesar's Civil War that lasted for four years.  After defeating Pompey and his supporters. Caesar  emerged victorious and established himself as the "perpetual dictator" of Rome. 

There is about $1.8 trillion invested in various IRA, 401k and 403b retirement plans in the U.S.  And that's not counting the trillions more in investment brokerage accounts earmarked for retirement. 

Ed Driscoll sets the context. The EU Crosses the Rubicon; How Far Behind is the U.S.?

In 2008 Argentina stole the private pensions of its workers, nationalizing those funds to deal with their own debt problems.  Bolivia did the same in 2010, as did Hungary.  And Bulgaria did their own scaled-down version of confiscating people’s private pensions in 2011.  Of course, those are just no-name South American countries and backwater Eastern European countries.  That can’t happen here in America!  Why, we’re Americans!  We have rights!

Unfortunately, the Democrats took note of what Argentina did in 2008 and have since bantered around ideas of rescinding the tax benefits of those programs, even outright nationalizing them.  There was hope with the Republican backlash of 2010 that such outright theft would be made impossible, but with the 2012 election decidedly going left, socialist politicians’ chops have been re-whetted for a piece of your IRA pie.  Ultimately, however, the real risk is not so much the political desires of socialist politicians, but that the economic situation is so dire it will essentially force the decision to confiscate people’s retirement accounts.  That is the true risk of promising ourselves everything.

Paul Rahe The EU Crosses the Rubicon

This weekend, the government of Greek Cyprus -- under pressure from the European Union -- negotiated a bailout that had as one of its provisions an assessment on the capital of those with deposits in the banks on Cyprus. Those with under 100,000 Euros in their accounts are slated to receive a 6.6% haircut while those with more than 100,000 Euros in their accounts will be docked 9.9%.

Whether the government can secure the approval of the Cypriot legislature for this unprecedented move remains unclear. There is talk of lowering the tax on deposits under 100,000 Euros to 3% and of raising the tax on larger deposits to 12.5%. But while the difference no doubt matters to ordinary Cypriots, whose savings are modest, and to the Russian oligarchs who have parked huge sums in the Cypriot banks, when viewed from a larger perspective, it matters not one whit. Indeed, at this point, it does not even matter whether the Cypriot government backs off from this plan altogether.
It would be hard to imagine what one could do to turn an ongoing crisis into a total catastrophe that would be more effective than the terms imposed by the European Union on Cyprus. That such a move is in contemplation is an indication of the degree to which the authorities in Brussels and Nicosia are in the grips of desperation.

Explaining the bail-in at Zerohedge

A bail-in takes place before a bankruptcy, and involves losses being imposed on bondholders, something that has rarely taken place throughout the GFC and euro crisis. In fact taxpayers (the government) have consistently bailed-out the private sector in full. The Cypriot bank rescue is no exception, except this time there is a bail-in and ironically again not of bondholders but of the depositors first. This is a direct contravention to the usual legal claims on the capital structure.
This is an unprecedented assault on individual property rights and every individual in the developed world should take notice, and far from stabilizing the eurozone, the bail-out likely heightens contagion risk across the EU.

Why bother holding a bank account when your government can expropriate your savings? Far from containing a bank run in Cyprus it will exacerbate it, absent capital controls, and likely begin significant depositor flights across the European periphery.

These events I believe signify one of the most alarming developments in the Eurozone crisis and by dint the global economy since the financial crisis began.
Posted by Jill Fallon at March 19, 2013 12:11 PM | Permalink