Collapse of Cyprus
Cyprus, a little island in the Eastern Mediterranean Sea, 3,572 square miles in
size with a population of just a little over 1.1 million people, is on the verge
of financial collapse. News that Cyprus banks would seize account holders funds,
triggered an immediate run on the banks and to add salt to the wound, ATMs are
not working and, the Cyprus government has now made it impossible to transfer
money out of the country. Depositors of Cyprus banks will lose some of their
money and they are furious. Half of the depositors are said to be Russian
oligarchs as well as other non-residents. In an attempt to explain the deal was
better than the alternative which would consist of immediate bankruptcy and
closure of major banks, depositors would lose a whole lot more money, businesses
would go bankrupt with no access to their funds once in banks for safe keeping
and, tens of thousands of people would be instantly thrown out of work. Some of
the banks in Cyprus, like many banks in Europe, are bankrupt. On Thursday when
the banks in Cyprus reopen, every depositor will have some of their money seized
and the current plan is as follows: accounts under 100,000 euros will have 6.75%
of their funds seized and accounts over 100,000 euros will have 9.9% of their
funds seized. Since no bank in Cyprus has enough cash on hand to pay off all its
depositors at once, runs on the banks will cause banks to go bust, the same
thing that happened to hundreds of banks during the Great Depression. Next move,
the Eurozone's emergency lending facility and the International Monetary Fund
will inject 10 billion euros into the Cyprus banks to allow them to keep
operating. Since the start of the global financial crisis in 2008, the Eurozone
gave Cyprus a bailout that included the stipulation that depositors in the banks
of Cyprus must pay part of the bailout tab, a shocking bailout condition that
has never been imposed before on any major banking system. Is the move by the
Eurozone part of yet a new era of bank bailouts, one in which bank depositors
will lose some of their money? Is this the beginning of a new bailout trend?
What's next, will depositors begin withdrawing money from their accounts,
creating an early run on banks? Banks will follow by making a mad rush to their
governments and/or the eurozone, to save them from financial collapse? The
Eurozone does not have an endless supply of funds, nor does the International
Banks worldwide felt the wrath of the Cyprus debacle on Monday, most ending
lower on the day. Steven Englander, Managing Director and Global Head of G-10
Strategy in a report said, “The issue is whether to believe that the Cyprus levy
on depositors is one-off, but depositors and investors elsewhere could easily
see this as another in a string of ‘one-offs’ and react badly.”
According to the National Association of Home Builders/Wells Fargo
housing-market index released Monday, builder-confidence index decreased to 44
in March from 46 in February for a second month of declines. "In addition to
tight credit and below-price appraisals, home building is beginning to suffer
growth pains as the infrastructure that supports it tries to re-establish
itself," said David Crowe, NAHB's chief economist.
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Mar 18, 2013