Sunday, March 17, 2013

Cyprus: a dangerous precedent. Another step forward toward the end of the EURO.

Dear all, after reading the latest news arriving from Cyprus I couldn't help but getting onto the blog and share these few lines.

In spite of the relative quiet stand taken by the European media the bailout news is HUGE and deserves to be absorbed in all its frightening details.

If approved by the Cyprus government tomorrow this is going to be first time that the European authorities are going to apply a levy on account holders regardless of income but purely on the amount of deposits held: 6.75% for all account holders with up to 100,000 EURO in deposits an 9.99% for all account holders with deposits above 100,000 EURO.

It is hard to say whether this measure was passed onto Cyprus citizen because the European authorities wanted to collect as much money as possible out of the deposits of Russian citizen holding cash in the country. Regardless, the implementation of such measures are bound to have significant ripple effects in other countries of the periphery. Nonetheless it will be interesting to see the Russian reaction to these measures after they contributed more than 5B EURO in previous bailout money to preserve a special status with Cyprus (please note that Cyprus and Russia have a taxation treaty and Cyprus has been the not too hidden destination of much of the money taken offshore by Russian oligarchs). Perhaps the real reaction we will see only next Winter when Russian gas will need to flow into Europe.

In consideration of the following:

  • current record bottom interest rates'
  • real risk of government appropriation of funds, whether mandated by the European Union or the IMF truly doesn't matter;
Most people in Greece, Spain and Italy are better off rushing to their bank and pick up as much cash as possible to keep it under the pillow or in the mattress. Better yet convert it into gold or buy diamonds with it....

As our reader generally know when have always been bearish against the EURO and we keep on holding our ground. The lack of proper planning and proper imagination is pushing all periphery countries into the same deflationary spiral that is currently in place. Bailout like Cyprus is nothing but another stepping stone of the same policy: austerity -- contraction -- austerity -- contraction and so on.

As we repeated in other occasions the reaction to this will be political and will not be of conciliatory nature. It doesn't matter how many EUROs the ECB will keep on printing.
This is a deck of cards destined to failure.

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