EU sets a dangerous precedent in Cyprus

A largely small European bailout is making big news around the world and it offers a real-world test of a concept that has long been a financial taboo – directly using people’s savings accounts to pay for a country’s financial trouble.

We all need to watch this very closely as it sets a very dangerous precedent with potential global implications that could make the crisis of 2007 seem like a child play.

Cyprus, not unlike other European countries, is in deep debt and needs a bailout in order to avoid going into bankruptcy. The European Union and the International Monetary Fund responded to the cry for help with a relatively tiny $10 billion package, with an important demand that makes it anything but the regular vanilla bailout to which we’ve come to be accustomed in the past half a decade.

The financial help comes with an important caveat which insists that bank account holders in country pay, on average, a 10 percent levy.

May all eyebrows the world over stand up?

Cyprus’ parliament is scheduled to debate and vote on the measure at 6 p.m. local time on Tuesday. In the mean time, Cypriots immediately started a literal run on the bank, clearing their accounts, where possible, by ATM withdrawals, transfers and whichever other way they can.

Monday is a national holiday in Cyprus and banks are closed and they are expected to remain closed on Tuesday as well, to try to avoid an even larger withdrawal frenzy.

The press is abuzz with the news in Europe and is picking up steam around the world. And rightfully so. As more details of the real reason for the unorthodox bailout demand become available, a picture with Russian motifs emerges.

It is reported that many Russian conglomerates and oligarchs have large cash deposits in Cyprus, seen by many as a European heaven for cash from both legitimate sources as well as potentially questionable activities.

It is suggested that this reportedly large pool of cash is the reason for the European Bank’s terms for the deal, which, apparently, is one of the reasons why the rich would be made to pay more.

As reported by European media, it appears that it is up to the Cyprus government how to divvy up the burden for the payments. One possibility is that accounts with less than $100,000 will pay a little less than 7% and larger accounts would take a 9.9% hit.

The Russian President Vladimir Putin already spoke about the levy through his spokesman calling it “unfair, unprofessional and dangerous,” as cited by BBC.

I have to agree with him here. Taking cash from either persona or business accounts indiscriminately and without due process is not very different from a pirate raiding a ship in open waters.

How, and whether, this deal go through remains to be seen (although Cyprus doesn’t have many other options), however, its mere offer already created an unprecedented crack in the world’s economic system and the powers that govern it.

Despite recent calls for capital redistribution and the “99 vs 1 percent” protests in the Western world, no one in the developed world has called for a raid on the savings account of anyone. Increasing taxes for the wealthy is one thing, directly dipping a hand in the cash jar and simply taking money out is a whole different concept. It is something that even hard-lined socialists would not dare touch.

After the near collapse of the world economy in 2007-2008, people across the globe have been largely skeptical of the global financial system. This lack of confidence is one of the many reasons for the slow and painful recovery process. Economists know that people’s trust in the institutions that hold their money is paramount for the health of the economy. This was one of the reasons for many of the moves that the United States and European governments, along with central banks around the world, including the Federal Reserve in the US, undertook as a response to the crisis, including the bailouts of a number of global and local banks.

Even economists with different opinions on the effectiveness of these bailouts agree that a run on the bank is never a good idea as it manifests such a great distrust in a financial system that is renders it useless.

The Cyprus’ precedent is something to be watched very closely as it could have enormous influence on the global economy for years to come.

It’s not where, but who!

While Cyprus is a tiny speck on the map and a mere blip on the world’s economic radar, the bailout demand is coming from the almighty European Bank along with the even mightier International Monetary Fund. These are one of the greatest economic minds of our time. Which is why this whole deal sets a very troublesome precedent and plants the seed of a very dangerous plant that could develop into a venomous weed with roots quickly spreading around the world.

Let’s hope that the financial master gardeners get back to their senses and stop this insanity.

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