The Raiding of Private Funds in Cyprus: Extreme Bailout Measure or the Look of Things to Come?

by Lear Capital EditorialMarch 18, 2013
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Who can forget the scene from "It's a Wonderful Life" when the citizens of Bedford Falls rush the local Savings and Loan en masse demanding to withdraw their money? This Hollywood style "run on the bank" features a compassionate and free-lending George Bailey contrasted with the overly wealthy and avaricious businessman Henry Potter.

Well, it's not a "Wonderful Life" for the people of Cyprus and their recent "run on the banks" is very real. In what is being called a "stability levy," the European Union has proposed a planned tax on bank depositors in an effort to financially rescue their smallest state. The €10 billion bailout of Cyprus is being called absolutely necessary to avoid complete bank collapse. If passed, those holding more than 100,000 Euros in Cypriot banks will be immediately hit with a 9.9% tax on their monies and those holding less than 100,000 Euros will be assessed a 6.75% tax.

Word of the bailout sent residents of the island nation rushing to ATM's to retrieve their money as banks scrambled just as quickly to limit electronic withdrawals and restrict all money transfers. As ATM's across the country ultimately ran out of cash ... panic and protests erupted throughout the island nation which sits just east of Greece.

This raiding of personal funds is unprecedented in the history of the EU and a departure from previous aid packages. It is considered necessary to prevent Cyprus from defaulting, crashing out of the Euro, and further destabilizing the Eurozone. To many of the citizens of Cyprus, however, it is an outright "confiscation" of personal savings and an action that politicians assured them would never happen.

Seizing money from the private sector is an unthinkable line that all governments promise will never be crossed. Likewise, penalizing private citizens for unchecked government spending and banking insolvency seems like an extreme and inconceivable measure. But, the reality is that world debt is breaking the back of the global monetary system and taking our civilization to extraordinary levels of crisis where we must entertain unthinkable remedies.

The notion that what's happening in Cyprus can't happen here is fast becoming a haven for the naive. And those same people that believed they could never be betrayed by a politician or misled by their government ... were the same ones standing in ATM lines all over Cypress this past weekend.

Officials in Cyprus and the EU claim that the radical bailout measures are the only option to avoid bankruptcy and total financial collapse. The irony here is that the ones being punished are the antithesis of irresponsible governments ... they are private citizens that have budgeted, saved and put money away for a stable future.

How does one prepare for such a scenario here in the US? We can start by acknowledging that the possibility always exists for desperate governments to take desperate actions. The Dodd-Frank financial reform legislation that passed last year has already put certain provisions in place that could also force losses onto bondholders to keep banks solvent in certain instances.

So whether you put cash in your mattress or gold in your vault, it's important that Cyprus be a wake-up call to diversify your investments and always maintain a percentage of liquid assets on hand.

There's no doubt that it was a "Wonderful Life" back in 1946 when the people of Bedford Falls came to the rescue of their Savings and Loan. They donated their own money to save the bank, rescue George, and secure the triumph of good over evil. In 2013, however, banks are massive global holding companies and buyout predators. The only helpful patron that showed up in Cyprus was one customer that arrived in a bulldozer intending to knock down the ATM machine so the crowd could retrieve some of their "confiscated" money.

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