You may be wondering how an island nation with an economy smaller than Vermont could set the world’s stock markets on edge for most of the week. The short answer is the markets are looking for any excuse to take some profits.
That’s not to say that I am ignoring events in Cyprus, a small island in the Mediterranean with a bit over a million inhabitants. The Cyprus problem is simple. Their banking system holds $176 billion in deposits–about eight times the nation’s GDP—and some of these banks are in deep financial trouble. They need a bailout similar to the rescue packages given to Greece, Ireland, and Portugal.
For the first time since the financial crisis began back in 2008, the EU has changed the rules for a bailout. In exchange for $13 billion in funds, the Cyprus government must raise $7.5 billion on their own. To do that, the EU wanted them to tax all their country’s bank accounts of 100,000 euros or more (about $130,000). What would you do if that happened here?
Two words: Bank run. As soon as Cypriots got wind of this scheme they stormed the ATMs of all their nation’s banks, but they weren’t working. Then the government said they would take steps to prevent any money from leaving the country. Chaos ensued. Parliament convened and it only took until Tuesday before the Cypriot government rejected the scheme out of hand. That still leaves the question of how and under what terms the country will be able to receive a bail-out.
What spooked investors was the possibility that what happens in Cyprus could happen in other parts of Europe. Was the EU signaling a new and potentially damaging approach to Europe’s financial problems? Would bank depositors in Spain, Italy or elsewhere be next? This is serious stuff, since the only thing keeping a depositor’s money in any particular bank is the belief and trust that their money is safe. If there was even a possibility that some government in financial distress might swoop in and “tax” 10% of your money, what would you do?
So the specter of a potential bank run throughout Europe was one of the “what if” scenarios making the rounds of Wall Street this week. It seems to me that every governmental financial institution around the world has gone to extreme lengths to convince depositors that their banks are safe. I can’t see what anyone would have to gain by changing that policy.
It may simply be that since the lion’s share of high net worth depositors in Cyprus happens to be Russian moguls, the EU may be trying to scare the Russian government into becoming a part of a Cyprus bailout plan. Who knows?
As for the U.S. market, you know my opinion. I’m bullish, but expecting a pull back. Investors used this obvious piece of negative fluff as an excuse to sell a little stock. If one looks hard enough, you can and will find something to worry about. This week it was Cyprus. Next week there will be something else. Stay invested.