Deposits Are Not Safe Assets

Published by Filipe R. Costa on Tue, 26/03/2013 - 10:30 in

Tags 

Cyprus, deposits, Euro
bank robbery

Daily Market Commentary for March 26: If you hold money at banks you have reasons to be concerned as the European Union just found a new bailout funding source: bank deposits. Deposits held at Laiki Bank in Cyprus will be levied in at least 40%.

EU finance ministers and the Eurogroup finally agreed on a solution to Cyprus. They thought lending €17 billion to Cyprus wasn’t safe for creditors so the best way would be to lend the country just €10 billion and raise at least €5 billion by levying bank deposits. That’s right! If you hold a deposit in Cyprus you will experience a large haircut on it that was first talked to be 30% but has now been enlarged to 40% and could very well rise even more over the next few days. Deposits below €100,000 will be safeguarded as the Cypriot Parliament just voted against the initial Troika proposal to levy all deposits (even though at different tax rates) but all other will experience a massive cut. This is one of the most unwise measures I ever seen coming from European officials as deposits should always be safeguarded. Just imagine what will happen in the future. Do you feel comfortable to put your money at banks? Do you think it is a one time measure. Deposits will never be safe again. If something fails inside a country, the ECB, the European Commission and the IMF will insist in whatever puts the burden out of the Eurozone. This time deposits under €100,000 will survive but that was just because Cyprus bravely opposed the measure. Is that the case with your country? Do you think your government will do the same to protect you? I leave these questions for you to think about. 

For now markets are declining as the initial optimism quickly faded. In special, the Euro is going down very fast and may experience a selloff depending on what happens when banks open in Cyprus (if they open again). They were to open today, but as politicians fear runs on banks they postponed to Thursday. In my opinion this will be postponed again until next week but one thing is for sure: say goodbye to deposits over €100,000. No rational person would ever deposit such amount at a bank in the future. why incur in the risk without being paid for it. There’s other safer assets around and one is gold. Buying physical gold is certainly a better option.