Please Pay in Cash

Published by City Blaster on Thu, 28/03/2013 - 13:22 in
cash is king

Daily Market Commentary for March 28: Cash is king! That’s something Cypriots will have in mind today as tight capital controls apply to their deposits. Banks reopened but the economy will struggle soon, as money will be drained from it.

After two weeks of tough negotiations with Cyprus being pushed from EU to Russia and again to EU, a deal was finally reached last Sunday which will impose huge deposit confiscations of more than 40%. In fact the final number is not known as depositors with more than €100,000 will be the new equity owners of banks as if they were bondholders of a bankrupted company! And as equity owners they just have a residual claim on the assets, so they may actually lose more than 40%.

Apart the unfairness of such measure, I must say this is one of the most stupid measures ever taken, so it’s no wonder it came once again from the so called troika. Deposits are not to mess with. Everybody knows that deposits are the life blood of banks and the oil the economy needs to work properly. Businesses need money avidly to invest, to enter new projects and to finance day-to-day activities. If people is scared away and keep their money under the mattress, where will banks get that necessary money from? This is where the ECB comes to rescue providing liquidity to the troubled Cypriot banks. But with money kept flowing out of banks and no money entering the system as people prefer cash in their hands, will the ECB kept injecting liquidity? I don’t believe it.

So, if you travel to Cyprus, the best is to fill your boots with fresh cash. Forget credit cards. I believe many businesses in the beautiful island will stop accepting plastic as a means of payment. With the tight capital control measures, receiving money directly going into banks is almost worth nothing so they better get paid in cash even if they lose some customers.

In the meantime, the Euro will drop. Not only because of Cyprus but also because the common currency is overvalued given the Eurozone situation. Europe is under recession and will be for some time more. worst than that is the fact the region will recover just slowly and with this mess with deposits, it is no longer safe for outside money. With all this in mind, let me keep a few pounds in one pocket, and probably some dollars in the other.