Whether it be banks, bonds or stocks, actions in Cyprus have affected the performance of traditional investments and encouraged investors to seek alternatives.
For the first time since the onset of the sovereign debt crisis in Europe and the bailouts of Greece, Portugal and Ireland, ordinary bank depositors, including those with insured accounts; were being called upon to bear part of the cost of the economic rescue. Under the terms of the Cyprus bailout agreement, the government must raise 5.8 billion euros by levying a one-time tax of 9.9 percent on depositors with balances of more than 100,000 euros (approximately $129,500 USD). Those with balances below that threshold would pay a 6.75 percent asset tax that would hit pensioners and low-income earners, the hardest.
Since leaders in Europe took the unprecedented step of trying to force depositors to pay for part of an international bailout, banks in Cyprus have begun filling cash machines in an attempt to calm the wave of heavy anxiety, that has washed over the tiny Mediterranean island of one million people. Concerned citizens lined up as A.T.Ms distributed 50-euro bills, in amounts as few as two or four at a time, to provide some degree of relief to depositors who were deeply concerned; that banks would remain closed over the weekend. The fear of most was that by the time they were able to get their money out, it would be too late.
“How can I trust any bank in the euro zone after this decision?” asked one troubled citizen, “I’m lifting all my deposits as soon as the banks open. I’d rather put the money in my mattress,” said another angry depositor.
Although placing money in a mattress is clearly not as profitable as other alternatives like investing in shipping containers or precious metals/gemstones, analysts agree that the move to confiscate money from bank depositors has opened a Pandora’s box, that could have crippling consequences for the global financial community. Even as the plan to tax deposits in exchange for the proposed 10 billion euro financial lifeline for this troubled nation concerned many of Cyprus’ banking population, it quickly caused concern for investors far beyond Cyprus’ borders. Stock markets around the world suffered losses amid the sudden realization, that Europe’s policy makers had made a significant departure from their past efforts to keep the euro zone united. It was noted that apprehensions had already began to show signs in Italy’s economy, where concerned investors quickly unloaded bonds from the four largest banks, fueled by the fear that they might become the latest investor class to suffer devastating losses, as a result of Brussels’ new get-tough approach to bailing out Europe’s troubled banks.
Around the world, investors will watch intently to see whether the level of bank withdrawals from the country’s banks will rise considerably, as a result of the new bailout agreement. Many analysts believe that the chances of big, destabilizing movements of money, whether it be into cash, deposited into another bank or moved into alternative investments, has just increased substantially. Furthermore, it is expected that the Cyprus bailout plan will encourage the investment community to seek the safety of hard assets like shipping containers, precious gemstones and/or metals investing, to protect their assets and personal wealth.