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George Michael: Banking questions haunt Europe

April 05, 2013|By GEORGE MICHAEL

It once was said that when Wall Street sneezed, the rest of the world got a cold. Times have changed. In a reversal of fortunes, turmoil in Cyprus caused uncertainty in financial markets in Europe and the United States for several days in late March.

How is this possible? How can a nation the size of Vermont in the eastern Mediterranean Sea have any impact on us? The answer is not due to the size of Cyprus but rather the questions raised about the process of changing banking rules for the people of Cyprus.

Cyprus, like Greece, Spain and Italy before them, asked the European Union (EU) for a financial bailout. The EU pressed Cyprus for some contributions from their own people as they have for the other nations. None of the previous demands have gone well as citizens in these nations rebel against getting by on less. The “gravy train” in these socialist economies has been running strong for too long.

One recommendation was for the government of Cyprus to confiscate some of the money in the bank accounts of its citizens and foreign investors. Due to lax banking rules, Cyprus has been a banking haven for people from other nations, especially Russians. But ordinary citizens use banks, too. 

The pushback was strong and significant, and not just in Cyprus. The critical question became, what does such a move portend for citizens of other nations?  Is this a remedy other governments might try? Could our IRAs and savings accounts and CDs be used by our government to reduce our national debt?  Warnings by conspiracy theory leaders have long maintained that such a move is not out of the question someday in the United States.

After the initial chaos and a vote against this by the Parliament of Cyprus, Germany and EU leaders said that no more funds would be forthcoming for a bailout unless their leaders got in line. A new proposal suggested that only the uninsured portion of accounts, that is anything above 100,000 euros ($128,000) would be “taxed” at a rate of 40 percent. After more negotiations, a two-tiered plan was adopted that will confiscate 60 percent of such accounts.

During the confusion, the banks of Cyprus were kept closed for 13 days. ATMs  ran out of money early in the process. Ordinary citizens found themselves in dire straits. 

When banks reopened at noon on March 28, the lines were long but orderly.  People could deposit checks but were not allowed to cash them. A withdrawal limit of 300 euros was allowed for each account. Time will tell if citizens will be able to continue making withdrawals or if further restrictions will be necessary.  People expressed frustration but seemed resigned to their predicament.

Banks in Europe and elsewhere were destabilized amid the confusion. Will other nations be forced to use the private savings of citizens to deal with financial problems? What will happen to the money in the banks of Europe?  Deposits there have already been trimmed significantly in recent years by ongoing withdrawals, and this is likely to speed up the process even more. 

The financial downside has critical implications and damages their economies in significant ways. Without capital, businesses cannot expand or even get needed funds to continue normal operations. Unemployment in Greece and other bailout nations is running 20 percent to 27 percent. Without stability in capital markets, no country can prosper.

So watch the EU banks and Europe’s efforts to keep this contagion of fear from spreading too far. The long-term trends are not positive.

George Michael, who lives in Williamsport, is a former principal of Grace Academy. His email address is gfmichael46@gmail.com.

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