By Michael Lombardi, MBA for Profit Confidential
Politicians in Cyprus are pushing for a government vote on a tax on all bank deposits in the country—6.75% on deposits up to 100,000 euros, and 9.9% on deposits above that amount. (Source: Wall Street Journal, March 18, 2013.) This step by one of the smallest nations in the eurozone could propel economic problems in the region to another level.
What was the cause of the proposed action to seize a percentage of citizen bank deposits?
Cyprus has been experiencing a credit crisis with its banks becoming illiquid, so it needed money. Despite the European Central Bank (ECB) taking the “it will do whatever it takes” stance to get the eurozone going again, Germany and the International Monetary Fund (IMF) argued that the bailout to the nation should be limited to only 10 billion euros, though Cyprus needed 17.5 billion euros. So, Cyprus was sent looking for 7.5 billion euros on its own.
Even though Cyprus is one of the smallest nations in the eurozone, this country’s move to seize a percentage of citizen bank deposits goes to show what can be the next move for other countries in that region that are in financial trouble. It is Cyprus now; it could very well be Greece, Spain, Italy, or Portugal next.
Why could other countries be next? Because the debt-infested nations of the eurozone are still struggling.
Greece is in a depression. Spain, the fourth-largest nation in the eurozone, is experiencing staggering unemployment. The number of unemployed in Spain is increasing to a point where the social security system is running out of contributors. (Source: Financial Post, March 13, 2013.) Just think of the riots when the country’s social security system runs out of money!
Confindustria, a federation of businesses in Italy, the third-largest economic hub in the eurozone, said 29% of businesses are struggling to meet their daily operational expenses due to a lack of operational funds. The conditions are so severe that one thousand businesses are going bankrupt in Italy every day! Italy’s industry chief warned that the country is facing a “full credit emergency!”
In January, the unemployment rate for the eurozone increased to 11.9%, up slightly from December, with 19 million people jobless.
Dear reader, the fact of the matter is that the eurozone credit crisis is still present—only a few examples of countries in distress are presented in this article. North American stock markets are not portraying reality, but as I have repeatedly been saying in these pages, it will be much longer before the theory that we can “just print money to get us out of this mess” will be proven wrong.
The eurozone credit crisis is sending ripples throughout the global economy. This goes without saying: there is a significant number of American-based companies that do business in the eurozone area. If the credit crisis in the region strengthens—which I believe it certainly will—these American companies will see their revenues decline.
The recent event in Cyprus may just be the start of another form of crisis. I am practicing caution, because it’s the only wise thing to do when optimism is at its peak, like the stock market is today. I also question the eventual possibility of something similar happening in the U.S. when the Federal Reserve and the U.S. government discover paper money printing can’t go on forever and our creditors don’t want to give us loans anymore. Food for thought.