Riots, Bank Runs in Cyprus As Euro Bailout Drama Unfolds
March 21st, 2013
Riots erupted today in the Republic of Cyprus as protesters clashed with police outside Parliament. Crowds continue to pile on to express their frustrations with ongoing negotiations between the European Union and the Cypriot government.
Cyprus faces bankruptcy as its credit crisis hit a fiscal cliff recently, and, when it turned to the European Union to request bailout money, a plan to levy between 8-10% from Cypriot bank depositors was proposed, resulting in immediate bank runs. In response, banks in Cyprus were forced to close as part of an emergency holiday, which is set to continue through next week. If a bailout deal can’t be reached, Cyprus may be forced to abandon the Euro. Check out raw video from the protests below.
The Credit Crisis As a Game of Musical Chairs
For the past few years, central banks and governments all over the world have been using bailouts to cover huge corporate losses. Meanwhile, bankrupt mortgages have been monetized by the Fed as a way to prop up flagging home prices. Financial losses, rather than being purged from the system naturally, are remaining on balance sheets through fiscal trickery and government force. The consequences are not unlike what would happen if a person decided to stop eliminating waste after eating meals. Eventually, organs will start to fail if toxins are held inside.
When governments and bailout-sized corporations hit a brick wall with interest payments, they play hot potato and chuck the bad debt onto someone else. This international ponzi scheme functions like a game of musical chairs in which the record has been skipping endlessly. With each bailout, another chair is removed, but the metaphorical game has yet to stop. The situation in Cyprus represents a possible stopping point for the first round of musical chairs, potentially leaving the island republic and other nations without a seat at the table as the music falls silent.
Russian Depositors Furious Over Suggested Bank Levy
Over recent months, large numbers of European investors withdrew capital from Cypriot banks. Meanwhile, domestic and Russian depositors increased their holdings. This has foreign policy implications as tensions are now rising between Russia and the EU. Russian depositors could lose up to $3 billion.
Meanwhile, crazy financial ideas are being leveraged. Cypriot deposit insurance claims might not be honored. Chances are now very high that uninsured bank deposits (those above the maximum size) will be at least partially lost, a move that is being viewed as an attack on wealthy investors.
As the chaos unfolds, it’s important to consider the reality that this game of musical chairs is not over and won’t be until all the bad debt is purged from the system. The problem in Cyprus may spread to other countries. In fact, it’s reasonable to expect that this calamity’s endgame will take place at some point right here in the United States.
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