Cyprus: lovely island of sun, sea, sand which, you may have noticed, has been in the news for other reasons this week.
As things stand, senior Cypriot government officials are in Moscow attempting to stave off an economic crisis which affects not only this small Eastern Mediterranean island, but Europe’s entire financial system.
I don’t want to dwell on the politics of the crisis, how it came about or the rank hypocrisy of other European governments. I want to focus on the potential issues for depositors and personal savers.
I have always had a benign attitude to clients having monies in Cyprus bank accounts, although I had been warning those with deposits there of the ever increasing risk of a default since 2008.
My advice was always to keep large deposits in life insurance wraps instead. Certainly, there is a trade off between instant liquidity of the bank account with the myriad of benefits of a life wrap, particularly the exemption for life insurance from the European Savings Tax Directive (meaning you can actually keep your bank account within your wrap, and not pay income tax on it).
However this last week has shown that for pure security of deposits, the life wrap scores much higher.
We only use life insurance companies who are incredibly secure, preferably with low levels of ‘risk’ insurance and these entities should always be based in locations with enshrined legislation giving a high protection of client assets, sometimes almost 100% protection, with no ceiling.
Compare this with the potential outcome of the Cyprus debacle, where the government, forced by the wonderful people at the ECB and IMF, have made a cash grab for ordinary retail deposits.
If this was anywhere else but Europe (say, Chavez’s Venezuela), there would be a huge outcry in the western media. Where is the security of the banking institutions?
Where indeed is the protection of the much lauded «depositors insurance scheme»? Well, of course, the scheme only comes into play if the institution has defaulted. Which they haven’t. Because they took the retail depositors money. Not the money of the stockholders of the bank. No. Not the money of the institutional bondholders. No. Just the money from the ordinary Giorgios from the street. Breathtaking.
Let’s not mince words here.
If this goes through, it will mean the end of any semblance of bank depository insurance in Europe. It COULD happen anywhere, it COULD happen to you.
There are already murmurings that if this crazy proposal goes through, it might be the tester for getting this out in other embattled economies, primarily those of the PIGS, although other countries mentioned include the Baltic states.
Just when it seemed that the European banking system was getting off its knees, along comes another ‘whammy’.
Whilst Europe waits on the outcome of the negotiations this weekend, retail investors should be consulting their financial advisors as to what they should be doing to avoid any nasty surprises in the coming few months.
Whatever the immediate outcome there will undoubtedly be a run on the Cypriot banks when (when!) they reopen, and that will do untold damage to the islands’ financial industry, the genie is out of the bottle.