Currency Wars, Capital Controls and Earthquake Kits
The latest financial progression of currency devaluation, asset confiscation, capital controls and ultimately political upheaval seems to have become a slippery slope that could easily decimate whatever investment funds you may currently have placed in paper assets.
Furthermore, the recent threat to levy bank deposits as an alternative to providing bailout money that was proposed as a solution to the Cyprus banking crisis has left many depositors increasingly wary of placing the bulk of their wealth on deposit with increasingly shaky financial institutions.
Another notable risk to depositors is the possibility of the monetary authorities reneging on their support for deposit insurance corporations, such as the insurance currently provided on bank account balances up to a certain limit by the privately-owned Federal Deposit Insurance Corporation or FDIC in the United States.
Pushing Back the Risks
Based on an on-the-record statement by Euro group head JeroenDijsselbloem, that he admittedly later backed down from somewhat, the highly controversial Cyprus banking crisis proposal to levy depositors with troubled banks and effectively wipe out bank bondholders is part of the Eurogroup’s strategy of “pushing back the risks” onto those who have invested in, deposited with or operated such banks.
Such proposals offer a relatively convenient way for authorities to get around challenging parliamentary votes and allow them to impose more bail-ins, in this case at the expense of wealthier depositors holding over 100,000 euros.
Although Dijsselbloemlater backtracked on the idea that this bank levy strategy might be a template applied to other troubled European Union banks by subsequently claiming that the especially worrisome strategy was instead “tailor made” for Cyprus, the financial markets were understandably concerned about the Eurogroup’s proposal.