Cyprus Collapse Triggers Unintended Consequences
by Keith Weiner
Monday, 1 April 2013
Some people believe that by imposing losses on investors and reducing the Cyprus banking system liabilities, the European powers have addressed the problems in Cyprus (if harshly). Others think that it was just an unjust tax on depositors. I have written about the sequence of events. Cyprus banks borrowed money and bought Greek government bonds. Greece defaulted, imposing big losses on bondholders. Cyprus banks postponed marking down their losses. Now, they have to mark those losses and admit that they are insolvent. This triggered a run on the banks. Now, finally, shareholders, bondholders, and depositors are taking their losses. The government of Cyprus and the “Troika” did not provide enough money to pay everyone.
Within Cyprus, there is now uncertainty about remaining deposits, capital controls, and the solvency of the Cyprus government itself. Elsewhere, the focus turns to other countries (e.g. Slovenia) where markets are becoming jittery that the same thing could happen.
The first question is, can one still buy gold in Cyprus? I predict that if it’s still possible to buy gold right now, it may not be for long. I corresponded with Panos Kostopoulos of AMP Gold Bullion Merchants Ltd. in Nicosia. First, he said:
“Immediately after the Cyprus presidential elections [Feb 24], I strongly recommended to Cypriots to buy gold, in order to protect their hard-earned money (taking in consideration wide spreading rumors for the deposits “haircut”, already at the time). Unfortunately, not a single person was convinced to do so. It is obviously needless to mention that I received orders for over 15kg within one day after the haircut was officially announced.”
It is interesting that Cypriots were not proactive, either in buying gold or in transferring Euros to banks outside Cyprus. It’s hard to believe that people will continue to be so naive in the next flare-up of the ongoing crisis.