Is Cyprus the beginning?

Cyprus is broke.  Its government debt to GDP ratio is 145%--much like Greece and worse than Portugal @ 120% or Italy, 115% or USA, 110%.  The European Central Bank vowed last year to save the Euro but with member countries like Cyprus, et. al. how can it continue?  European finance ministers offered to bail out the Cypriots with 10 billion Euros but 17 billion are needed.  Everyone is arguing who ordered who to do what but the idea was floated that the Cyprus government would assess a 10% tax by fiat on all bank accounts.  That led to riots in the street and the members of parliament all passed the buck and said, no, we won’t do any such thing.  Then as the weekend started with banks closed for 10 days, they did a very similar thing, an ingeniously loopy thing, by assessing a whopping 40% charge against all accounts over 100,000 Euros. 

            In USA we’d call this unreasonable seizure, a violation of the Amendment IV.  But TV political idiots chortled that this only hurt the Russian mafia who created Cyprussia by parking big bucks in the banks there. 

            But what happens now?  Among the proposed daydreams of the political class is a Russian Bailout.  Something that would give Russia claim to most of the enormous natural gas field that has been found in Cypriot waters in exchange for a bailout.  But then the thought of having a puppet government and banking system run by Putin where German taxpayer money goes towards making the Russian mob whole isn’t very appealing.  Unlikely to happen.  Hereinafter, no sane individual keeps his money in a Cyprus bank.  No deposits, no banking or at least only a miniscule banking industry.  No banking, no business loans.  With little banking available, how do mortgages get paid, salaries get paid, or anything else commerce-wise?  Clearly in such an economy cash is king.  Bartering begins.  The economy tanks and the government collapses.  Eventually, a succeeding gov’t will have to prop things up by some technique and the likely outcome always points to inflation, which allows a Mt. Debt to look smaller with each passing year until it is under control.  

            But there is more.  Greece’s banking system is heavily interfingered with Cyprus and will likely collapse if Cyprus does.  The ECB and IMF suggested that individual’s accounts be zapped and they are likely to suggest this to other PIIGS countries.  Already there seems to be a solution trial balloon floated that essentially all private stocklholders and junior debt holders of banks be given a haircut (or beheading).  Now it may seem grossly unfair that old grandpa who keeps his life savings in an account, or some investor who bought bank stock should lose most of what they have, in order to bail out the government who created the debt.  True. But this is how government power works.

            What Europeans hope is that the Euro nations’ troubles won’t make the investors of the world very skittish about lending money to Europe.  If that happens, they will have to borrow at a premium of interest and likely make their economies into sinkholes for years to come.

            So what should an American think?  First, the people who are scoffing at concerns over our debt are Fools.   We must get deficit spending  under control, along with entitlement reform.  If you are pessimistic about this happening, then bury some cash, because if the debt disease spreads to USA, there is no big ECB or IMF to bail us out.  We are the IMF and we are too big to bail. Finally, if the credit crisis expands, there will be countries defaulting, that will bring high borrowing costs and stagnant economies, and opportunistic dictators will arise to blame someone else.  Like Hitler blamed the WWI allies.

            I just pray that Obama can watch what is happening to others and learn a lesson before it is too late. You are digging your hole in the backyard, aren’t you.