Cyprus port of Limmasol_311.
(photo credit: Reuters)
If the Cypriot government had examined the country’s financial situation the
same way a chess grandmaster evaluates a chessboard, they never would have ended
up on the verge of collapse.
Ultimately, unfriendly relations between the
new conservative president and the governor of the Central Bank of Cyprus (who
was appointed by the now-ousted communist party) caused a delay which led to
trying to solve a 10 billion euro problem in the course of two weekends. That’s
like a chess player letting the minutes on his clock tick away and only starting
to move pieces with seconds remaining at the end of the game.
point, the Cypriots need to start with the most fundamental principal of chess:
don’t sacrifice your king.
When trouble lurks on the board, chess players
seek solutions that hurt their opponent, maintain the status quo, or, at the
very least, lead to a draw. But they absolutely never move their king into
harm’s way. They don’t even threaten a king sacrifice since, without the king,
they lose the game (or in chess jargon, checkmate).
To obtain backing
from the European Union, however, one of the first sacrifices the Cypriot
government offered was a tax of up to 25 percent on large, uninsured bank
deposits. Subsequently, that number increased to 60% (though depositors would
get bank shares in exchange for some of that money... not a particularly good
trade for them).
President Nicos Anastasiades said, the so-called tax on
deposits would mitigate the need to reduce social programs, cut pensions or
increase taxes. Perhaps he’s right, but the short-term fix will utterly
devastate public faith in the banking system. The central mission of a country’s
banks is to protect deposits. Taxing deposits also taxes people’s belief in the
banking system’s security, and that tax on faith will ultimately cost too
Without absolute confidence that banks will secure their client’s
money, all levels of financial affairs will crumble. The 100% money-back
guarantee from a bank is the king of all financial affairs, and must not be
sacrificed for anything.
During the darkest days of America’s most recent
financial crisis, the United States government stepped in by increasing the
Federal Deposit Insurance Corporation’s coverage from $100,000 to $250,000 in
Rather than stoking fears that their banking system could
falter, the US treasury backstopped the banks. And regardless of all the pundits
talking about the liquidity problems of the FDIC, not one depositor lost a
single penny from an FDIC-insured bank account.
Compare the United
States’ approach of shoring up the core financial institutions at times of
trouble to the European Union’s support of expropriating cash from what should
be considered sacrosanct safety. Cyprus’s top business is banking. Taxing
deposits doesn’t only hurt the current depositors who get hit by the one-time
tax, but will forever damage its image as a world banking center.
must immediately undo its plans for confiscation of assets and shelve any
further ideas of taking money from bank deposits. The Cypriot government needs
to pass rock-solid legislation that will demonstrate to the world that until all
other means have been exhausted, from austerity measures and tax increases to
restructuring loans and even selling national treasures (including rights to the
natural gas finds off their southern coast, for which they have already received
offers from Russian energy giant Gazprom), they will never offer up the king of
their financial board – their clients’ bank deposits – as a sacrifice to any
god, not even the EU.
World chess champion (1996-1999) Susan Polgar and
international investment advisor Douglas Goldstein, CFP® are collaborating on a
new book, Rich As A King: How the Wisdom of Chess Can Make