Cyprus: Another nail in the coffin of the euro

Keep in mind that governments around the world are in desperate need of cash, including Israel, and will do whatever it takes to raise that money

By AARON KATSMAN
PM Netanyahu with Cyprus President Dimitris Christofias 390 (photo credit: Amos Ben Gershom / GPO)
PM Netanyahu with Cyprus President Dimitris Christofias 390
(photo credit: Amos Ben Gershom / GPO)
Remember four years ago when many analysts were predicting the demise of the US dollar to be replaced by the euro as the new global reserve currency? Well, one huge Greek debt crisis later, European banks are virtually insolvent, a deepening recession sweeps across the continent and many are questioning the long-term viability of the euro. I continue to believe that, just as I wrote in this column three years ago, by the year 2020 we will not recognize the euro in its current form.
Legalized Theft
The concept of the euro may seem utopian. Having a single currency that binds numerous nations in economic harmony sure sounds good for a continent that was ravaged by two major wars in the last century. The problem is that, as it is for most utopian ideas, in practice it doesn’t work. Due to an implicit guarantee by strong member nations to support weaker ones in times of trouble, smaller nations like Cyprus, Portugal, Ireland, Greece and Spain (PIGS) spent money recklessly as they were able to raise money at low interest rates. Now that their collective irresponsibility has left them all on the verge of economic collapse and bankruptcy, they are calling for the union to bail them out.
What easier way to bail out the system than by stealing from innocent depositors? Basically what has happened in Cyprus is that in the dead of the night, when banks were closed, the European Union decided to enact a “tax” on deposits of more than 100,000 euros. While it seemed that the “tax” would be around 10 percent, we know have learned that it will be 40%. Yikes.
I am sure this will go a long way in providing confidence for citizens in the banking sector. Who in their right mind will deposit more than 100,000 euros in any bank? Don’t think this will stop just with Cyprus. It appears that bankrupt banks in Spain are going to join the theft party.
In Jewish law, there is a discussion about the definition of theft and robbery. The law is that a thief has to pay double what he took, whereas a robber only has to pay back what was taken.
Eretz Hemda has an explanation, saying, “According to the Talmud (Baba Kama 79b), the question is of when a thief is considered a ganav [thief] and when he is considered a gazlan [robber]. This question is very important, for only a thief who is, by law, deemed a ganav, is fined to pay double what he stole. A gazlan, on the other hand, is obligated only to return what he stole and does not incur any fines beyond that.
“In general, it appears from the Gemara that the main difference between a ganav and a gazlan is that a ganav tries to conceal his actions, whereas a gazlan commits his act in the open.”
While I think you could argue that the EU’s deposit tax is either theft or robbery, I am sure that in either case depositors will never even see their 40% back, let alone be compensated double.
Can it happen here?
Many investors are asking the question whether this money grab can happen in other places? Well there are those who have their heads in the sand and believe that in places like Israel or even in the US, it could never happen.
Don’t be so sure. In the US, George Miller, a Democratic congressman from California, is leading a charge that is gaining some traction for the government to buy your retirement plan (be it a 401k or IRA) and then guarantee a 1-3% interest rate per year (meaning you won’t have the chance to grow your retirement savings) on the money but eliminate the tax deduction you get for contributing to your plan.
Keep in mind that governments around the world are in desperate need of cash, including Israel, and will do whatever it takes to raise that money.
What should you do?
What I think we will see is a big move by investors to open multiple bank accounts all over the world in an attempt to be less exposed to one over-zealous government deposit grab, and protect themselves that way. Not a great solution but in an era of government unpredictability, what choice do you have? Future So what does this all mean for the future of the euro as a single currency? Well, as I said at the beginning of this column, I don’t think in 10 years it will look like it does now. The strong nations may force out the weaker, more problematic nations. Or the stronger nations, i.e. Germany, may decide to opt out of the union and go it alone. Or the real possibility exists that the whole endeavor will fall apart.
Aaron Katsman is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, MSRB, SIFMA. For more information visit www.aaronkatsman.com , call (02) 624-0995 or email aaron@lighthousecapital.co.il.