As you may have heard, Cyprus decided to arbitrarily confiscate 10% of all money in all of their banks. They have announced a bank holiday, initially just for Monday, but it has now been extended to Tuesday and potentially even Wednesday. All interbank money movement has been stopped.
Sure, they didn’t call it confiscation, but that’s essentially what it is. Pure unadulterated theft.
There’s two things that are concerning here. First, this was done primarily by the European Central Bank. No, they can’t legally do it, but the pressure to sieze the cash came from them. Rumor has it they wanted 40%, not 10%.
They flat out said over the weekend that Italy is next on their radar. It’s reasonable to think that Greece won’t be that far behind.
That’s a worrying thing for sure. But a side comment by one of the guys involved in Cyprus caught my eye a little more. He said (paraphrased) that if they get away with this, then everyone’s going to do it.
In other words … if they get away with stealing money from their folks, then none of us are safe because those Bankers will look at it and see $$$.
I’ve mentioned credit default swaps before. Basically, it’s insurance for losing money. Except everything is so overleveraged that estimates of global CDS liabilities are over 600 TRILLION dollars. The gross WORLD product (all the economic activity in the world) for 2011 was 70 trillion.
Rudy’s Note: Credit Default Swaps are crazy. In terms we all understand, it’s as if you loan your brother cash to buy a house. Then you go and get insurance for the house in case he can’t pay.
Except you don’t insure the house you insure the debt. And you insure it twenty times. So that $100,000 loan just turned into a potential windfall to you of $2,000,000 if your brother doesn’t pay. Except that money comes from somewhere. So that $100k loan to your brother turned into $2 million in potential liabilities for the 20 insurance companies if he doesn’t pay you.
Take that up to a global scale and you can understand how you get to over 600 trillion in liabilities.
If that snowball starts rolling, nothing is going to stop it. And major defaults in Europe could push that snowball over the edge.
I try not to ring alarm bells all that often. I find it counter productive.
But if you don’t have cash on hand for a month or two, fix that.
If you don’t have food on hand for a few weeks, fix that.
If you can’t protect yourself, fix that.
My gut tells me that we’ll end up as a safe haven for cash fleeing the Euro Zone if they start cascading confiscation and we’ll be ok for the time being.
But I wouldn’t bank on it. Best to be prudent here and realize the dangers of massive disruption.
Have a great week…