According the news, EU officials are telling Cyprus that in order to get more bailout money Cyprus needs to start raiding personal savings accounts to pay off government debt. Some of this has to do with allegations of money laundering for the Russian mafia but it will surely hit hard at families who have put their life savings in Cyprian banks. The news of Cyprus raiding personal savings accounts to pay off government debt drove stocks lower across Europe. Anyone who has been thinking that it is time to invest in a Euro Zone recovery, may need to think again.
Austerity versus Growth Strategies
The raging argument throughout the European Union is whether to stimulate economies to encourage growth or hunker down, reduce government spending, and little by little pay off debt. Many of the smaller and Southern members of the EU have national debts that they cannot pay. The most famous is Greece. A Greek financial collapse has been averted only because the EU believes that a collapse in Greece would spread across Europe’s southern flank to Italy, Spain, and Portugal. Austerity measures have thrown many out of work and brought down governments such as in France. Cyprus is under the gun because the EU is demanding austerity measures including raiding personal savings accounts to pay off government debt to the tune of €5.8 billion.
Faith in Banks or Lack of the Same
Those who have chosen to avoid stocks, bonds, hedge funds, and the rest over the years have commonly chosen to simply put money in the bank. Many may have missed out on great profits, at times. And many avoided losing most of their acquired wealth because they were not it the stock market when it crashed in 2008. Now, it would appear that Cyprus is raiding personal savings accounts to pay off government debt. Perhaps the EU is excited about the prospect of getting ten percent or more of laundered Russian mafia money to help pay off Cyprian debt. But the folks who vote in Cyprus also have savings accounts and loss of faith in the banks could lead to a run on banks in Cyprus and elsewhere. It could lead to a loss of faith in the current Cyprian government and new folks in office next time around.
Where to Put Your Money Now
Are we going back to the day when families put their gold coins in a clay pot and buried it under the fireplace? It was certainly a way to keep money safe, unless of course you think about the fact that the gold bull market may well have run its course. Will folks in Cyprus simply keep cash at home instead of banking it? If the government makes a practice of raiding personal savings accounts to pay off government debt, a viable solution might be to buy property, collect rent checks, and wait for the financial crisis to burn itself out. Taking a wider view, the example of confiscating money in bank accounts may send shivers across Europe and across the Atlantic. It could possibly wreak havoc in financial markets worldwide.