Cypriot bank account raid
In the past few days the Cypriot Government has announced the incredible news that it will be raiding its residents’ bank account savings to help pay for its banking crisis – including 60,000 Brits. Bank accounts on the island will be hit with a levy of up to 12.5% in a bid to satisfy Euro bigwigs that Cyprus are playing their part in dealing with its debts and therefore deserve another bailout.
So what does this incredible move, engineered by Germany, actually mean?
Firstly, the fact that Cyprus needs an £8.7Billion bailout from the IMF and Brussels shows that the Euro crisis has not gone away. The headlines of the past month or so have focussed on the UK ratings downgrade and the increasing chances of a triple dip recession. I guess no news on the Euro front was deemed ‘good news’. It’s natural to hope that the Euro crisis has improved as we haven’t heard of any catastrophes lately. Unfortunately this latest requirement for funding demonstrates that the crisis has not gone away. In fact, while we hear of high street brands going bust here in the UK and people continuing to lose their jobs, you can bet that there are even more companies going under and massive job losses in the likes of Greece and Spain. We just haven’t heard about it recently.
End of bailouts?
Even more worrying is the fact that the bailouts now seem to have strings attached.
Germany have basically said that to earn this bailout, Cyprus needs to raise £5 billion themselves by stealing from its residents’ savings accounts. This illustrates how the richer Euro countries are becoming fed up of throwing good money after bad. They want to see the poorer countries demonstrating that they will take charge of the own finances and not just seek bailout money. Who knows what future bailout strings will demand, or if this clause shows that bailouts are coming to an end – possibly pushing the weaker countries out of the single currency.
We also need to be concerned about the consequences of such a savings raid. While in the short term it may pay the latest loans for the Cypriot banks who have accumulated huge losses to Greek banks, in the medium term it could seal their fate. It is likely to cause a panicked public to withdraw as much money from ATMs as possible. For others, they may choose to leave the country to attempt to protect their wealth. For sure, it will diminish private wealth and therefore reduce any spending or hopes of recovery on the island.
UK savings at risk
Apart from the impact a collapsing Euro will have on the UK, perhaps we should also be worried about our own bank account savings. It is highly unlikely that the UK treasury will copy such a move here but the Cypriot actions further undermine traditional values that your money is safe in the bank. With interest rates on savings accounts well below inflation, there seems little incentive to take the chance. It absolutely makes sense to move some of your money around to hedge your bets.
Gold is an obvious place to move some of your bank savings into. Returns have far exceeded those in savings accounts and the yellow metal has proved just as liquid as cash – especially in its physical form of coins or bars. Moreover, the economic environment we find ourselves in paves the way for gold to continue its rise in value. With UK gold coins being completely tax free, they provide a compelling reason to be proactive with your savings before the headlines return closer to home.