The Bitter Lemons of Cyprus (Part 2)

So what’s the big deal?

The leadership of the EU has proposed that Cyprus dun its bank depositors by $5.8 billion in order to qualify for a bailout that will recapitalize their banks. And banking is a big deal in Cyprus. Because of lax money-laundering rules, it’s become the Cayman Islands of the Mediterranean

But 6.75% was too much of a hit on small deposits for lawmakers to accept. Never mind that bank deposits in Cyprus pay almost 5% and inflation has averaged about 2 1/2 % over the past 5 years. Bank depositors were seeing a positive real return from their holdings, unlike Germany or the UK or the US. As we all know, bank deposits rate here in the US have been paying less than the inflation for the past 4 years.

So savers in the US have been dunned by almost 10% in real terms since the beginning of the Financial Crisis. But there’s no sense of panic, no lines in front of ATMs, no protests at the Fed–just a steady drip, drip, drip of negative real interest rates.

So what’s the big deal, Cypriots? If you think a one-time charge punishes the thrifty, try investing in US Dollars. Because over here, what’s safe doesn’t pay, and what pays isn’t safe. Economists call it “financial repression.” I call it a “stealthy Cyprus.”

Douglas R. Tengdin, CFA

Chief Investment Officer

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