Real Estate Investor Magazine South Africa June 2013 | Page 17

UPFRONT
Cyprus
What happened in Cyprus? Essentially, the
big banks in Cyprus took huge bets on Greek
sovereign debt, and lost. The government, as the
guarantor of the banks, had to bail the banks
out, but could not, since it was bankrupt itself.
To salvage the situation, a 10 billion euro loan
from the European Union, European Central
Bank and International Monetary Fund was
negotiated as part of a debt settlement deal, with
one significant condition – Cyprus had to raise
5.8 billion Euros to qualify for the loan.
And where does a bankrupt country get 5.8
billion Euros? By dipping into the accounts of
those who hold accounts with the country’s two
largest banks - deposits held safely, supposedly,
in trust! The buck stops with us.
Thankfully, this time round, the lower and
middle income groups, which are invariably also
heavily indebted, were not the main targets of the
“appropriation” of bank deposits. The target is
depositors in the upper middle and upper income
groups, with more than 100 000 Euros in the top
two banks - Bank of Cyprus (BoC) and Laiki or
‘Popular Bank’ - who face losing a large chunk,
up to 40%, of their money. Thereafter, the second
target will be the bank accounts of small and
medium sized firms, not to mention substantial
Russian deposits in Cypriot banks.

Dangerous precedent
It sets a dangerous precedent. What stops a
government from including the low and middle
income groups at a later stage? And as George
Friedman of Stratfor Global Intelligence
commented: “If Russian deposits can be seized
in Nicosia, why not American deposits in
Luxembourg? The proposal ... undermines a
formerly sacred principle of banking in most
industrial nations, the security of deposits
– setting a new and possibly destabilising
precedent in Europe.”
Friedman notes that the point of the global
banking system is that money is safe wherever
it is deposited. If foreign depositors in European
banks view Cyprus as a template for the future,
foreign corporations – and even European
corporations – could start pulling at least part of
their cash out of European banks, putting it nonEuropean banks and transferring it as needed. If
these withdrawals occur, it could create a massive
liquidity crisis in Europe. “At the very least,
every reasonable CFO (chief financial officer)
www.reimag.co.za

will now assume that the risk in Europe has
risen and that, in Europe, depositing money in
a bank is no longer a no-brainer,” he says.
In light of this, a statement from the
International Institute of Finance (IIF),
which represents more than 400 leading banks
worldwide, is truly disturbing. It warned that
“investors would be well advised to see the

of South African citizens and the decline of
the financial system are not “government’s”
concern: the buck stops with you and me. Our
tax money and our “promises to pay” underscore
the entire system, and when things go wrong, it
is us who bear the brunt.
Corporations cannot sign promises to pay.
Only people, or those authorised to act on their

“We don’t have to wait for the global
financial system to collapse to realise that it is
you and I who will ultimately pay the price”
outcome of Cyprus ... as a ref lection of how
future stresses will be handled”.

behalf, can sign promises to pay. And when
things go wrong, it is us who bear the brunt.

It is disturbing because major f inancial
institutions around the world are in trouble.
And while this is the first time that a “bail-in”
for creditors, including deposit holders, was
practically implemented, legal frameworks exist
for it in a number of developed countries.

We don’t have to wait for the global financial
system to collapse to realise that it is you and I
who will ultimately pay the price. Just ask the
hundreds of thousands of South Africans who
have lost everything to the bottomless pit of
debt that is the modern financial system.

In New Zea land a “ haircut plan” was
envisaged as far back as 1997, during the time
of the then Asian financial crisis. There are also
provisions in place in both the UK and the US
to facilitate the confiscation of bank deposits.
Our government, using the authority and power
we have bestowed on it through our vote, has
also already ensured access to our bank accounts
to collect taxes – through what is called an
“agent’s appointment”. This allows SARS to
implement a type of garnishee order against
your bank account if you are an individual, or if
you are a company, to “collect” their share from
your account, even if that means cleaning it out.
Furthermore, in Europe, depositor savings up
to €100 000 are guaranteed to be secure should
the institutio