What Will Happen To The European Banking Sector After Cyprus Bailout Agreement?
Monday, the Cypriot government made the decision to adhere to the EU and IMF bailout terms in an agreement to tap into account holders assets that total over $100,000 in an exchange for a 10 billion euro bailout package. The motion to sacrifice the trustworthiness of the Cypriot banking system was originally rejected by Cyprus’ government officials, but as the IMF threatened to remove all emergency funding from the struggling country, Cyprus had no choice but to acquiesce to the demands.
How Will The Cyprus Bailout Agreement Impact Cypriot Account Holders?
Unfortunately, those who hold bank accounts in Cyprus, totaling $100,000 euros or more, could stand to lose as much as 30% of their assets in equity conversions. Bondholders and shareholders will be targeted first. Currently, All Cypriot banks are closed and will remain closed until Thursday to prevent any panic driven runs on the banks. Those who had their funds tied up in Laiki the Cypriot popular bank will have the most exposure. A total of 4.2 billion of the 5.8 billion that is being required by the EU as part of the bailout agreement will be coming from Laiki bank. All accounts totaling less than 100k will be moved to the Bank of Cyprus, creating a good bank bad bank scenario.
Are Banks Still Safe For Investors?
The situation that is currently engulfing Cyprus, sparks an interesting question, namely, are banks truly safe? If you were a citizen of Spain, Italy or any other struggling European country, for example, wouldn’t you also be concerned that your bank may not be as safe and as protective of your assets as you had previously thought? Here in the U.S. we have already seen and felt the effects of banks who have made poor financial decisions, creating the need for Government assistance. Unfortunately, these “too big to fail” banks, did not learn from their previous experiences. Today, there are approximately 10 trillion dollars invested into U.S. banks. The U.S. Banking system, however, has over $300 trillion tied up in derivatives, and mortgage backed securities. The FDIC backing of accounts under $250,000 is only a drop in the bucket compared to the overall derivative exposure. If any of these big bank investments were to go sour, we could see a total crumbling of the banking system. Between the EU’s decision to invade private bank accounts in Cyprus, and the current banking situation here in the U.S., it gives me great pause when I consider keeping any major assets in the bank.
What’s The Alternative To Keeping Money In The Bank?
If all this bank scrutiny and turmoil is giving you pause about whether or not banks are truly a wise place to put your hard earned assets, and if you’re starting to think that grandma and grandpa may have been on to something when they stored their money under their mattress, now is the perfect time to consider physical metals as an investment. Physical metals not only gives you the ability to control and store your own assets, it also provides an investment with remarkable profit potential that will also serve as a hedge of protection should inflation further erode the dollar. For more information on Precious Metals as an investment in light of Cyprus and the banking sector, speak to a Redhawk Financial Advisor near you today.