The Cyprus Banking Crisis: What it Says About Gold and Silver

Cyprus is a tiny country few can even locate on a map.

We’ll admit it — when we first heard about a banking crisis in the small Mediterranean island nation, we had to dust off our globes.

 A Brief Look Back

In March of this year, the once quiet member of the European Union (EU) was roiled by a banking crisis that dominated headlines from New York to Tokyo and back again.

In the past decade, a number of serious debt problems have weakened member-states of the EU. As a result, several countries have found themselves in deep recession. Even some of the EU’s largest members, France and Germany, have suffered.

Many of the difficulties lie with unsustainable sovereign debt from various countries, namely Portugal, Italy, Ireland, Greece and Spain. One of the major flashpoints in this ongoing saga occurred in Greece in 2011. For a short time, it even appeared that the Euro monetary system was in jeopardy. A series of events beginning in late 2009 seemed to indicate that the Greek government was insolvent, unable to service its debt.

To stave off a complete collapse, the European Central Bank quickly organized a bailout package. One of its key measures consisted of a “haircut” of nearly 50% for holders of Greek debt.

(In the financial world, a haircut refers to a certain percentage subtracted from the market value of an asset, then used as collateral).

Since much of Cyprus’ economy was based on offshore banking, its institutions had large holdings of Greek debt. Things were difficult already, but the haircut posed a problem for financial stability in Cyprus.

An emergency loan from Russia in early 2012 helped for a short time, but by the beginning of 2013, it became clear that Cypriot banks were in serious trouble.

Cyprus Asks for Help

Since many banks in Cyprus had heavy exposure to Greek debt, their balance sheets were in disarray. The Cypriot Government cited this as the key reason it reached out for assistance from the EU and the International Monetary Fund (IMF).

Two banks in particular — the Bank of Cyprus and the Laiki Bank — were of concern, as they were the largest and most heavily affected by the 2011 Greek bailout.

On March 16, the European Central Bank and IMF proposed a 10 billion Euro deal with Cyprus. A critical part of the deal involved a deposit levy of 6.7%, up to the insured amount of 100,000 Euros, and a 9.9% levy for accounts over 100k. As one can imagine, this led to extreme outrage in Cyprus, along with a pretty significant bank run.

The nation’s parliament rejected the proposal on March 19.

Back at the table, Cyprus President Anastasiades, along with Eurozone and IMF officials announced a new plan involving the closure of one bank (Laiki) and the restructuring of another (Bank of Cyprus). Deposits below the insured amount were left untouched, while deposits over that amount were subject to confiscation.

This is significant largely because, in the past, only shareholders and bondholders lost funds. Now, ordinary depositors — who believed their funds were safe — suddenly found them confiscated.

Moral of the Story?

As a discussion on Yahoo! Finance pointed out, the bailout package for Cyprus was a true “Crossing the Rubicon,” because even depositor funds are no longer safe from confiscation in a crisis.

Which begs the following questions: Will the EU institute similar measures in future crises? Could the Fed institute capital controls here in the U.S.?

Needless to say, gold and silver coins held in your possession are not subject to these sorts of threats, which is the reason many investors consider precious metals to be a safe haven compared to money in the bank.

Indeed, if a crisis were to hit, depositors would flood the banks in hopes of retrieving their funds. If this were to happen all at once, the bank couldn’t keep up since only about 10% of deposits are actually held in the bank’s vault. The rest is loaned out.

Yet if you own Gold Eagles or 90% junk silver coins, you have access to them at any time, provided they’re not in a safety deposit box and a bank holiday is declared. If you keep them at home, you can rest easy knowing you have a store of value readily available.

The lesson of the Cyprus banking crisis is this: you can’t fully trust that the money in your bank account is safe. Of course, most of us have checking accounts to pay our many bills, but only a small fraction of Americans own gold and silver.

If a full-blown banking crisis — similar to the Cyprus situation — were to hit a major country like Germany, England or the U.S., the perks of having precious metals on hand would quickly become crystal clear to the bulk of the population.

What Are Your Thoughts?

Will the Cyprus contagion spread to other EU member-nations?

Do you keep some of your precious metal (and other assets) out of the banking system?

Tell us what you think. Post a comment below, or track us down on Facebook and Twitter  today!