Brian Jacobsen

Cyprus: A path out of crisis

AdvantageVoice® Blog—3-20-13
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

The Cypriot parliament rejected the proposal to levy a “tax” on insured deposits in Cyprus’ banks as part of a bailout package from the European Commission, the European Central Bank, and the International Monetary Fund. It would have been the end of the political career of anyone voting in favor of the confiscation, so it’s no wonder there wasn’t a single vote in favor of the tax. 

The finger-pointing for the bad idea of the deposit tax has already resulted in the proposed—and rejected—resignation of Cyprus’ finance minister. Nobody wants to take responsibility for proposing the idea because the idea of a deposit tax would have caused chaos in the banking system. It would have undermined the legitimacy of the deposit insurance system of each country and left depositors fearing weekends and holidays because there could be a tax that pops up while the banks are closed and the money is trapped.

In order to move forward, I think the eurozone needs two things: 

  1. Before the end of the bank holiday in Cyprus, there must be a plan in place to have eurozone-wide deposit insurance, much like we have in the U.S. through the FDIC. 
  2. Cyprus needs some money. 

The first element is pretty easy to craft because they have been moving toward a common deposit insurance system since 2008. They can accelerate that process. The second element is more difficult. It will likely involve the Russian government, or a Russian company, infusing money into the Cypriot banks in exchange for exclusive exploration and development rights to Cyprus’ newly discovered natural gas reserves. Yes, this could upset things from a global-balance-of-power perspective, but it’s probably the path of least resistance out of this mess.

Possible scenarios can range from catastrophic to beneficial. The catastrophic scenario is one where this leads to bank runs and the political unwinding of the eurozone. The beneficial scenario is one where there is a eurozone-wide deposit insurance system that emerges, much like what happened in the U.S. in March 1933 after many bank runs and Franklin D. Roosevelt (FDR) declared a national bank holiday on March 6, 1933. A stronger banking union would promote competition and stability instead of breeding further fragmentation and dysfunction. 

The next few weeks will be pivotal in determining which scenario plays out. There are, of course, many other scenarios that span between the two extremes. The Saturday announcement of the deposit tax tilted things toward the catastrophic. Recent developments have marginally moved things away from that extreme. 

The views expressed are as of 3-20-13 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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