May 2013 | www.selectasset.com
Crisis in Cyprus - what does it mean for investors

As you must know, a tiny European nation off the coast of Greece has been making big news in the financial world.

Cyprus has become the latest victim of the Eurozone financial and banking crisis.  A popular haven for offshore investors mostly from Russia, the island has fallen into a downward spiral as its banking sector ballooned to more than seven times the nation's economy, according to James Saft at Reuters.  Banking investments in real estate and Greek debt further weakened the fragile economy.

The bailout

In 2012, just four years after adopting the euro as its national currency, Cyprus became the fifth euro-area nation to seek a bailout.  The deal struck with the EU and International Monetary Fund imposed harsh terms.  At the two biggest banks in Cyprus, extensive levies were enforced on uninsured deposits of more than 100,000 euros and cash withdrawals were severely limited.

The bank robbery

On March 16, 2013, the entire nation went on an “extended bank holiday” – essentially trapping all deposits for nearly two weeks to avoid a bank run while they scrambled to arrange for mandatory cash-seizing capital controls on cash withdrawals. These mandatory measures were the first of their kind in Eurozone history.”

Lessons learned

The loss of wealth felt by depositors in Cyprus was considerable – as much as 60% as reported by The New York Times.  However, as James Saft of Reuters explains, with a little precaution and common sense, these losses could have been avoidable.

  • Lesson 1:  Reward and risk go hand in hand.

There is still no free lunch, suggests Saft. “While deposits in Cyprus banks are insured to up to 100,000 euros, any policy which violates the spirit of that is an outrage; the truth is that depositors should have known better”.

  • Lesson 2:  Overseas bank deposits don’t shelter you from sovereign risk.

While International bank deposits might save in taxes, depositors are beginning to realize that they are less secure and it could cost more in the long term. Many International Banking centers have large financial systems relative to their economies, so it may be difficult to solve a major banking crisis without seizing assets.

  • Lesson 3:  Financial repression isn’t going away.

As long as governments have goals that they must meet, the tactic of capturing money from any available source with permission of the depositor will always remain a possibility.  Plan your investments accordingly.

The Cypriot financial crisis is far from over.  Consumption and business investment is being stifled in a uninviting cash-tight economy.  Unemployment is already at 15% and is rising.  Tourism has taken a hit and will take years to jumpstart.  The economy is still in a state of flux and more needs to be done. Convincing investors that the financial limitations imposed in the past were one-time restrictions will be the cornerstone of these rebuilding efforts.

Yes, there are lessons to be learned in Cyprus, as well as the other recent failures in the banking industry.  No doubt, investors are going to have to think long and hard about where to put their money. Need ideas? Contact Select Asset Management to speak to one of our senior advisors about prudent financial planning for your future.