27 March 2013

Hump Day Herald: Cyprus

It's Wednesday again, so I've prepared another haiku. But first, there's a topic that is simply too big and important to go unnoticed: Cyprus. If you haven't been keeping up with the news, Cyprus has finally reached a deal to address their financial crisis. But that leaves questions. What is Cyprus (as opposed to cypress)? What crisis? How could such a tiny place have such a big splash? And most importantly, how does it affect you? (Assuming you're not a Cypriot or Russian business(wo)man. If you are, it's time to call your accountant.)


Cyprus is a small island nation in the Mediterranean off the coast of Turkey. With only 1.1 million citizens, they're a rather small country. Accordingly, their entire economy is almost smaller than the monthly savings under sequestration. Their economy is only 0.2% of the Eurozone. So how have they been holding the news spotlight so effectively after never being heard of since Isaiah?

The situation

As it so happens, Cyprus was a popular tax haven for Russian business(wo?)men, akin to places like the Bahamas are to America. This has led to an inflated sector of the economy, namely banking. Much like in the American financial crisis we recently exited, banks were very prominent in the economy despite not actually doing very much of anything. Things were humming along as the economy grew, but the slowing and recession caused the problems to become painfully obvious because perpetual growth can't exist.

A large portion the money in the banks was being used to make loans to Greeks. Greece has its own set of problems, and those had a big impact on the Cypriot banks when the loans started going bad. At length, it became evident that the banks were going to fail, but as part of the European Union, Cyprus doesn't have its own central bank. So unlike America, they couldn't just print more money to  make the problem go away kick the can down the road and must instead actually face the music now.

The bank is being raided.

The "solution"

To resolve the problem, the EU is going to loan Cyprus some money. But they need collateral. Lots of it. And about the only place to find it was bank accounts. As a result, the first solutions proposed included a "one-time" tax of about 10% on all bank accounts. This was quickly changed to be about 7% for bank accounts with under €100k. The final deal spares the lower accounts completely, but any amount above €100k might see up to 30% 40% of the balance disappear to fund the bailout. They also won't even be able to remove what's left over to another more solvent bank elsewhere.

The aftermath and YOU

Finance, accounting, law, economics, banking, and plenty other professors now have fodder for years worth of lectures. But even if you do not plan to be sitting in their classes (or reading their blogs), this was not just another story in an otherwise mundane day. It has very real implications for everyone, namely the security of funds held in account and access to those funds.

Make sure you know how your money is (not) insured. We put our money in the bank to keep it safe, both from personal attacks and from inflation. But what about from the bank itself? Thousands of banks have failed since 2007, when the financial crisis first started bubbling up and more continue to fail every day. Whether at a bank or credit union, deposit accounts are federally insured, but only up to $250k. That means that if the institution fails, you'll get up to that much back for each qualifying account. What makes the Cyprus situation disturbing is that they were essentially going to only insure 90% of the account balances. In the future, that could happen here. YOUR hard-earned money that has already been taxed would be taxed yet again to fund bad decisions by management. So that they and bondholders don't have to lose money. Doesn't sit well with me.

Keep some cash on hand. As they say, "cash is king". You're only as rich as the amount of money you can actually get to. Access to the funds is a major issue. All the insurance in the world is no good if you cannot access the funds. While I don't believe that things are going to completely fall apart (yet), there are plenty things that could lead to being unable to access your funds in the bank. The banks in Cyprus have been closed for over a week. No one has been able to get money from an ATM in about that long and their debit cards also are not working. (I experienced the same thing once when my bank decided to upgrade their computers. On a holiday weekend.) As a result, those caught unprepared have had to find ways of making do, whether by borrowing from friends/family members or begging what few businesses were even open to be merciful. Neither is a position you want to be in.

So in conclusion, two major realizations have come out of Cyprus:

  1. We cannot be so sure of the safety of our money, even in "insured" accounts
  2. Cash. Keep some. Probably at least a week's worth of living expenses. In smaller bills.
  3. Now haiku.
The banks failed today
People waiting with much fear
Everyone lost.

Image from 401(k) 2013 on Flickr.

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