-- Posted Sunday, 17 March 2013 | | Disqus

Depositors who are waking up to find that up to 10 per cent of their bank accounts in Cyprus have been confiscated as a part of a European Union rescue operation are unlikely to leave their money in the country because of the risk of it happening again. ATM machines have already emptied on the Mediterranean island in a bid to drain accounts. All electronic money transfers have been stopped.

An estimated $50 to $58 billion of deposits are being subject to the so-called tax or special levy, which gets around what was supposed to be an EU bank deposit guarantee scheme. This is the first EU banking bailout to involve such a mandatory confiscation of depositors’ money and was agreed by finance ministers yesterday.

Ending money laundering

It is aimed squarely at the huge offshore funds held in Cyprus by Russians, much of it said to be from money laundering though how an offshore banking centre is suppposed to adjudicate on the source of offshore funds presented to them by depositors is unclear.

The EU would evidently rather not have this money deposited inside the bloc and has made its draconian ruling to frighten this money away as well as to help refinance the beleaguered Cypriot banking sector. Ironically the impact of this $50 to $58 billion leaving the system will of course be devastating and almost certainly result in another crisis for the banking system.

The cost of securing German support for the rescue package has been high indeed: the whole future of Cyprus as an offshore banking centre. Will depositors risk leaving their money in such a jurisdiction for a second round of this banking system’s collapse?

How much more of depositors’ money will the EU want then? Depositors, who are far from all being Russian oligarchs and mainly ordinary people and pensioners are hardly likely to stick around to find out. That’s why there has been a run on the banks and ATMs.

German finance minister Wolfgang Schaeuble commented: ‘The Cypriot banking sector will be significantly reduced to a sustainable level and business model.’

Gold to benefit

Where will this flood of money leaving Cyprus go? Mr. Gold, veteran trader Jim Sinclair says gold will rise past $1,600 on Monday and never look back as a consequence. Rival offshore benking centres will benefit and the nearest outside the EU are Istanbul, Beirut, Bahrain and Dubai.

Russian President Vladmir Putin will undoubtedly be furious at this confiscation of Russian savings. Mr. Sinclair thinks Russia might now signal that its central bank is going to raise its gold holdings further. Perhaps Mr. Putin might also try to tempt depositors to bring some of their money back home.

But the real beneficiaries will be rival banking centres outside the EU who are shown at a stroke to be more reliable custodians. Confiscating depositors’ money will be suicidal for the Cypriot banks but a boost for offshore banking rivals elsewhere.

ArabianMoney thinks this is a terrible precendent for the EU to set as it means it no longer guarantees the security of all bank deposits within its territory. That has not happened before. Where will it happen next? Greece? The eurozone financial crisis is back with a bang!

-- Posted Sunday, 17 March 2013 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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