In Cyprus, the ECB had forced a tax upon the bank deposits. The plan was to force Cyprus banks to exact a 9.9 percent tax on accounts with more than 100 thousand Euros and a 6.5 percent tax on accounts with less than 100 thousand Euros. Those latter accounts are protected by deposit insurance.
The Cyprus Government was trying to modify this confiscation and just voted unanimously to void the agreement, choosing instead to play a game of chicken with the ECB. The ECB blinked and promised to supply necessary liquidity to the Cyprian banks without taxation. There will likely be a run on the Cyprian banks when they are reopened, and that is rescheduled for Thursday but may not open even then, to the hardship of the poor and elderly who have accounts.
Had the ECB plan been approved it would have likely put gold back into the picture. I had written previously that in the bankers' order of things, gold was less pristine as collateral than treasury bonds of the strongest nations, like Germany, the US and Japan.
But confidence is waning in the Eurozone, and if there could be a bank run in Cyprus, there could be one in Spain, Italy, etc. Contagion often starts with banks not trusting each other. The ECB had planned to use the 5 plus billion euros collected along with new loans to stabilized the nation's banks. Now it could be up to the Germans to bail out Cyprus, and if so, bigger demands could be forced upon the wealthy nations of Europe.
After all, if Cyprus could thwart the will of the Eurozone, what are Spain and Greece and Italy waiting for? And know this, there is no exact plan in place to capitalize the Cyprian banks and open them! Talk about the destruction of confidence!
But there were so many other ways to fix these problems that we see in Cyprus and the poorer Eurozone nations. There could have been a ban on hot money in the first place. If banks know that their customers' accounts can be taxed for their bad loans, can you imagine the moral hazard?
It was bad enough that the banks loaned recklessly and then the governments are forced to participate in massive austerity. But now the very lenders to the banks, the customers, are in jeopardy.
It doesn't matter that the ECB, for now, has backed off on threats to deposits. The idea has been unleashed. It cannot be put back into the box. Now, at least, capital controls of hot money are being considered for Cyprus
But the folks who should take the hit are the insider wealthy folks, the hedge funds and the biggest investors tied to central bank influence, who should take a hit as the bank bonds should be hit. But there are so many derivatives on those bonds that it is easier for the central bank to just threaten to appropriate depositors' money or subject the nations to austerity, which is now causing fatigue in the Eurozone.
The bankers at the central bank level have gone overboard and are showing themselves to be confiscators of wealth by even considering the idea of deposit taxation! There is so much fiat money that they have to appropriate deposits to control inflation? Is that what is happening?
I am all for stopping excess speculation and commodity inflation. I have written many articles calling for this halt to futures speculation. But confiscation is not the way to do it.
This call for depositor sacrifice is heavy handed behavior on the part of the ECB, and a confiscation of money makes sure interest rates stay low, so that the banks win in the interest rate swaps game with all the people who fear inflation.
But capital controls would stop excess speculation and inflation. Capital controls as an alternative plan is considered crazy among the insiders, but it makes perfect sense as a means to stop speculation. Capital controls should be instituted the world over by sovereign nations acting in a sovereign way!
The motivation to own gold won't be in order to fight inflation, if the system continues to slow economic growth on main street and keep interest rates low, but owned because people lose confidence in the banking system as a whole. We are far from that today, and so people should not go all in to gold. But it is a possibility that these calls for appropriation could continue. And I use the word appropriate in the most negative way.
While the Russians who deposited money into offshore accounts in Cyprus were to be punished investment banks in the US and the Eurozone would never be stopped from their massive speculation in oil and foodstuffs, etc. Is it only the Russian "Mafia" who deposited money in Cyprus that needs to be stopped from speculating in the western world?
So, having physical gold in the portfolio in case the entire financial system collapses is wise, but it most likely won't collapse as interest rate swaps make treasury bonds in demand. Gold bars at Kitco would be the best way to obtain physical gold just in case confidence in fiat money vaporizes.
If barter were to become king instead of the fiat money, gold, real estate and food would be very valuable. Let's hope that is not where this reckless banking is taking us.
In the meantime, banks of Italy, Spain, Greece, could face contagion, first due to bank runs by citizens, then by bank to bank mistrust. Spanish banks can no longer foreclose, meaning they have to pay for their mistaken lending. Yet, ultimately government or even depositors could be on the hook in Spain, just like in Cyprus.
Most likely, the Spanish government would be on the hook, but I would not be buying Santander (SAN) and other Spanish banks. Santander already is puffing up its tier one numbers with goodwill. Therefore, even though it is a too big to fail bank, and is diversified worldwide, it could have profit issues because of foreclosure limitations and the potential tax that its depositors would have to pay.
That is assuming that Cyprus is not just a one off event.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.