What have we learned so far from the events surrounding Cyprus? The endgame for the euro is back on the table and fast approaching.
The EU has come to the realization that it cannot continue bailing out countries left and right so the use of a deposit tax was a surprise to everyone in the market. Hidden under the veil of taxing laundered Russian money signifies more troubling problems.
The EU has decided to tamper with a long-held tradition of deposit insurance. By choosing to tamper with this sacred cow the EU attempted to lure Russia in to assist in the bailout at the same time risking the pan-European banking sector.
Cyprus has a dirty, little secret. The island has a history of being Europe's tax haven. When Cyprus was admitted to the EU the various tax loopholes that companies used to access the EU were never closed leaving a tax avoidance highway for companies to access Europe.
Occupants of the Greek side of the island made a very bad bet, deciding to support their brethren to the North and now they must pay the price for their mistake.
The problem from the EU's side of the coin is that they have tapped out their friends and now need a new supporter.
The United Kingdom is currently undergoing an austerity program and has no money to pay. The EU is busy supporting the economies of Ireland, Spain, and Portugal, while they undergo economic programs. Greece is a lost cause and Italy may be joining it soon if Berlusconi returns to power. The U.S. is busy supporting the EU banking system through various swap programs and cannot be tapped for additional funds as the funds are busy supporting U.S. Treasury auctions.
For Cyprus, the EU needed to find a new country willing to play the shell game and it tried to play a game of chicken with Russia using a deposit tax as a threat while undermining the banking sector.
While the statements insist that this is a one-time event the use of a deposit tax should not be taken lightly. Crossing the line and stomping on the safety net underpinning the banking sector has sent people running back to Gold (GLD, DGP) and Silver (SLV, AGQ).
If deposit accounts in Europe cannot be considered safe then savers have very few options left for themselves. Government bonds run the risk of default outside of the France and Germany and as we have seen with respect to Greece and Cyprus the EU will run roughshod over bondholder rights in order to protect their own holdings.
What is happening in Europe threatens the very fabric of the European Union. If bondholder and depositor rights are not upheld then what lengths will the EU go to in its attempt to hold the continent together?
It has become apparent that the EU needs to get through the German elections in the fall without a hiccup or risk problems rapidly spreading across Europe. The last thing Angela Merkel needs at this moment is for her election to become a referendum on the euro and the continued bailouts of Southern Europe. She may be polling seven points ahead of her last election numbers but one has to look at a German economy that is falling into a recession, party losses across the board in Germany the past few years, and an electorate that is tired of bailing out the rest of Europe.
Investors in Spain and other countries being supported by the EU will have a very difficult choice on their hands. By broaching the deposit insurance line and once again trampling on bondholder rights the EU has sent a message to the markets. Your money is not safe here and the safest place is in precious metals. While Gold and Silver have seen a disappointing start to the year the problems make it a continued safe haven in these times of trouble. While fingers are being stuck in dams trying to contain the damage being caused by bad decisions additional cracks are forming and the EU is running out of fingers.