The Cypriot ‘bank robbery’ policy has proven to be one of the slowest heists ever seen. While real world bank robbers plan to be out of the bank with all of its money within a matter of minutes, the Cypriot government has spent a solid week in parliament going through the motions of stealing everybody’s money. The problem with this outcome is that the government can’t actually step in to take money out of savings accounts until it has actually passed the legislature to do so, meaning that the only people who will really lose out are the ones with funds left in their accounts at the time of the bill passing.
Needless to say, the end result was picture perfect bank run, resulting in empty ATMs, and banks closing their doors to prevent insolvency. That being said, as the turmoil unfolds (and hopefully dissolves with the decision to not-pass the bill) it is important to remember that US investors are also exposed to the volatility that a foreign deposit account tax has on the overall markets. Specifically, between the currency risks, the flight to tangible value, and the president of the bill itself, investors need to be aware of what might happen to their personal savings accounts if this sort of deal goes through.
Since a great deal of the funds held in Cypriot savings accounts today are believed to be foreign accounts being used by wealth international investors, it stands to reason that these individuals would be particularly upset by a tax placed on their deposits. The logical progression to follow is that these savers will start their own electronic run on the bank to a different country, and even to a different currency all together. The distinction here to make is then to recognize how it is that such a flight would likely occur as a collection of very large cash transfers out of the Euro-zone all at once, with very little price sensitivity towards the exchange rate being received.
If we proceed with the assumption that many of these foreign investors are wealthy Russians, it then stands to reason that they might all pull their money within the same week, and transfer it to the same secondary tax haven. The end result of such a situation could spell out a rapid decline in the value of the Euro, against an appreciation in the value of the secondary haven’s currency price. Ignoring then the interest rate adjustments that come as a result of such a transaction, we need to take a look at how it is that such a currency flight could impact an American saver with domestic funds.
Over the last few years, we’ve seen how it is that news from the EU has managed to dramatically impact US equity markets because of the way in which they represent the global demand for goods and commodities. Since a capital flight from the Euro decreases the purchasing power of the grouping, it represents a decrease in the aggregate demand in the global market, and would therefore very likely have a negative implication for US equity markets.
That being said, many circumstances similar to this one have created more of a flight to tangible value than they have a withdrawal from the markets entirely. Given that we have funds fleeing from the Euro, and a potential decline in US equity markets, it is likely that investors will also see an increase in the value of commodities that can provide some sort of tangible safe-haven value to investors while currency and political environments remain particularly unstable. This means that investors could see another pop in the price of gold, precious metals, and land.
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