If you are reading this blog, you are probably well informed enough to have heard about what is going on in Cyprus over this weekend. Just in case you haven't, here's a synopsis:
-Cypress needs a bailout
-In order to receive a bailout, the IMF demanded that money be taken directly from bank depositors
-Between 6 and 9% of every savings account at every bank in Cyprus will be removed by the government.. and there's nothing that can be done to stop it (technically it still has to be approved by Cyprus' parliament Monday, but the alternative is a default, which is even worse).
-Upon hearing this, crowds of people went to ATMs to attempt to withdraw as much money as they could because the banks are closed (its a 3 day weekend there)
-The ATMs are now empty.
Why does this matter to us? The reason is that this is the first time that Joe Average's bank account was robbed. It sets a precedent that it could be done again in any of the countries in Europe that are facing fiscal problems. The big fear is that people throughout Europe will feel that their money is unsafe in a bank, and will attempt to liquidate their accounts.
That wouldn't sound like a big deal, unless you realize that banks make money by lending out money that they have (plus a lot more) so at any given point there is no way a bank can pay out all of the money that has been "deposited." Suddenly, as people attempt to withdraw funds, the bank runs out of cash to give out, goes bankrupt, and people's deposited money is vaporized. No one wants to be the last one to withdraw, so once something like this starts, it will probably escalate very quickly.
So, if you were living in a European country, you would probably be marching over to your local bank to retrieve your hard earned money as soon as they open on Monday.
This very dangerous, and it will probably result in a significant sell-off in worldwide markets Monday.
The most ironic thing, to me, is that there was almost no news coverage of this disaster in the making this morning. Sure, CNBC and WSJ were all over it, but Fox and CNN had one tiny blurb in their "business" sections and the sunday morning news shows were only concerned about CPAC and the US budget. I bet that changes real quick.