This week the news of the Cypriot government grabbing assets from savings has been all over the headlines, furthering fears that the EU’s debt problems have not been resolved. On Tuesday the 19th the government voted no on levying bank deposits, which alleviated some of the fears for the moment, however there are still many unanswered questions.
Much like Greece, Spain, Portugal and Italy, Cyprus has an unsustainable level of debt. Fearing bankruptcy, the Cypriot government reached out to the European Union and the International Monetary Fund for financial assistance. Those groups told Cypriot Parliament that in order to qualify for a bailout they would need to raise immediate cash on their own, and thus the concept of levying bank deposits was born.
After protests and demonstrations, the government rejected the proposal and has begun to seek an alternative bailout measure. Rumors are running wild as to what will happen next, but nobody is quite certain as to how this will affect the US economy.
One persistent fear is that levying bank deposits (or the attempts to) will not be confined to Cyprus. Cyprus is part of the EU along with 26 other nations. Of those 26 other nations, several are facing financial problems of their own. By the EU and IMF even hinting that in order for Cyprus to get a bailout they would have to take 10-12% of all deposits within the country’s banks, it instantly brought in to question the integrity of other member banks.
The fear of wealth confiscation resulted in a bank run in Cyprus; however the banks were on a holiday from Monday-Thursday, so only a small amount of money could be withdrawn. If Cyprus faced a major bank run, or if bank runs were not confined to one nation but rather spread throughout the EU as a whole, the results could be catastrophic. The US has seen massive bank runs before, most notably in 1929 during the early years of the Great Depression.
Oddly enough, Europe’s woes could be just the spark that the US economy needs. We have written for over a year now that US corporations are sitting on record amounts of cash and are waiting for the right opportunities to come along to initiate spending. Many multi-nationals have kept funds abroad to avoid paying the United States’ 2nd highest corporate tax rate in the world. Do not think for a second that CFOs of these organizations are dismissing Cyprus and Europe’s problems.
Hypothetically, if other European nations decided that they were going to levy bank deposits in an effort to raise immediate cash, corporations are left with 2 choices; 1) leave assets overseas and wave goodbye to 10% of their money overnight, or 2) bring cash back to the US, exchange for dollars before the exchange rate takes a turn for the worse and deploy that capital towards domestic initiatives. Our feeling is that corporations will be inclined to bring that money back to the US for a litany of reasons; our long term economic forecast is better than Europe’s, our labor force is more productive than Europe’s, and there is much more uncertainty and volatility in Europe right now than in the US.
There is a silver lining in just about everything in the financial markets. Remember, anytime that there is a loser, there is a winner. Sometimes, finding the winner is a little more difficult than we imagined, but in this case, Cyprus’ problems may result in a win for the US economy.