Tuesday, 26 March 2013
OUTSIDE THE BOX
TEN days ago, the International Monetary Fund (IMF) and the European Union decided that as a condition for them loaning money to the government of Cyprus to save its banking system, bank depositors would be forced to give up as much as 10 percent of their deposits in return for stocks in the failing banks. The bailout was only $13 billion, which is about four days of money printing by the US Federal Reserve. However, the IMF and Germany required that bank depositors put up about half of that amount.
One legendary trader, Jim Sinclair, said this: “In truth, the IMF disaster, which has just taken place in Cyprus is comparable to the assassination of Archduke Ferdinand that started World War I. This is a major event in history.”
The requirements set by the IMF is the most fundamental change in the history of modern banking system and is perhaps not coincidental that it comes in the 100th anniversary of the creation of the US Federal Reserve Bank. During the last 100 years, through the US Federal Reserve system, the power of the government over the banking system has increased to the point that the government has absolute control of the banks.
Cyprus is an insignificant financial player on the world stage. The amount of the bailout is really nothing. However, the banking system, both globally and nationally, can only function when depositors are confident of the bank’s ability to pay back depositors’ funds. This fact is even more critical now as the Western banking system is in trouble and depositor confidence is vital as the banks and governments try to work through the massive debt problems.
One important purpose of US banking policy is to protect depositors from any potential bank failure. To achieve this, the Federal Deposit Insurance Corp. was established by the Banking Act of 1933 requiring banks to pay into a fund that would then guarantee all deposits in US banks up to $250,000. Similar deposit guarantees have been established in almost all countries, including Cyprus.
The IMF decision to seize part of depositors’ money destroys the idea that money in a bank is guaranteed safe and protected by law and government action.
Now everything has changed and the IMF decision may unravel all the efforts the central banks have made through Quantitative Easing in the last five years. In the last few days, US Federal Reserve Chairman Ben Bernanke has even said that he may not continue as Fed chairman when his term expires in January 2014.
How the situation in Cyprus eventually plays out is unknown. There is talk that Russia may extend the $13 billion to Cyprus in return for concessions, including oil-exploration rights. But were this to happen, it would fulfill a centuries-old Russian dream to have and control a safe and defensible warm-water seaport. But that is another geopolitical story.
The financial world is holding its breath to see how the citizens of other European nations, primarily Spain and Greece, react to this development. The concern is that depositors in these and other countries, fearful of a forced takeover of their funds, will massively withdraw their money. If that happens, the European banking system may fail.
Can this kind of event happen in the Philippines? Theoretically, yes, and realistically, no.
However, for any bank depositor to rely on the wisdom of government policy and action is a dangerous path to follow.
Depositors have usually suffered only minor losses from a local bank failure as the larger banks have been able to take over the failed banks. But this is now being tested by the Philippine Deposit Insurance Corp. not being able to find a buyer for the recently closed Export and Industry Bank. That story also has yet to play out.
Doing your banking business with a stock-exchange listed company is better because these banks are subject to a slightly higher degree of financial scrutiny. These range in size from Banco de Oro to Citystate Savings Bank. Yes, there have been some failures of listed banks but you need all the protection you can get and this is one way. Another is to spread your deposits among several banks. And if you have an offshore bank account, particularly in the West, you may want to reconsider that idea.
Sensible money is not going to put up with even the threat of confiscation. Western money is going to flow to the East in increasing amounts and the Philippines will be a recipient. The government could prepare itself to take advantage of this by providing better foreign-investment opportunities but is unfortunately probably more concerned with the “Kris/James Affair” than the “Cyprus Affair.”
E-mail to firstname.lastname@example.org. My web site is www.mangunonmarkets.com and Twitter me @mangunonmarkets. PSE stock-market information and technical analysis tools provided by COL Financial Group Inc.