If you’ve been paying attention to the latest economic developments in Europe, you might have heard something about Cyprus, the latest flash point in the ongoing and seemingly unending European financial crisis. The situation in Cyprus has gone from bad in 2012—a series of bailouts and a downgrading of the nation’s credit rating to junk status—to worse in 2013: a €10 billion bailout from the ECB and a virtually unprecedented “tax” on uninsured deposits.
Basically, every bank account over €100,000 (which is the federally insured limit in Cyprus—equivalent to the $250,000 FDIC guarantee here in the U.S.) will be subject to what amounts to a seizure of assets. Early information was that the government was going to confiscate anywhere between 40% and 70% of funds, but the final analysis ended up around 15% for large depositors. I imagine that’s cold comfort to large Cypriot account holders, who will see 15% of their savings simply taken by the government.
Can you imagine if something similar happened in the U.S.? It would be catastrophic. Think about what that would mean to someone in the U.S. with, say, $400,000 in retirement savings in the bank: that would be a $60,000 hit! Fortunately, we are nowhere near in as bad shape as Cyprus, and such a drastic step is unlikely to happen anytime soon. The bad news, however, is that while Cyprus is a small country, today’s interconnected global economy means that even small countries can have an outsized impact on the rest of the world’s finances.
There are already rumblings that some kind of similar steps may ultimately have to be taken in some larger European countries. The lesson here is to appreciate the fact that nothing is certain. We might be a year or two behind Europe in terms of debt, but global finance has shown that anything can (and will) happen when markets begin to teeter.