In 2022, What Cyprus Teaches Us About Safe Deposit Boxes
Between 2012 and 2013, the Republic of Cyprus experienced a financial crisis that set a troublesome precedence not only for other countries in Europe, but in other parts of the world as well. The country’s banks were unable to meet their obligations due to the collapse of its banking system.
This led to an increase in bank deposits being frozen by the government and ultimately resulted in a bank run. In response, the Cypriot Parliament passed legislation that allowed it to confiscate bank accounts held by depositors with more than 100,000 euros ($126,000) in order to help stabilize the economy.
The legislation was designed to prevent people from withdrawing all their cash at once, which would have caused the Cypriot banking system to collapse. However, the law created a problem for those who had deposited money into safe deposit boxes because they could no longer access their funds. As a result, many people were forced to sell off assets or take out loans in order to pay back their debts.
The situation has been described as “the worst case scenario” by analysts. It is estimated that around 80% of the island’s population will be affected by this, either directly through losing their savings or indirectly through having to borrow money in order to repay them.
Cyprus is currently undergoing a process of economic recovery, with GDP growth expected to reach 1.5% next year. Nevertheless, there are still signs that the effects of the crisis may continue to linger on.
The Cyprus Bank Bail-In At a Glance
On March 25, 2013, a €10 billion international bailout by the Eurogroup, European Commission, European Central Bank and International Monetary Fund (IMF) was announced as a solution to the economic turmoil the country was facing.
In turn, Cyprus had to agree to close the Laiki Bank and impose a one-time bank deposit levy on all of its uninsured deposits, as well as 47.5 percent of uninsured deposits in the Bank of Cyprus.
As reported by the BBC in 2013, “People in Cyprus have reacted with shock to news of a one-off levy of up to 10% on savings as part of a 10bn-euro (£8.7bn; $13bn) bailout agreed in Brussels.”
Citizens in Cyprus with less than 100,000 euros in their accounts would have to pay a one-time tax of 6.75%, while those with funds greater than 100,000 euros lost 9.9% of their deposits.
This meant that depositors had no option but to take losses. One day their savings were safe and sound in the bank but the next day, people were frozen out of their savings.
The public was shortchanged, to say the least, all because the government and its banking system had accumulated too much debt. The worst part is it happened without a warning.
What this Means for The Rest of the World
The Cyprus Bail-In set a dangerous precedent for European countries and other parts of the world as well. It provided a proof-of-concept of sorts for other governments and for big financial institutions.
If Cyprus can use depositors’ hard-earned money to get out of a rut, then other countries could replicate it and on an even bigger and ominous scale; as we have seen in Australia with the passing of the Financial Sector Legislation Amendment (Crisis Resolution Powers And Other Measures) Bill 2017 bail-in law.
This bill allows Australian banks to force shareholders and stakeholders to absorb substantial losses, including the loss of their homes, during a financial panic. The same thing has been happening in the United States as well.
The Cyprus Bailout Should Be Avoided in All Countries
With the collapse of Lehman Brothers in September 2008, the global economy entered a recession that lasted until June 2009. Since then, many economies around the globe have struggled to recover from the economic downturn. However, some countries have fared better than others.
For example, the UK economy has recovered significantly since 2010, growing by 3.2%. On the other hand, the US economy grew only by 2.1% over the same period. We expect to see more countries struggling when the next wave of crises hits them.
With the Cyprus bailout, the EU exposed itself to potential future bailouts of other financially troubled countries. The Cyprus bail-in law will allow other countries to seize private assets if they face financial difficulties.
Cyprus’ Bail-In Law Is Bad News for Everyone Else
There are two reasons why the Cyprus bail-in law should be avoided:
1. Moral Hazard
If a state or a large institution is bailed out by another party, then there is a risk that the bailing out party might abuse its power. As a result, the bailing out party may become reluctant to rescue the failed entity in the future.
In the case of Cyprus, the Cypriot government will not be able to let the country go bankrupt again if it fails to come back with enough cash to repay its creditors. Therefore, it is likely that the Cypriot government would never allow the country to fail again.
This means that the likelihood of the Cypriot government being willing to bail out the country again in the future is very high.
2. Property Rights
Another major problem with the Cyprus bail-in is that it violates the sanctity and inviolability of private property rights.
Under the bail-in provisions, any bank account holder who holds deposits exceeding €100,000 ($112,500) must convert those funds into equity shares. These shares are subject to confiscation in order to pay off the creditors.
Shock to the System
To add to the shock and uncertainty, in 2017, Greece, as a countermeasure to its failing banking system, had confiscated the contents of bank controlled safe deposit boxes as well as securities and wealth stored in private homes.
Greeks could not withdraw the cash they left in safe deposit boxes as a result of the level of capital control the government had implemented. The Greek authorities said they were taking these steps because the banking sector was collapsing at such a rate that it posed a threat to public safety and national security.
According to the Greek Ministry of Finance, the actions taken against the citizens involved the seizure of gold, precious stones, artwork, antique furniture, yachts, jewelery, and other personal items.
Safe Deposit Boxes
Governments and financial institutions tend to take drastic measures during economic turmoil, so there’s no telling when this same event will happen in other parts of the world.
Even in the case of Australia’s bank deposit bail-in law, the government could steal your savings in the event of a nationwide financial emergency.
The Cyprus bail-in law is a prime example of how an international agreement can quickly turn into a disaster. It is important to note that the purpose of this agreement was to stabilize the European Union’s economy, but instead it has destabilized the entire region.
If you want to avoid similar disasters in the future, make sure you keep moving forward on your own path.
It’s quite simple really – the reason why people store their money in banks is that banks are trustworthy and stable (the word “safe” comes from “savings”).
When the people realise that banks aren’t trustworthy anymore, they start storing their money elsewhere. That way, even if the banks close down, the value of the currency doesn’t drop too much, because most people still trust the currency itself.
Most people are, rightfully, afraid we are heading towards a situation where none of the currencies have any real value; Recent events surrounding runs on the banks in China is showing that more and more people don’t trusts banks anymore.
A Safer Location
With the knowledge of what Cyprus teaches us about safe deposit boxes, it’s important to know that there is a smarter option for your safe deposit boxes; especially if you’re in Australia where there are private safe deposit box facilities on offer in every major region.
Situated on the headland in stunning Redcliffe, QLD, Private Vaults Australia is a completely flood and fire free facility to suit all of your high security storage needs.
A Smarter Option for Safe Deposit Boxes
Today, independent facilities like Private Vaults Australia (PVA) are proud to offer secure storage completely separate to the banking system. To learn more about What Cyprus Teaches Us About Safe Deposit Boxes, contact PVA or read the the PVA blog for more interesting news, tips and ideas to guide you.
My background involves the ownership of many businesses including owning and running multiple Chiropractic offices but mainly focused in Nerang on the Gold Coast for 30 Years.
I have a passion for accumulating and holding Bullion and have done so for many years. My extensive Business skills and Bullion knowledge makes it easy to assist others buying, selling and storing their Bullion.
Peter and Cassie work together to assist anyone from the experienced Bullion Investors to the complete novice. They are here to answer any questions to help you.