This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Cyprus Troubles Cast A Shadow Over Deposit Accounts





Cyprus is a small country, but the prospect of a Cypriot bank bailout made international headlines because of a disturbing proposal by European Union: It suggested Cyprus should pay for part of the bailout through a seizure of a portion of the country's bank deposits.

The proposal could not have done more to increase anxiety about the safety of banks, and to heighten tensions between the haves and have-nots of Europe.

The bailout proposal

At first blush, the proposal seems outrageous: The government of Cyprus would seize a portion of all bank deposits on the island to help finance the bailout. However, it becomes easier to understand when you realize that this is no ordinary banking system.

Cyprus has less than a million inhabitants, yet it attracts a disproportionate amount of bank deposits because it provides an offshore shelter for foreigners (in this case, largely Russians) who want to hide their assets from their own governments. Cypriot banks have been so attractive to foreigners that total deposits equal roughly eight times the island's Gross Domestic Product.

In one sense then, you could say that many of those who would pay the levy on Cypriot deposits were people who were trying to game the financial system in the first place. That may or may not be justified, but the bigger problem is that the notion of deposit seizures raises global doubts about the banking system -- exactly the kind of panic that bailouts are designed to avoid.

Lessons from Cyprus

The solution to this bank crisis is still to be determined, but already there are at least three lessons that can be gleaned from it:

  1. Asset seizures destabilize financial systems. Free market advocates preach over and over again that there are long-lasting negative effects on investment when countries nationalize corporate assets or otherwise arbitrarily seize property. It's ironic, then, that the economists of the European Union should make a proposal that amounts to something similar.
  2. It's never a good idea to let people see the sausage being made. All this worldwide angst and market disruption occurred not because these deposit seizures actually took place, but simply because they were proposed. It was probably premature to publicize something that had not yet been agreed to, because it triggered a run on the banks and a great deal of ill feeling without ultimately raising one penny toward the bailout.
  3. People -- including Americans -- may want to rethink offshore deposits. All savings accounts are not created equal. From the Cayman Islands to Cyprus, offshore accounts have been popular for everything from political reasons to tax evasion. However, leaving the stability and regulatory protections of the American financial system can have consequences.

Bank savings accounts are supposed to be the ultimate in stable and secure places to put money. With one proposal, the European Union has forced people the world over to question that assumption.

null

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,122.01 +15.31 0.09%
S&P 500 2,000.12 +0.10 0.00%
NASDAQ 4,569.6210 -1.0160 -0.02%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs