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Why Cyprus matters.

ITEM: The Washington Post reported on March 20 that a rescue effort to bail out Cyprus had been rejected after a public uproar: "The fate of the 17-nation currency union ... again hangs in the balance, threatened by a country that constitutes just 0.2 percent of the [eurozone's] collective economy. Throughout the crisis, European policymakers have tried to keep any country from leaving the euro. Losing a member would pose uncertain risks to the world financial system and be politically embarrassing to the major powers."

A proposed tax on bank deposits, first accepted by Cyprus and then rejected by Cypriot lawmakers, was, said the Post, "one alternative for raising the money. It had the advantage of grabbing $2.2 billion to $3 billion from foreigners, many of them Russians, who own more than one-third of the money on deposit in Cypriot banks."

ITEM: On March 22, the Washington Post reported that a "departure of Cyprus from the euro zone would be a stunning blow to the crowning achievement of Europe's post-World War II effort to unify its warring nations. The euro was intended to be so ironclad that there are no procedures for countries to back out of the currency bloc. But leaders have feared that if one country leaves, pressure could increase on others to follow suit, quickly destabilizing the entire project."

ITEM: In a March 19 article in the New York Times entitled "A Bank Levy in Cyprus, and Why Not to Worry," Andrew Ross Sorkin asserted that while the "bailout of Cyprus is a fascinating case study and raises in theoretical questions about moral hazard for policy wonks and talking heads, here is the reality: It is largely irrelevant to the global economy. Cyprus is tiny; its economy is smaller than Vermont's. And the bailout is worth a paltry $13 billion, the equivalent of pocket lint for those in the bailout game. Even the larger issue about bailing out a country by taking money from depositors--which quickly created outrage around the world--seems overblown."

CORRECTION: There is one prime reason why the New York Times, for example, might put reassuring commentary on the front page of its business section--even while that paper itself and other media outlets worldwide are showing crowds in the streets of Cyprus and lines of distraught savers trying to withdraw cash from ATMs. This is supposed to put our minds at ease.

The hoi polloi need to be calmed down from thinking that such a crisis might sweep larger European economies or affect the United States. Ignorance is an opiate that induces sleep. Thus the message: It can't happen here. Of course, "here" is a country that has amassed more debt than any nation in Europe. The United States has been wildly spending borrowed money beyond the means of taxpayers to repay. But never mind. In this version, the establishment media don't point out that the emperor is unclothed; rather, he is shown holding up a sign that says, figuratively, "I'm not naked. Really."

One is reminded of the disclosure made by Jean-Claude Juncker, Luxembourg's prime minister and then-head of the Euro Group's finance ministers, after he was caught lying in 2011 about an emergency meeting on Greece. As he admitted: "When it becomes serious, you have to lie?" (Forbes. August 9, 2012)

Angela Merkel, Germany's chancellor, is now saying that Cyprus is a "special case," so we shouldn't worry. Sure. Meanwhile, it has no doubt crossed her mind that she faces an election this year and that the German public is sick of picking up the tab for bailouts around Europe.

Cyprus is the fifth of these.

Even as we are told that what happens in Cyprus makes little difference to the real powers, we are supposed to believe that it is key to Europe's future.

This posturing should be kept in mind regardless of whatever "solution" might be on the table when this is read. The "Troika," made up of the European Commission, European Central Bank (ECB), and the International Monetary Fund (IMF), will surely tell us that all will be well.

It might be comforting to think that what happens on the small Mediterranean island is meaningless. Yet, that conclusion doesn't hold water. The banking system on Cyprus, as pointed out by Johns Hopkins Professor Steve Hanke, is "actually quite large--more than eight times larger than the Cypriot economy itself. What's more, if Cyprus does end up partially financing a bailout using depositors' money, it would set a dangerous precedent and could shatter confidence in an already-fragile European banking system. And if Cyprus's banks do go bust, it would send shock waves through the markets."

It is consoling to think that electronic transfer shutdowns and bank closures are just concerns for small foreign nations, or that the only people hurt might be Russian mafia figures using Cyprus as a parking place for their ill-gotten wealth. But that is whistling past the graveyard.

Yet, what was first proposed--making individual bank depositors in Cyprus liable to a hefty tax on personal savings to pay for an international monetary bailout--could become a model. It will be better disguised the next time. In this case, employing larceny directly against the little guys in Cyprus was a blunder.

As commentator Peter Schiff noted, the "mistake was to do so in a way that was not camouflaged by financial smoke and mirrors." The plan "for Cyprus was far too transparent, simple, and direct to survive in a world dependent on deceit and obfuscation."

The Fed and countless Washington politicians undoubtedly agree--having utilized various "stimulus" packages and bouts of "quantitative easing" of the currency to steal much more quietly from us all.

How different were the actions of the sainted Franklin Delano Roosevelt. He did more than declare "bank holidays." Financial commentator Bill Tatro recalls that FDR, via Executive Order 6102, "confiscated all gold and gold certificates, exchanging them for paper. Consequently, if you didn't surrender your gold, you went to jail. The price of gold was set at $20.67 per ounce. Yet, within a year, the government reset the price to $35.00 per ounce."

One need not go back that far to uncover U.S. government thievery. One Obama-Care provision, largely unnoticed, added a Medicare surtax of 3.8 percent on "assets" (as opposed to income). You might discover that unhappily in selling a house.

Other politicians are considering how they might adapt the pilfering. As noted by Investor's Business Daily. the "expropriation of the tiny country's savings may have seemed like an easy test case for the EU because the population is small and some of the depositors are rich and unsympathetic, but the blowback will hit savings and investment--and future economic growth--all over Europe. Worse still, it could catch on here." As it is, says IBD,

  Congressional Democrats are plotting the expropriation of Americans'
  private 401(k) and IRA retirement savings accounts in favor of "a
  guaranteed income." If bank accounts can be casually expropriated
  in Cyprus to pay for big-spending governments and bailouts, there
  is no reason a nice slice of the $19 trillion in retirement accounts
  can't get the same treatment.

While the initial blatant move against Cyprus sparked an angered response, someone will have to pay if there is to be a bailout. Yet, why is a bailout presumed to be inevitable? That is a question not often asked.

Daniel Hannan, a British Conservative member of the European Parliament, is one who has done so. He opines in London's Telegraph that Cyprus should copy Iceland and allow the banks to collapse and make their shareholders and bondholders sustain the loss. (The economy in Iceland, meanwhile, is now growing much faster than in the United States.) However, as Hannan notes, the powers in Brussels don't like that model. The expropriations are necessary, admits the European Central Bank, to prevent 'worries over the reversibility of the euro resurfacing.' Cypriots, in other words, are being sacrificed to the greater goal of monetary union."

Those pushing the One Europe model, a subset of One Worldism, recognize that its appeal is shaky at best. Crises tend to expose the weaknesses of these grandiose schemes. Nevertheless, there are "deep cracks" in the "European Project," remarks Luke Coffey of the Heritage Foundation:

  The hubris of those wanting to establish a European superstate at
  whatever cost hide behind the Brussels bureaucracy while the
  average European suffers. If the EU backs these draconian economic
  measures in Cyprus, there will be nothing stopping them from
  supporting similar acts in other ailing eurozone economies--
  countries like Ireland, Italy, Portugal, and Spain should consider
  this a warning.

The tactics of expropriation, coupled with mollifying deception, are unremitting. These are not auspicious omens.
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Title Annotation:Correction, Please!; bailouts
Author:Hoar, William P.
Publication:The New American
Geographic Code:4EXCY
Date:Apr 22, 2013
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