The nation of Cyprus has beaten out Britney Spears, murder trials, and basketball for attention in the news cycle for the past week. The only problem is that most TV viewers have little or no idea of where Cyprus is and its significance.
Most of the reporting has expressed understandable outrage at two of the proposed solutions for the monstrous Cypriot National Debt. One involved stealing up to 10% of the funds in all bank accounts held in Cyprus. The other was a plan to nationalize all pension plans in the country. Both plans were considered and rejected by the Parliament of Cyprus. By the time you read this on Monday morning the country will have had to come up with some other solution or face national bankruptcy.
First, a little background. Like most of Europe, Cyprus is a confused mess. There are three parts to the island of Cyprus. The northern portion, which is about 36% of the land mass, has been occupied by Turkish forces since 1974. The southern portion is administered by Greek Cypriots. And between them is a narrow strip of land called the “buffer zone” which is administered by the UN. The international community recognizes only the Republic of Cyprus in the south as the legitimate government of the entire island. Turkey, which used the excuse of fighting between Greek and Turkish Cypriots as its excuse to invade and occupy the north, is the only nation that recognizes what they call the Turkish Republic of Northern Cyprus.
How did they get into their financial distress? Like most European nations (and like the United States) Cyprus has lived far above its mean for many years, spending much more than it takes in through taxes. Because of its tremendous debt, the nation’s credit rating has been lowered – just as the credit ratings of other European nations and the United States have been lowered. This produces a vicious cycle in which lenders require a higher interest rate due to the lowered credit rating. . The higher interest means less money goes toward paying down principal, causing the credit agencies to lower rates again. Cyprus’ rating is now BBB. This doesn’t sound so bad unless you understand the system. Dropping from AAA to AA, as the U.S. did, is a big deal. Cyprus having its rating dropped several times all the way to BBB is a HUGE deal.
Cyprus is in desperate need of a bailout. Sound familiar? It should. Several years ago I predicted the credit crash and subsequent bailout of four European nations in this column. All four of them have since required multi-Billion Euro bailouts to avoid financial collapse. Now it is the turn of tiny Cyprus.
So what’s the big deal? Other nations have received bailouts. And Cyprus is – well, tiny. Who really cares besides the Cypriots and the other nations that have to bail them out?
The big deal is not the Cypriot bailout. The big deal is not even that their Parliament seriously considered two solutions that are terrifying to lovers of liberty worldwide: The confiscation of up to 10% of citizens bank accounts (which in many cases represent the total of their savings after a lifetime of labor). And the Government takeover of pension plans. The pension takeover would have been the equivalent of the U.S. government taking over all IRA’s and 401k plans and forcing them into the black hole of the Social Security System.
The big deal is that neither of these evil plans was hatched by the government of Cyprus. These plans were forced on Cyprus by the European Central Bank (ECB) as a condition of the bailout. I believe this back story is far more important than the story that the mainstream media is running with.
If you’re planning on loaning Billions to a country that has a terrible track record for managing money, what’s wrong with requiring the country to show some fiscal responsibility? Nothing at all. In fact it would be irresponsible for the EU nations to loan their citizen’s money to another nation without making sure that they had the ability to repay the loan.
But the solution should not have been the theft of the life savings of citizens, as both of the solutions put forth by the ECB would have required. The solutions should have been in the areas of spending cuts to wasteful government programs; loosening the stranglehold of regulations on businesses that make it difficult for them to grow; and a move away from the Socialism that is crushing European growth and entrepreneurism and resulting in huge job losses.
Here’s a real-life example of the folly of doing what the ECB wants Cyprus to do. When Argentina was facing complete financial collapse in the late 1980’s, these conservative solutions were what the US required in exchange for our bailout: Our central bank (the Federal Reserve System, the “Fed”) told Argentina that we would save her on condition that she cut government spending and regulations; privatize publicly owned businesses; drastically cut taxes; and back their worthless currency with Gold. These measures (which are the opposite of the demands the ECB placed on Cyprus) worked. Argentina’s inflation rate, deficit and National Debt all dropped dramatically. What I find fascinating as the United States heads down the same road as Greece and Cyrus, is that we are doing exactly the reverse of what we required Argentina to do.
So with history solidly on the side of a conservative, fiscally sound approach to the problems in Cyprus, why is the European Central Bank pushing for a liberal, Socialistic “solution”? Simply because many other European nations want to tax wealth, not just income. They want to raid pension and retirement plans to bail out their debt-ridden, failing economies. Like the US, where the money in pension plans, IRA’s and 401k’s almost equals the National Debt, these countries want a quick fix to their problems. They don’t want to do the hard work of balancing their budgets and slashing their debt. They would prefer to steal from their citizens rather than admit to their own mismanagement of their economies.
I had considered waiting to write this article until we saw the final chapter of the Cyprus bailout. As I write this the European Parliament has planned a late night session on Sunday to deal with the problem, and the Parliament of Cyprus is likewise searching for last-minute answers. The Bank of Cyprus has mandated a maximum withdrawal limit of 100 Euros from ATM’s to avoid a run on the banks. At this point no one knows whether Cyprus will receive approval for the proposed 10 Billion Euros ($13 Billion US) from the IMF and the ECB on Monday morning. Cyprus has to come up with 5.8 Billion Euros ($7.5 Billion US) in order to qualify for the bailout.
So didn’t I wait to write about this next week when the dust has settled? Simply because the exact details of the deal won’t matter to anyone except the Cypriots and the lenders. The real importance of this whole exercise is that it has given the European Parliament an opportunity “test the waters” to see how far the larger European economies can go in ripping off their own citizens.
Earlier this week I watched Stuart Varney comment on Cyprus on Fox Business. I like Varney, and normally agree with his views. But on at least part of this issue he has it all wrong.
Speaking of the final deal that will emerge, the interviewer asked Varney if the concept of taxing wealth would eventually spread to the rest of Europe. He said it undoubtedly would. Right you are, Stuart.
But then he stuck his foot in it. Asked if a similar rip-off of the citizenry could ever happen in the United States, he replied, “Of course not.” He offered no explanation or justification for his ridiculous answer. Nor did the talking head who was interviewing him ask the obvious question: “Why not?”
Since the United States was taken off the Gold Standard in 1933 by FDR, we have gone from being the greatest creditor nation on earth to being the greatest debtor nation. The Bible says that the debtor is slave to the lender. The US has gone from being the unchallenged economic leader of the world to being slave to our creditors – including our greatest enemy, Communist China.
So pray tell, Mr. Varney: What is to prevent the already Socialist-leaning White House from following in the footsteps of Europe? Obama has already expressed a willingness to confiscate wealth from US citizens. His administration is reportedly looking into various methods of confiscation of retirement plans. And he loves to cover his actions with the cloak of “international precedent.”
We need to face it, friends. The world is going down a dangerous path, and for the last four years we have been following the leftist nations, instead of leading other nations in the right direction. In the next election we need to hire some real conservatives to put the reins on Obama’s financial recklessness. And in 2016 we need to elect a president with guts – and brains. That would certainly be a welcome change.
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