Is the Latest Ultimatum in Cyprus About to Derail the Eurozone?

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You probably know the story by now.

Following riots in the streets and a run on local banks, Cypriot lawmakers voted down a key element of the European Central Bank's (ECB) bailout proposal that would have required the country to impose a one-time 9.9% tax on bank deposits of more than 100,000 euros and a 6.75% tax on bank deposits under that amount.

I can understand why people took to the street – the "tax" was little more than organized robbery under the guise of keeping that country afloat.

Why should you care about what happens in Cyprus?…

Cyprus is not Las Vegas. What happens in Cyprus cannot possibly stay in Cyprus. The world's financial markets are too interlinked. Ultimately, it is a move intended to keep the euro afloat at any cost.

The Desperation Behind the Cyprus Bailout

In this case, three banks control 60% of the country's 150 billion euros in total banking assets, at a time when Cypriot bank assets exceed 835% of the country's 2011 national income, according to the IMF.

Those same three banks – Bank of Cyprus, Laiki Bank and Hellenic Bank — lent heavily to other failed economies throughout Europe such as Greece, where loans to the troubled Mediterranean country all by itself amounted to 1.6x the entire Cypriot GDP.

Now they need to find 5.8 billion euros to bail the mess out.

Eurozone politicians and bankers are anxious to have the world believe this is a carefully measured negotiation. In reality it's a move that reeks of desperation no matter what they call it – a tax, a levy, or even a bailout.

Why I think so is pretty simple.

Banks are fiduciary institutions. They rely almost entirely on trust and confidence. If there is a breach of trust – for any reason – the banks are cooked.

Individuals deposit money in banks instead of stuffing it in their mattresses because they believe that their money will be safe there. Once they realize, or even suspect, that the money they put in the bank is anything but safe, they will take whatever's left and run – and the bank will collapse in spite of the "bailout."

Because the Cypriot banks are linked to investments and deposits throughout Europe, what's happening there highlights something I've talked about since this crisis began – the euro is a "house of cards," and should one country — no matter how small — decide to leave the European Union, the entire shootin' match comes tumbling down.

Anxious to prevent a run and complete chaos, the government has ordered the banks to stay closed until Tuesday in the wake of the ECB's latest ultimatum. That's the date the EU has set for Cyprus to get its affairs in order and prevent a financial collapse — not to mention a messy exit from the euro.

The psychology is very interesting to me because this saga highlights the split between Europe's "haves" and "have nots." After years of bailouts, the northern nations have had it with paying for the fiscal mistakes of their southern partners. The two-speed economy I wrote to you about several years ago seems to be a de facto truth now.

Now you'd think they could just figure a way out of this mess, but that's extremely unlikely because this crisis is happening at a time when socialist leanings are overwhelming the need for fiscal reform. There's a leadership vacuum across Europe (and in the United States) that's preventing politicians from telling people the truth — which is that they are going to have to make tough, unpopular decisions to resolve this mess.

It's made far worse by the fact that central bankers are repeating errors that are well documented in the historical record, not the least of which is thinking they can print more money to solve everybody's problems.

The Key Takeaways for Investors

I expect the ECB and IMF to resist additional losses so they will inject, print, inflate, bamboozle and con their way through increasingly creative stimulus packages – the EU's ultimatum is a smokescreen for the bigger picture and the bigger players.

So don't sell prematurely. The last place you want to be is on the sidelines if a deal is reached at the 11th hour.

If it isn't, that's not necessarily a bad thing. A little financial honesty would do Europe good at this point in the scheme of things. But absolutely make sure you have trailing stops in place as we head into the weekend. That way you can harvest gainers and protect your capital at the same time if things do get bumpy next week.

No matter what happens come Monday, I expect renewed interest in gold…but after a short-term decline. This will catch a lot of people who are expecting an immediate run by surprise. The key to this lull is the false sense of relief that will accompany any newly injected "liquidity" no matter how convoluted any "solution" actually is.

Bear in mind that nothing in the underlying markets has changed. Whether Cyprus is a part of Europe or not has no bearing on the euro. It's a wreck now and it will be a wreck come Monday.

Traders know this, which is why the really big move here will be to the U.S. dollar and, to a lesser degree, the Japanese yen. The former is because it's the best-looking horse in the glue factory, while the latter is simply because it's a force of habit for traders looking to go "risk-off."

This favors U.S. equities at the moment, and is a renewed opportunity to short the yen if it rallies. Japan still has the worst demographics on the planet, and longer term that's a negative, not a positive. As for the euro, there really aren't a lot of reasons to buy it. In fact, I'd be a net seller.

Second, get ready to pounce.

If Cyprus does derail the Eurozone, we're going to see everything from ABB Ltd. (NYSE:ABB) to Nestle SA (VTX: NESN) put on sale.

And you don't want to walk by the bargain basement bin when it happens this time around any more than you did in March 2009…right before the markets "melted up."

As for how this situation may play out, Hollywood couldn't come up with a more subtle story of international intrigue.

Both Russia and China have long angled for ports and energy rights in the region. Even if the IMF and ECB do come forward with some sort of liquidity arrangement, expect one or both nations to wind up with enhanced interests in the region. I think some mix of deep water ports, more extended lending arrangements, and newly acquired rights to energy reserves and drilling in the region are distinct possibilities.

The EU's political leaders and Washington's strategists will go apoplectic, because a Russian or Chinese presence in the middle of the EU is not something they want to see.

But there's nothing they can do about it. Fresh lending in exchange for prize assets is the ultimate discipline in capitalism.

If you're out of money, creditors take prize assets. That's just the way it works. It's a reflection of the ultimate Golden Rule – you know the one – he who has the gold makes the rules.

Right now, it looks like the European Union is coming up empty.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Dimi Chakalov | March 22, 2013

    Keith Fitz-Gerald: "If Cyprus does derail the Eurozone, we're going to see everything from ABB Ltd. (NYSE:ABB) to Nestle SA (VTX: NESN) put on sale."

    Then pigs will fly.

  2. Ric | March 22, 2013

    I can't get the question out of my head..'why is this being orchestrated'? There is more to this than meets the eye.. Is this part of a plan to create more chaos within the wider economy so that someone or body may come along with a perfect solution, namely something like a world bank… Part of the plan of a new world order. Create a fear or a problem and present a solution, then a majority will agree to it.

  3. Benton H Marder | March 22, 2013

    So, the US and Europe are not anxious to have greater Russian and Chinese presences in the Mediterranean. That's just too bad. Money talks and BS walks. The US has been intruding upon the traditional Chinese sphere of influence for quite a while, as it has done upon the traditional Russian sphere of influence. Europe is bust. There is no way that the Europeans and the Brits will be able to retain their traditional influences. The USA is bust; yet we pretend that the USA can indefinitely float its world economic and military presence on the River Tick. Sooner or later, we will run onto the bar and rip the bottom out in the rapids. Do our glorious elites even see the rapids and the sharp stones in the shallows? Or, in another manner of speech, does the captain of the Titanic even know that there are such things as icerbergs—or are they totally wasted on drugs or booze?

  4. Leslie Belden | March 22, 2013

    Good article–more about following the money than following the politics than other articles. But I'm with "RIC." This is the first wave in the banking elite's plan to crash the world's currencies and take over that One World they've been dreaming about. I am a little surprised that it's starting with the Euro–that bears a little rethinking, but the Jenga tower coming down.

  5. H. Craig Bradley | March 22, 2013

    TIMBERLAND FIRESALE

    America too has a number of "prized assets" that potentially could be sold should we ever find ourselves in a mess like the European Union with their "technically bankrupt" banks and nearly insolvent sovereigns. Among them: National Parks, Military bases, GSA prime urban real estate, various blocks of productive timberland, both on National Forests and private lands ( Cascades and Southern U.S.).

    Ditto with airports, seaports, railroads (oops, Warren Buffet now owns many of those at Berkshire Hathaway). Then their is the gold stored at the Federal Reserve Banks in New York, Denver, and good old Fort Knox, Kentucky, as well. We could reduce the price and sell them all in a New York Minute to China or Saudi Arabia.

  6. H. Craig Bradley | March 22, 2013

    NOBODY GETS ALL THEY WANT

    Let the International Banking Cartel try to take over the world. All they are likely to get is America and Bankrupt European countries. Big deal. The locals will make transnational terrorists look like practice. Germany won't go along with the One World plan either. China, a national socialist state with base of 1 Billion people and a racially pure population won't buy into anyone else's terms. So, the "banking elitists" won't own China and its Billion Ethnic Chinese. They will have to settle for 3/4 World, at most.

  7. Keith Fitz-Gerald | March 22, 2013

    Hello everybody. Thanks for your comments and your thoughts. I've got some insight that I'll be sharing in a follow-on article next week that may answer your observations with regard to who is manupulating this, how and why. It's not the banking elite but they're definitely involved…have a great weekend and thanks again for being part of the Money Morning family. Catch up wih you then – Keith :-)

  8. Joe R. | March 23, 2013

    Hmmm. Okay, got "some message" here. Euro now in banking dis-repair and possible demise. Doom and gloom predicated by who? Like RIC, Marder, and Belton, I believe more is at foot here than genuine stupidity to banking malpractice. The banksteers always have a master plan. Get right and get real. Appears that you are lassoing in the mis-informed? To what end game do you see the final play?

  9. Michael Frederick | March 24, 2013

    There seems to be a scheme going on so somebody or group can come out to take over the world.
    Countries after countries are becoming bankrupt and the policies of the IMF and Money Lenders are not helping out instead they are making things worse for some leader or leaders to offer up themselves as saviour/s to the world.
    What are the bright economist doing to save the world from this slaughter of poverty that is taking place when there are so much richness around us? Are the advisors out of ideas no one seems capable of taking the world from the mess it's in.
    Too much doom and gloom. The greed that has led the world to this stage must stop.

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