At first glance it seems an unlikely connection. The island of Cyprus, whose economy is just a tiny sliver of the Eurozone, would seem to have little impact on our local economy. But as so often happens, a small domino falling somewhere in the global economy can have an impact far from where it fell.
On Saturday, Eurozone bureaucrats in Brussels - let's call them Eurocrats - enacted a $13 billion bailout of Cypriot banks. Cyprus is a small country, total population just over a million; more people live in Dallas. And the Cypriot economy is small - smaller than that of Shreveport, Louisiana. But as part of the Eurozone, Cyprus uses the Euro as its currency. The damaged banking system, with billions in defaulted loans to Greek companies, was on the brink of collapse. Hence the Eurocrats decreed a bailout to save Cypriot banks.
Still with me? Stop yawning, I'll make it quick. This Euro-bailout differs from past bailouts in that bank depositors are getting a haircut - 10% on deposits over $130,000 and 6.75% on more modest deposits. Another word for haircut is confiscation. Cypriots with $5,000 in a savings account will wake up with $4,662. Ouch. This new get-tough Euro-bail policy has bank depositors running for the exits. Previous bailouts have left savers untouched. (Makes me think some of those folks would have been better off owning stock in Exxon, but I digress.)
My point: scared European investors will bolster the US dollar and the US economy. If you don't want the risk of seeing your checking account confiscated, what are you going to do - invest in Chinese Renminbi? Urugayan Pesos? Fact is, scared money flows to one place: the US. More money flowing into our financial markets means higher bond prices and lower interest rates. If you thought 3% mortgage rates were the bottom, think again.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).