Neglect Cyprus- This Is a Significantly Bigger Threat to Europe

Investors aren’t exactly thrilled with the breathtakingly shortsighted “bail-in” Europe has imposed on Cyprus.

This is a rescue in name only. In reality, it will gut the Cypriot economy and set a nasty precedent throughout the rest of the eurozone.

Rather than cough up €5.eight billion ($ 7.4 billion) to save Cyprus (a measly .05% of EU GDP) European leaders prefer to see the Cypriot government confiscate 40% of Cypriot bank deposits over €100 thousand.

It will drive Cyprus into a depression, considerably like the “rescues” of Greece, Spain, Ireland and Portugal have completed. That is due to the fact the deal utterly destroys the credibility of Cyprus’ banking sector, which tends to make up 45% of Cypriot GDP and employs 70% of its workers.

Europe’s mantra is that Cyprus is a “specific case” due to the fact it is a tax shelter for Russian oligarchs’ cash. About one-third of Cypriot bank deposits come from Russian depositors. But the claim that all of this cash is illicit is pure nonsense. It is widely believed due to the fact it plays into a stereotype of Russians as corrupt gangster varieties.
Scratch the surface and a diverse story emerges…

Very first, Russia has a 13% flat-price income tax and a 20% corporation tax. So the require to “dodge” taxes is not precisely pressing.

Second, about 40,000 Russians call Cyprus home. There may be some shady types amongst them. But it is a stretch to claim that the majority of them are corrupt oligarchs who deserve to have their savings robbed. Russia has cold winters. Cyprus sits in the Mediterranean and is warm all year round.

Third, Cyprus and Russia have a double-taxation treaty. This puts a five% cap on taxes on interest and means an effective % rate on dividends and royalty payments. So why would not Russians seek out these terms? You never have to be crooked to want to lessen your tax exposure.

But Merkel, Draghi et al. want a scapegoat. And they have discovered one particular in the Russian mob.
But the Cyprus story is a diversion. The real threat to Europe appropriate now is Italy.

To say Italy is on the brink is an understatement.

The huge winners of the current Italian elections have been a former Communist, Pier Bersani a former comedian, Beppe Grillo and a disgraced former politician, Silvio Berlusconi.

And they utterly rejected the caretaker prime minister, the industry-friendly technocrat Mario Monti.

The level of political disarray and disillusion in Italy (where I write to you from right now) is challenging to think.

Monti has mentioned that his government “cannot wait to leave office.” And Bersani has said that “only an insane person” would attempt to rule Italy in the existing atmosphere. Meanwhile, Grillo, who can’t hold workplace simply because of a manslaughter charge against him, has announced that Italy does not require a new government to pass reforms.

He is also on record as saying that his anti-austerity and anti-establishment 5 Star Movement wants to “destroy almost everything.” He will also push by way of a referendum on leaving the euro if he gets into government.
If either Berlusconi or Grillo gets into energy, the markets will panic.

Currently investors are selling Italian and Spanish sovereign bonds and purchasing protected haven German bunds and U.S. Treasury bonds. This is a slow drip proper now. But it could easily turn into a torrent, if either Grillo or Berlusconi seizes the reins of energy in Italy.

Bottom line: One more European summer of chaos and crisis is really a lot on the cards. This will not only throw European markets into disarray, but also lead to investors in U.S. stocks to run for cover.

U.S. stocks have currently much more than doubled because their March 2009 lows. Wading in correct now could prove to be horrible timing.

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SABUNG AYAM