Last night the Cypriot parliament rejected the proposed IMF/EU bailout that would have seen the confiscation of up to 10% of depositors’ money from the island’s banks. Under pressure from hoards of protesting citizens (and perhaps fearful of the consequences of stealing from one or two of the wealthier Russian depositors) the politicians buckled: not a single one voted in favour of the now infamous bank “levy”.
The Cypriot finance minister has now flown to Moscow to attempt to cobble together a deal with the Russian government. The political significance of a possible Russian bailout should not be underestimated, given that it would be the first instance of a sovereign nation rejecting the IMF’s ministrations in favour of a bailout from another country. As Jim Sinclair says at King World News, this “would mean that the IMF would not carry the clout which it has carried over the years as a group of many nations. If one nation can turn the switch ‘off’ against the IMF, it’s going to be very hard to turn that switch back ‘on’ at the IMF.”
He also points out that given that the IMF is based in Washington and heavily influenced by the US government, this would amount to a repudiation of the US as well as the IMF and EU. Put in Cold War terminology, Sinclair notes “Moscow won this round”.
Jesse’s Café Americain has an excellent essay on Cyprus’s broader effect on confidence in the financial system. As he notes, the troika (European Commission, ECB and IMF) thought nothing of violating their own rules about the safety of deposits of less than €100,000. This proposal – even if unsuccessful given yesterday’s vote – is one more nail in the coffin as far as confidence in the current monetary system is concerned. In Jesse’s words: “It is confidence that sustains the integrity of a system based on counterparty risk.”
This is why the gold price is best described as a barometer of confidence in the financial system. Physical gold – as opposed to ETFs and various other types of “paper” gold – is no one’s liability (unlike bank deposits). It and other precious metals have no counterparty risk; an attribute that an increasing number of the world’s savers will start to place a high price on.