If Cyprus Fails, So Will Your Investments
There is a potential financial crisis brewing in Cyprus, and no one in the U.S. really seems to be that concerned. Just like our out-of-control national debt, sequestration, and growing number of unemployed and poor. Stocks continue to move higher, and it appears as though nothing can stop them.
There is clearly a financial crisis in the eurozone, which I feel traders in the U.S. have largely pushed aside during the American stock market rally.
In Cyprus, we all know the government tried to place a tax on all bank deposits in an attempt to raise $7.6 billion in capital as part of the country’s bailout deal. The strategy was turned down; so here we have the tiny island of Cyprus in the Mediterranean Sea where the estimated gross domestic product (GDP) of $22.45 billion in 2012 (source: International Monetary Fund) would be ranked dead last amongst the U.S. states, finishing behind Wyoming with just over $25.0 billion in GDP in 2011 (source: U.S. Department of Commerce).
So what’s the deal with Cyprus, and why should you be concerned?
While Cyprus is tiny and pretty well insignificant as far as its economic clout goes, a financial crisis, especially within the country’s fragile banking system, could drive widespread mistrust and confidence issues throughout the eurozone. This is the concern; that Cyprus could foreshadow a deeper financial crisis in the problematic regions of Italy, Spain, and Portugal.
Greece went through its financial crisis roller coaster, including two bailouts, and it is currently surviving on loans and credit. It’s going to take decades for Greece to recover from its financial crisis.
The fear is that the situation in Cyprus could surface anywhere, especially in the eurozone, where there are so many weak countries that would have collapsed if not for the financial help from larger countries.
When you have 17 different countries with their own political and economic system come together and form the eurozone, you know there will be problems. Unfortunately, it has not been smooth sailing since the beginning of the euro in 1999. The region is in a recession.
Of course, the mess in the weak eurozone countries is driving down economic growth in France and Germany, the two pillars holding up the eurozone. France is finding that things are getting more difficult as the eurozone tries to dig itself out of its financial crisis mess.
If Cyprus was forced to exit the eurozone, it would create havoc around the world, which is why Greece is still a member of the eurozone, but has no influence or clout.
The reality is that the eurozone financial crisis is still around, and the problem overseas is not going away. Consumer confidence in the eurozone came in at a muddled -23.6 in February, according to the European Commission. The media is stressing that the numbers have improved from the -26.5 in December; but while I’m not sure about you, I think the reading is awful.
As an investor, I would avoid Europe for the time being, as I feel the region will take years to recover. But if you want to invest in Europe, I would advise sticking with the major companies in Germany and France that can be bought via exchange-traded funds (ETFs).