Cyprus Bank Tax – The Big Picture

By The Banker | Blog Posts
19 Mar 2013
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Over the weekend the European Union agreed to a 10 Billion euro bailout of member country Cyprus’ banking sector, but imposed as a condition of the bailout a 9.9% tax on all bank deposits above 100K Euros.[1]

On its face and in the abstract, this proposal is a horrible way to bail out a bank and an ailing economy, as it violates rule #1 of financial bailouts, namely “avoid bank runs.”

Not only does the proposal guarantee every Cypriot bank will suffer a run by all its depositors as soon as they open on Thursday, but every bank in Southern/peripheral/wobbly Europe – Spain, Portugal, Greece – has to wonder whether their depositors will do the same in anticipation of future similar bailout terms imposed by the European Union, and Germany in particular.

The fastest way to achieve a run on banks in weak countries is to suddenly punish depositors for leaving their money in the bank.  Even to threaten to do so can create a self-fulfilling fear, one that leads quickly to bank runs.

The proposal also violates rule #1 of dealing with distressed banks, which is that depositors get treated better than bondholders. The European Union’s proposal to punish depositors – while bondholders suffer no losses – upends the traditional order of payment priority of bank liabilities.

On the other hand, I can see why the European Union made this odd deposit tax proposal, as the specific situation of Cyprus boils down to the European Union vs. Russian oligarchs.

Cyprus is the Cayman Islands of Russia, a hub for vast quantities of Russian banking deposits.  Some may be savings of ‘ordinary’ Russians, but most people believe a combination of Russian Mafia, Russian oligarchs, and dirty money sloshes around the Cypriot financial sector.  Bailing out Cypriot banks, without confiscating what is perceived to be largely illegitimate Russian money, was too much for the German leadership of the EU to swallow.[2]

Which all reminds me that in a world of Plutocrats, in which huge aggregations of money are perceived to be illegitimate, it becomes much easier for policy-makers to engage in what would otherwise be horrible banking policy.

I don’t think it’s a stretch to wonder about the implications for the US.

The inequality here has reached a point where, if people actually knew how stratified we’ve become, the idea of a Cypriot bank tax in the US to confiscate wealth goes from being an Occupy Wall Street fantasy to becoming more normalized.

In the US we currently view our own plutocrats as superheroes.  But if they instead become morally equated with Russian oligarchs, then a confiscatory tax like the Cyprus proposal starts to almost look ‘fair.’

I think this is a nightmare scenario, but I also think structural inequality in the US sets the scene for this kind of nightmare.  It’s not unthinkable.



[1] Although the proposal keeps changing as of this morning.  Maybe it’ll be 15% for depositors over 500K Euro, and 3% for depositors below 100K Euro, and no tax for depositors below 20K Euro.  Also, maybe the Cypriot parliament will reject the whole deal and take their chances.

[2] The other interesting angle: If you’re a Cypriot parliamentarian, are you willing to vote for something that hurts the Russian mafia?  I mean, admittedly everything I know about the Russian mafia comes from Hollywood, so I don’t really have real life experience here.  But I’d be pretty nervous to vote for this bank tax and put a big fat Russian mafia target on my back.

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11 Comments

  1. Cathy says:

    thanks for the article, now I can see the potential impacts might occur.

  2. Jennifer says:

    Having handed over $6500 in American $50s and $100s to a woman in a bathrobe on a street corner in Moscow during the course of conducting a “normal” “above board” adoption, you are wise to avoid the big fat Russian mafia target on your back.

  3. ToddR says:

    Would it not be sensible to imagine that Cyprus was among other things, a trial balloon, and even just one step in the adjustment of the Overton Window? If in a matter of key strokes, depositors are immediately subject to an X% confiscation, AND IF (for example) a rogue trader can eliminate $billions on a faulty hedge, isn’t it possible that the Fed has the means and the will to create a crisis that they could not let go to waste?

  4. The Banker says:

    I’m not big on seeing the Fed as conspiratorial in that way, so, no.

  5. Alonissos says:

    I’ll be very interested in seeing how people feel when I spend the month in Greece. And I will not deposit any more than the bare minimum in my bank account there.

    • The Banker says:

      Since its from Ex-bankers, it presupposes a certain comfort-level already, and a ratcheting-down of that flush lifestyle. Useful in that way. Not necessarily applicable to the non-banker, just started out, trying to save money initially.

  6. Robert says:

    I rather suspected it of being subtle satire.

  7. GCT says:

    Great post banker.

    When looking at this Cyprus was offering some outrageous interest on deposits. So will the depositors actually loose any money? I think this is why the EU is approaching the bailout in this manner. Cyprus was a tax haven and doled out alot more interest to depositors. The EU does not want the taxpayers in other soverign countries to hand out money to pay interest. I think the bond holders happen to be the ECB, IMF and they are not going to take losses.

    This sets a very dangerous precedence in my mind as the system is based on faith and the faith just left the Cyprus and the EU. Bank runs are almost certain to happen when the banks open.

    Now the EU is proposing this for Italy and a Spanish MP is stating this may be good for Spain. I know if I had any cash in the EU banks it would be out as soon as they opened. Better to have cash and buy some hard assets like PM’s.

    As I think about this whats is savings? Many times now discussions have surfaced by the poiliticians that 401k’s or other retirement accounts are savings accounts.

    What also bothers me is honest people that just saved paid taxes on this money once already. I may be over reacting, and some will probably tell me I am, but this is basically screwing depositors while the equity and bondholders do not take a hit. Scary indeed.

  8. ToddR says:

    The thought that keeps coming to mind is that IF you hold property that is electronically stored liquidity, AND IF you chose that (cash) asset position for its preservation attributes, well…you’ve just been put on notice.

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